A good rule of thumb when doing business in international trade is that you should buy FOB and sell CIF. Why is this a good rule to follow? The reason is very obvious. When you sell CIF you can make a slightly higher profit and when you buy FOB you can save on costs. Let me explain how.
An importer must look into the options of buying the goods under the terms that are more favorable to his or her expenses. So what does FOB and CIF means ?
CIF – COST INSURANCE AND FREIGHT (named port of destination):
Seller must pay the costs and freight includes insurance to bring the goods to the port of destination. However, risk is transferred to the buyer once the goods are loaded on the ship.
FOB – FREE ON BOARD (named port of shipment):
The seller must themselves load the goods on board the ship nominated by the buyer, cost and risk being divided at ship’s rail. The seller must clear the goods for export. Maritime transport only but NOT for multimodal sea transport in containers.
The major difference between CIF and FOB is the transportation costs and insurance during it.
Why buy CIF?
Importers generally buy CIF if they are new in international trade or they have very small cargo. It is a more convenient way of shipping since they don’t have to deal with freight or other shipping details, but you must realize that you are probably paying a lot more to get the goods than you should. Your supplier is responsible for arranging the freight and insurance details. Handling freight may be too detailed or complicated for a new importer, therefore they simply let their supplier deliver the product to them. It is an easy way of bringing the cargo from point A to point B without dealing with details but with a higher cost. Why CIF might cost you more? The vendor often will work with his own forwarder and mark up the cost offered from his forwarder as an additional way of making profit.
Having CIF terms might not work for you when you start buying more. As the number of CIF shipments increase, more problems can occur, since obtaining accurate shipment information becomes more difficult. Overseas suppliers might not help you on a timely manner to handle service issues that might develop in transit. Their responsibility ends on destination port and for any problem, you may have to bear extra demurrage, per diem or unexpected shipping related costs. Importers have to rely on their supplier and the freight agent they are using. The communication and information flow might be a hassle and even a day delay can be very costly.
Also take into consideration that when you buy CIF you might end up paying duty on the freight and insurance charges your supplier adding on. The freight and insurance charges are not dutiable but it can be very difficult to separate those from the actual invoice value. These costs can not be estimated. It has to be actual ones and evidence of payment must be submitted to US customs. This is not a problem when you buy FOB since those charges are not in the selling prices.
Why buy FOB?
Buying Free On Board simply has two major benefits over CIF. You have better control of the freight and the freight cost. The cost is always important and you will have a better chance of gaining a more competitive freight rate. Using your own freight forwarder will help you obtain more accurate information in a timely manner. They can assist you better once a problem arises. The logistic partner you choose always works together with you for your best interest not your suppliers.