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Commentary: Choosing the right Incoterm

Corina Meoño, director of operations at Dedola Global Logistics, explains the difference between FOB and CIF, as well as how to tell which might be the best fit for your specific business.

FOB vs CIF. As two of the most common Incoterms, how do you determine which one is right for your business? The answer depends on one crucial factor: how much control do you want over the shipping process?
   The control of shipping a product from Point A to Point B can either be yours or your buyer’s/seller’s, depending on whether you choose FOB or CIF. 
   With a free on board (FOB) shipment, the seller/exporter bears the cost and risk until the cargo has been loaded on board the vessel at a named ocean port (for example, FOB Shanghai). The buyer/importer chooses their own logistics provider, and the seller/exporter, along with getting the goods on board the vessel, is responsible for export clearance.
   Once the goods pass the ship’s rail, the importer/buyer assumes all responsibility for the goods. This includes transportation and unloading costs, as well as insurance on the cargo.
   For CIF, on the other hand, the seller/exporter arranges for shipment to the named destination port, including providing a minimum insurance policy naming the buyer/importer as the beneficiary. After the cargo is loaded on the vessel at origin, the buyer/importer bears the risk of damage or loss.
   So which one is right for you? Longstanding practice in the industry is that you should “buy” FOB and “sell” CIF, as there are pros and cons of each pricing term as they relate to an importer or exporter.

FOB: Great For Importers.
One of the most important aspects of the FOB Incoterm is that an importer/buyer is in control of the entire shipping process, from the originating ocean port to door delivery.
   Why is this important? 
   If you’re the buyer/importer, you’re able to choose your own freight forwarder based on your own requirements, rather than those of your supplier. And if your freight forwarder provides tracking and visibility tools, you get critical information about the status of your shipment, often in real time.
   Further, for ocean shipments into the U.S., FOB puts you in a better position to comply with Importer Security Filing (ISF) regulations.
   Contrast that to CIF, where the seller/exporter handles the ocean freight arrangements and the logistics partner works for them, not for the buyer/importer.
   On the surface, shipping CIF may seem like the simplest option, but you need to consider the risks. Not only do you have no control over the ocean freight, but getting tracking or status updates about your shipment may be next to impossible. And even though the seller/exporter is arranging and initially paying for the transportation costs, these charges will be passed on to you, often with an additional markup.
   In addition, if you have multiple suppliers, importing using CIF can make it more difficult to manage your shipments, as you will likely be working with multiple foreign freight forwarders instead of consolidating your volumes with trusted service providers.
   In the simplest terms, FOB gives an importer more control over its supply chain, and is usually the best long-term importing strategy.

CIF: Great For Exporters. If you’re an exporter, however, CIF can have significant advantages. Like FOB for importers, CIF gives exporters control of the ocean freight process, and when you have the right freight forwarding partner, this is a competitive advantage.
   It’s also useful when trying to reach new customers that may not be familiar or comfortable with international shipping. With CIF, you are able to quote these customers a rate that is inclusive of the cost to bring it to their local ocean port.
   Additionally, if you have multiple overseas customers, shipping CIF simplifies the process. Instead of working with several freight forwarders with varying procedures and service levels, you can choose the right logistics provider for your shipments.

Editors note: For more information on Incoterms, see Tom Cook’s two-part Bottom Line column in the September and October issues of American Shipper (“Successfully managing Incoterms—Part 1,” September 2016, page 8 and “Successfully managing Incoterms—Part 2,” October 2016, page 8).
Corina Meoño is Director of Operations at Dedola Global Logistics, a global freight forwarder and provider of supply chain management services. She has over 18 years of experience in the supply chain management and cargo management industry.