Should I Buy CIF or FOB ?

FOB and CIF are the two most popular price terms of the Inco terms. What are the differences? Should you buy CIF or FOB?

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.

About Onur Akarca

Onur was born and raised in Turkey, where he got his Bachelors Degree in Business Administration. Onur worked as a Logistic Manager for a garment importing company for 10 years before joining MTS. He has been working in sales at MTS Logistics since February 2008. Having been on the other side as a logistics manager for a garment importing company helps him to understand what customers need from a logistics partner, especially for time sensitive cargoes like garment.
Fun Fact: Onur loves skiing and soccer!

Comments

  1. Mohit says:

    What if we take rate from our forwarder for CIF and matches it with seller, so that
    seller can’t make a gain out of transaction.

    • Onur Akarca says:

      Hi,

      Thanks for sharing; yes you can also control your cost by doing that. Please 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.

  2. Ed Mascher says:

    To support buy FOB sell CIF, consider the insurance portion. In the even of a claim the person holding financial interest in the goods is left to negotiate with a foreign insurer. Addiitionally, the insurance purchased sight unseen may not be all risk coverage,

  3. Vijay Bansal says:

    hi, liked the article on this site and would like to add on whether to buy FOB or CIF. we have come across cases when lot of suppliers ex-India ship their goods ex-India to other destination on CIF basis, 90% of them inflate their freight amount in CIF. Their forwarders (either local or MNC) are hand in glove with them. If we talk about import shipment on FOB or CIF basis, then we should concentrate more on full charge from supplier’s door to our door. We need to take rates from supplier in break up – cost + Freight + Insurance and then compare this freight with your local forwarder. Moreover, if the supplier’s forwarder is competitive than look at the destination charges of this forwarder / co-loader at destination. They are sometime exorbitant and buyer end up paying huge money. Hence, it is always advisable to check door to door rates (formulate it in an excel file) and then move the freight. Have a close eye on the availability of documents on time to prevent storeages at destinations, as it can be killing. THERE ARE LOT OF UNFAIR PRACTISES IN LOGISTICS – SO BEAWARE !!!

  4. Stewart Selwood says:

    When shipping CIF the fact that so many suppliers now expect a kick back or ’0′ freight rate from freight forwarders mean that the true costs of freight are often recovered in the country of arrival.
    It is extremely frustrating when we handle shipments for our many clients that have originated in China, for example, on a CIF basis and the UK co-loader recovers charges that they detail as ‘CISF’, ‘ROE Differential’, ‘China Handling’ etc etc – effectively the UK importer pays the freight to their supplier who in turn pays 0 freight cost to the shipper who in turn recovers from the UK importer – the importer not only pays their supplier for the freight but also the shipping agent. It is an unfair practice and unfortunately becoming more common.
    We would always recommend FOB as the buyer can control the shipment and determine their own agent from the start and ensure charges are exactly as they expect.

    • Gurjeet Singh says:

      CIF and FOB are well explained, a well knit article. I personaly feel that whether to go for CIF/ FOB would depend on lot of controlable and extraneous variables. With controlable variables I mean factors like buying capacity of importer, international sales volume of exporter, negotiation capabilities of the buyer, regular sourcing, one time sourcing and so on. Extraneous variable like drop in shiiping volumes due to recession; BAF and CAF increase due to volatile situation etc.

      For clarification I would like to sight a simple real life example, for instance the buyer is a small scale company in asia with a 20-30 TEUs of import a month from a single exporter say Unilever or so with a monthly volume of import and export to the tune of 500 FEUs. Unilever would easily bargain a better freight deal than importer due to its high voulme. So in such a situation it would be much better to go for CIF for importer. Its always better to go for CIF in regular sourcing if in near future shipping volumes are expected to drop(recession time) and to FOB in boom time as freights would go up and exporter would have to bear the extra cost. Many Asian companies shifted their periodic regular imports from CIF to FOB in 2009 and 2010 to take advantage of low rates due to global low volumes due to recession.

      Stewart has refered to passing on of handling charges to the importer, a simple solution would be to go for CPT instead of CIF. In real life there is no suich hard and fast rule of going for some specific incoterm, one need to consider the variables as discussed above.

  5. Rudy Gunawan Syarfi says:

    Fully agree that the logistic partner you choose will works together with you for your best interest not your suppliers.
    CIF/FOB have their own advantage and disadvantage, depends of some conditions; cargo size, value, volume, lead time, and type of user/ industry .
    In case of EP/oil and gas industry as the user, we need good transit service and accuracy of lead time besides the price.
    The best incoterms here is FCA global hub/country of origin, then you can leave it to the proffesional in logistics service provider to do their job based on your needs.

  6. Gaurang Pandya says:

    It is really a interesting and cost conscious way to benifit organisarion from Supply Chain

  7. Neelam Advani says:

    I work in a garment Manufacturing firm out of Hong Kong and yes it is true that we have sellers who add in profits while quoting CIF by marking up freight cost and we have experiences where the local handling charges , loading charges etc which are supposed to be paid by shipper under FOB conditions may also be passed onto the buyer under the CIF conditions . Unless properly investigated , one never knows. We therefore make it a practice to investigate freight cost for reference for all shipments and use reliable shipping lines like APL and Maersk for standard quotes.

  8. exportarya says:

    Hi,

    Here’s the formula and how to calculate fob price

    http://www.exportarya.com/calcular-precio-fob.asp?id_idioma=3


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