CIF vs. FOB
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.