Lessons · Lesson 3 of 6

What FOB actually buys, and what it costs to own

Price the obligations that arrive with a fabric invoice, and find the limit that decides how much FOB a factory can do at all.

Lesson 3 of 6 · 20 min

Did you know

Why does a factory keep being offered the jobs that eat capital, and never the profitable ones? The pattern is documented, and clothing is its textbook case. Gary Gereffi split supply chains into two kinds. A producer-driven chain is organised by the firms that own the plants. A buyer-driven chain is organised by retailers and brand companies that own no production at all, and that hold their position through design, marketing and access to the shopper. In a buyer-driven chain the lead firm decides what is made, where, and at what price. It keeps the jobs with the highest returns for itself. So the jobs a factory is invited to take on tell you about the chain. They are not a reward for good work.

Source: Gary Gereffi, The Organization of Buyer-Driven Global Commodity Chains, in Commodity Chains and Global Capitalism, eds. Gereffi and Korzeniewicz, Praeger, 1994

The premium, and what has to fit inside it

Lesson 2 ended with the only honest number. Moving CN-5140 from CMT to FOB is worth USD 0.4384 a piece instead of USD 0.3529, once you count the cost of the money. CMT means cut, make, trim: the buyer sends you the fabric and you only sew. FOB means free on board: you buy the fabric yourself, and you sell the finished goods.

The difference is USD 0.0855 a piece. On 48,000 pieces that is USD 4,105.40 a season.

That figure is not a profit. It is a budget. It is all the money you have to pay for everything that arrived with the fabric invoice and was not there before. This lesson is a list of what has to fit inside it.

Five things that came with the invoice

Under CMT, cloth is a thing that turns up. Under FOB, cloth is a contract. And a contract can fail.

Quality. Somebody has to inspect the cloth. Somebody has to deal with it when it fails. Nabhani had never owned a fabric inspection. For eleven years, cloth that arrived out of specification was Vaudreuil's argument with Vaudreuil's mill.
Delivery. The mill is late and the ship date does not move. Under CMT a late fabric delivery pushes the whole calendar and the buyer carries it. Under FOB the buyer's delivery window is a contract Nabhani signed, so the sewing window absorbs the delay.
Price. Nabhani quotes an FOB price in November and buys the cloth in February. Whatever happens to the cotton market in between happens to Nabhani.
Quantity. The cut runs short by nine hundred metres. Under CMT that is a shortage the buyer covers. Under FOB it is an air-freighted top-up at a price nobody negotiated.
Currency. The mill invoices in one currency. The buyer pays in another. The factory's own costs are in a third. Course 13.6 covers that subject and it is not a small one. Note only this here: FOB is where it starts to matter to a factory that never had it before.

Five risks, one budget of USD 4,105.40. Any one of them costs more than that in a bad season. Lesson 4 is what happened when two of them arrived together.

The mill base, which is not a detail

Here is the question a factory almost never asks before saying yes. Can I actually manage this fabric, or am I only paying for it?

Nabhani cannot buy this twill within a day's drive. The cloth for CN-5140 is made by Sarikaya in Turkey, and the nearest alternative Brindlecote will approve is in Italy. That distance changes every one of the five risks above, and it changes them all in the same direction.

	A mill ninety minutes away	Sarikaya, four days away by road and sea
A shade query	a visit, the same week	photographs, then a courier, then a wait
A re-dye	eleven days	six weeks, plus the freight again
A short delivery	a partial, collected	a partial, on the next sailing
A claim	settled in the meeting	a form, then a credit note, months later
Your leverage	you are one of forty customers who visit	you are an account somebody else opened

The same fabric problem, at two distances

The last row is the one that matters, and it is the one nobody puts a number on. So put one on it.

Brindlecote buys roughly USD 14 million of fabric a year from Sarikaya, across all of its suppliers. Nabhani buys USD 317,376.00. When cloth for a Brindlecote programme goes wrong, the call comes from a customer Sarikaya cannot afford to lose, and the answer is a re-dye in eleven days. When cloth for the same programme goes wrong and the invoice happens to be in Nabhani's name, the call comes from an account worth about 2.27% of that, and the answer is a form.

A buyer's leverage over a nominated mill does not transfer with the purchase order. That sentence is the single most expensive thing in this course. Lesson 4 is what it cost.

What a claim is actually worth

Numbers, from the autumn 2026 delivery.

Sarikaya delivered a lot in which 4,410 metres were outside the approved shade band. At USD 4.35 a metre that cloth is worth USD 19,183.50. Nabhani claimed all of it.

Sarikaya's technical department agreed the rolls were off-standard. It disputed the tolerance. It offered a credit of USD 0.93 a metre. On 4,410 metres that is USD 4,101.30, which is 21.4% of the claim, settled seven months later.

Two things about that number are worth sitting with. The first is the recovery rate. A fabric claim that a factory wins is often a claim it wins for about a fifth. The second is the timing. Seven months means the credit lands in a different season, against a different order, long after the loss has gone through the accounts. That is why factories keep under-counting what fabric faults cost them. The loss and the recovery are never in the same month, and only the recovery is memorable.

The constraint nobody prices

Now the finding that decides whether Nabhani should take FOB at all. It is not on the cost sheet.

Follow the cash. At its peak — the day the last carton is on board and Brindlecote has paid nothing — Nabhani has USD 438,528.00 tied up in this order: USD 362,496.00 of materials and USD 76,032.00 of conversion and other direct costs.

Nabhani's total shareholders' funds are USD 610,000.00. One order at peak is 71.9% of everything the family has in the business.
Nabhani's working-capital facility is USD 450,000.00. Working capital is the money that pays for an order before the buyer pays you; the bank agreed this facility on the strength of the Brindlecote contract. One order at peak is 97.5% of it.

Read the second line again. Nabhani cannot run two of these at the same time. Not because the lines are full — the order takes 100 line-days out of a factory that has about 2,496 in a year — but because the money is committed for 188 days, from the fabric deposit to Brindlecote's payment, and there is no second facility.

So the factory's real FOB capacity is about two orders a year, or 200 line-days. That is 8.0% of the factory. The other 92.0% stays CMT whatever anybody in the meeting believes, because CMT needs almost no money and FOB needs all of it.

Why the buyer wants this, which is not a conspiracy

It helps to see where the pressure comes from, because it is structural rather than personal.

In this industry the firms that set the terms are not the firms that own the factories. A retailer or a brand with no plant at all decides what is made, to what specification, at what price and by whom. It holds that position through design, marketing and access to the customer, not through machinery. The organising power sits with the buyer, and the buyer keeps the profitable jobs.

Read the four models again with that in mind. They stop looking like a ladder and start looking like a series of decisions about what a buyer wants to stop doing. Fabric buying eats cash, carries a lot of paperwork and has no glamour, so it is the first thing a growing brand pushes down. Design is the opposite. That is why ODM — own design manufacture, where the factory designs the garment as well as making it — is offered rarely and grudgingly, and why lesson 5 finds what it finds.

Check yourselfYour buyer offers FOB and nominates a mill in the next town. You already buy there for two other customers, and you are one of that mill's larger accounts. How does the arithmetic of this lesson change?Show the answer

The premium stays the same and almost every cost inside it falls. A shade query is a visit. A re-dye takes days, not weeks. A claim is settled by somebody who wants your other orders next year. A short delivery is collected rather than shipped. The cash cycle also gets shorter, because a local mill will usually take shorter payment terms than an export mill that wants a deposit and documents. That is the whole point. The FOB decision is not made once for the model. It is made once for each supply base. The same premium buys a risk you can manage in one case and a risk you cannot in the other, and nothing on the cost sheet tells them apart.

What to take away

The FOB premium is a budget for the fabric risk, not a profit. Here it is USD 4,105.40 a season, and five separate risks are bidding for it.
Ask whether you can manage the cloth, not only whether you can pay for it. Distance to the mill changes the cost of every fabric problem, in the same direction, every time.
A buyer's leverage over a nominated mill does not transfer with the purchase order. You inherit the price and the specification. You do not inherit the relationship that enforces them.
A won fabric claim is often worth about a fifth, months later, in a different season. Budget the loss, not the claim.
The limit on FOB is usually the bank facility, not the lines. Work out how many orders your working capital can carry at once before you work out whether the margin looks attractive. For Nabhani the answer was two a year — 8.0% of the factory.