CMT vs FOB (Garment Manufacturing)

Ask two garment factory owners how they price an order and you will get two completely different answers. One quotes a few cents per piece for stitching. The other quotes several dollars per piece for a finished, packed garment. Both are quoting correctly — they are simply operating under different commercial models. Those models are CMT and FOB, and the difference between them shapes almost everything else about how a factory runs: how much cash it needs, who absorbs a fabric price spike, and how profitable a full order book actually is.

What CMT (Cut-Make-Trim) actually means

Under CMT, the buyer owns the materials. They source the fabric, the trims, the labels and the packaging, and they ship all of it to the factory. The factory contributes three things, and they are right there in the name: it cuts the fabric, makes (sews) the garment, and attaches the trims. It then hands finished garments back to the buyer, and invoices for labour and overhead only.

Because the factory never buys fabric, a CMT order ties up very little working capital. The quoted price per piece is small — often only 10 to 20 percent of the garment's eventual FOB value — but almost all of that price is the factory's own value-add. CMT dominates in Bangladesh and Cambodia, and it is common in parts of Vietnam, particularly where buyers have their own established fabric mills or nominated suppliers.

What FOB (Free on Board) actually means

FOB is a shipping Incoterm that has, in garment trade, come to describe a whole manufacturing model. Under FOB the factory sources everything: it buys the fabric, negotiates with trim suppliers, funds the materials, manufactures the garment, and delivers finished goods to the port. The buyer takes ownership once the goods pass the ship's rail — that is the literal meaning of "free on board" — and pays a single per-piece price that bundles material, labour, overhead and margin.

FOB is the norm in India, Turkey and China, where deep domestic fabric supply chains make sourcing practical. It puts the factory in charge of far more of the value chain, which is exactly why it is both more profitable and more dangerous.

CMT vs FOB compared

Why the margin percentages mislead

The single most common costing mistake is comparing the two margin percentages directly and concluding that CMT is more profitable. It is not — the percentages are calculated on completely different bases, and the base is where the money lives.

Take a shirt. Under CMT the factory charges 2.00 USD per piece for labour, and earns a 15 percent margin on that: 0.30 USD per shirt. Under FOB the same factory sources 5.50 USD of fabric and trims, adds the same 2.00 USD of labour and overhead, and sells the finished shirt for 8.40 USD. A 10 percent margin on 8.40 USD is 0.84 USD per shirt — nearly three times the CMT profit, on identical sewing work.

That is the case for FOB, and it is a real one. But the same arithmetic runs in reverse when something goes wrong. On the CMT order, if the fabric arrives late or costs 20 percent more than planned, the factory shrugs; the buyer owns that problem. On the FOB order, a 20 percent fabric price rise consumes 1.10 USD per shirt against a margin of 0.84 USD. The order does not merely lose profit — it loses money. FOB converts a factory into a materials trader that happens to own sewing lines, and materials trading is a business with its own risks.

Working capital is the real constraint

Margin analysis explains why factories want FOB. Working capital explains why many cannot have it. A factory running a 100,000-piece FOB order must fund roughly 550,000 USD of fabric and trims — typically 60 to 120 days before the buyer pays. That cash has to come from somewhere: retained earnings, a bank line, or supplier credit. The same order run as CMT requires the factory to fund only its own payroll.

This is why the transition from CMT to FOB is the defining growth step for a garment manufacturer, and why so many stall partway through it. It is not a sewing problem. It is a financing and visibility problem, and it usually arrives before the factory has the systems to handle it.

Running both models in one factory

In practice most established factories run a mix, and that is where the accounting gets genuinely hard. The same sewing line, the same supervisors, and the same overhead pool serve CMT orders for one buyer and FOB orders for another in the same week. If overhead is allocated per piece, FOB orders look artificially unprofitable. If it is allocated as a percentage of order value, CMT orders look like they cost nothing to run. Either distortion will push an owner toward the wrong customer mix.

The fix is to cost each order against the model it was booked under, allocating labour and overhead on a consistent basis (usually standard minute value) while including material cost only for FOB orders. Vastra ERP configures the model per order, so a factory can quote CMT and FOB side by side, allocate shared overhead consistently across both, and see true per-order profit rather than a blended average that hides which customers are actually worth keeping.