Thursday, May 2, 2013

Why suppliers may be unwilling to agree to DDP delivery terms.

A reader that is involved in having aircraft engines repaired thought that it was “unfair” as the supplier required them to ship the item to be repaired on DDP terms (delivered, duty paid) to their repair location. The supplier insisted upon shipping the repaired item under CPT (cost paid to) deliver terms. Since others may run into a similar situation with returning Items for repair, I thought I would share my response.

If you understand the reasons why they want to do it that way, it may not be "unfair", it may be just good business for both parties and it may in the end be saving you money.

There are many reasons why a supplier may not want to deliver product or service on a DDP basis. The first is duties, usually when there is export, duties are not charged. When a product is imported back into the country where it was made, there usually are no import duties provided that it is shipped out. When it is returned to the buyer, there could be import duties although some countries will allow free import if it can be proved that it was previously imported and duties paid. Since the supplier didn't import it, they can't prove it was previously delivered and duties paid, so with their delivery term they are looking for the buyer to prove it with their export documentation for the return of the product.

A second and usually more important reason is when a company sells a good or service under delivered terms, that sale is becomes a local sale within the importing country. This is normally the major reason why they will not want to sell under DDP terms. Being a local sale would make them subject to needing to be registered to do business locally. That can be an expensive, time consuming process. It would subject them to local law. Their profit they make on the repair would be subject to local taxes. That can change their selling margins and profits. In many countries, local transactions must also be paid for in local currency. That can also create potential issues with repatriating the profit. Then there can currency exchange issues and potential losses. If a supplier were to accomodate the request for DDP terms on the return shipment, my guess is they would need significantly increase their price to cover the additional costs and risks associated with that DDP term.

Since the supplier was shipping under a CPT terms I also commented on that. CPT (cost paid to) is not a good term for Buyer's as the risk of loss is transferred to the Buyer upon delivery to the carrier. As in his case engines are very expensive so rather than pursue DDP terms (that you are unlikely to get because of the above reasons), I suggested that he might want to focus on two things. One is to have them deliver on CIP terms so that it is insured by them. If it is damaged, it will cost them less to repair it than it would cost you. This is especially important if the supplier is selecting the carrier and the freight lanes as either of those can also increase your risk loss or damage. The other thing I recommended is more of a cost of quality issue. I would want the supplier to reimburse you for the costs you incur with the shipment of the repaired item if the repair is defective and needs to be returned again. The simple argument that I always use is you paid for a quality repair, so you should only have to bear those costs once.