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 A merican companies can either allow their overseas suppliers to handle the shippi ng 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 the se factors may affect your business. This overview is intended to provide clarit y among these issues so that you may utilize the most advantageous method for yo ur situation.

The following definitions are taken from the Globe Express Services Dictionary o f 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 respons ible for paying for the costs associated with transport of the goods to the name d 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 a s any additional transport costs. The seller is also responsible for procuring a nd 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 resp onsible for the costs and risks of delivering the goods past the ship s rail at th e named port of shipment. The Free On Board term is used only for ocean or inlan d waterway transport. Why ship CIF? Generally speaking, importers prefer CIF terms when either they re new to internat ional 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 ch oosing freight carriers, routing and other shipping specifics. For these compani es, 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 shi pments, the more problems can occur with obtaining accurate shipment information . Overseas suppliers are not well positioned to handle service issues that devel op in-transit. What s more, they are not required to arrange anything past the por t of destination, so final delivery concerns, monitoring of penalty situations ( demurrage, per diem), etc. are all the responsibility of the importer. Regular i mporters quickly grow tired of the hassle of relying on suppliers and their frei ght agents for shipment information.

Why ship FOB? Buying Free On Board has two major benefits over CIF, more competitive freight r ates 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 shipm ents. U.S. importers quickly learn that they can obtain very competitive shippin g rates even with small to medium freight volumes. While cost is always importan t, there is another major reason for buying FOB. Increased supply chain visibility and control is a critical FOB benefit. By taki ng title to the goods as they cross the ship s rail at the overseas port of shipme nt, importers are better able to obtain accurate and timely shipment information by working with the third party logistics provider of their choosing. In this w ay, they are assured their freight partner is working in their best interest, no t that of their supplier s.