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Cost,
Insurance and Freight (CIF) vs. Free On Board (FOB)
Terms
One of the
fundamental decisions of international trade is how to structure
the terms of sale between buyers and sellers. In the case of
imports, Canadian and American companies can either allow their
overseas suppliers to handle the shipping and insurance of goods or
they can take these responsibilities on themselves. There are
benefits and downsides to each, so it important to understand how
these factors may affect your business. This overview is intended
to provide clarity among these issues so that you may utilize the
most advantageous method for your situation.
The
following definitions are taken from the Globe Express Services
Dictionary of International Trade (Incoterms
2000):
- Cost,
Insurance and Freight (CIF) – An international trade
term of sale in which, for the quoted price, the
seller/exporter/manufacturer clears the goods past the ship’s rail
at the port of shipment (not destination). The seller is also
responsible for paying for the costs associated with transport of
the goods to the named port at destination. However, once the goods
pass the ship’s rail at the port of shipment, the buyer assumes
responsibility for risk of loss or damage as well as any additional
transport costs. The seller is also responsible for procuring and
paying for marine insurance in the buyer’s name for the shipment.
The Cost and Freight term is used only for ocean or inland waterway
transport.
- Free On
Board (FOB) – An international trade term of sale in
which, for the quoted price, the seller/exporter/manufacturer
clears the goods for export and is responsible for the costs and
risks of delivering the goods past the ship’s rail at the named
port of shipment. The Free On Board term is used only for ocean or
inland waterway transport.
Why ship
CIF?
Generally
speaking, importers prefer CIF terms when either they’re new to
international trade or they have relatively little freight volume.
These importers often find CIF simpler in that their suppliers are
responsible for arranging freight and insurance details. Under
these terms the importer relinquishes control of choosing freight
carriers, routing and other shipping specifics. For these
companies, convenience outweighs the need for enhanced shipment
control and associated freight savings.
Shipping CIF
grows increasingly difficult as companies increase their number of
overseas suppliers and overall freight volume. The greater the
number of CIF shipments, the more problems can occur with obtaining
accurate shipment information. Overseas suppliers are not well
positioned to handle service issues that develop in-transit. What’s
more, they are not required to arrange anything past the port of
destination, so final delivery concerns, monitoring of penalty
situations (demurrage, per diem), etc. are all the responsibility
of the importer. Regular importers quickly grow tired of the hassle
of relying on suppliers and their freight agents for shipment
information.
Why ship
FOB?
Buying Free
On Board has two major benefits over CIF, more competitive freight
rates and enhanced shipment control. When shipping CIF, companies
must be careful that they’re shipping rates are competitive since
overseas suppliers are inclined to mark up their freight cost for
the extra service provided in arranging shipments. U.S. importers
quickly learn that they can obtain very competitive shipping rates
even with small to medium freight volumes. While cost is always
important, there is another major reason for buying
FOB.
Increased
supply chain visibility and control is a critical FOB benefit. By
taking title to the goods as they cross the ship’s rail at the
overseas port of shipment, importers are better able to obtain
accurate and timely shipment information by working with the third
party logistics provider of their choosing. In this way, they are
assured their freight partner is working in their best interest,
not that of their supplier’s.
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