To FOB or CIF, That is the Question

Most first time importers, and even those with experience, remain unsure whether to purchase from suppliers on FOB or CIF terms. FOB and CIF are two of the most popular incoterms and understanding them is important. First, FOB stands for ‘Free on Board’ and CIF stands for ‘Cost, Insurance & Freight’.

When calculating your landed cost, the largest gray area especially for new importers, is around the “on the water” portion of the journey. Therefore, you may want to consider placing your orders, or at least your first order, CIF instead of FOB if you want the least amount of surprises. Here is a clear explanation of what is covered with FOB and CIF:

Buyer & Seller Responsibilities for FOB vs. CIF

Services	FOB	CIF
Warehouse Storage	Seller	Seller
Warehouse Labor	Seller	Seller
Export Packing	Seller	Seller
Loading Charges	Seller	Seller
Inland Freight	Seller	Seller
Terminal Charges	Seller	Seller
Forwarder's Fees	Buyer	Seller
Loading On Vessel	Seller	Seller
Ocean/Air Freight & Insurance	Buyer	Seller
Charges On Arrival At Destination	Buyer	Buyer
Duty, Taxes, & Customs Clearance	Buyer	Buyer
Delivery To Destination	Buyer	Buyer

So… you may be asking why you shouldn’t always purchase product CIF instead of FOB? There are some good reasons. For example:

1. Comparing Apples to Apples Cost Across Factories - When factories quote CIF, you have no way of really knowing the breakdown of costs. They could potentially be padding a specific cost for extra profit or they may be artificially lowering the cost of the goods and transferring cost to the shipping/insurance side of the equation. If you’re looking to find the cheapest producer of the product itself across multiple factories, it’s easier to compare apples to apples using FOB.

2. Your Shipping/Insurance Agent May Be Cheaper - While larger factories typically have good relations with freight forwarders, shipping companies and the like, don’t underestimate your own ability to negotiate for good rates either. If the lowest landed cost is important to you, make some phone calls as well. We personally recommend based on experience Triple Eagle.

3. Opportunities to Build Relationships - Especially as you grow your importing venture, building relationships with the largest number of companies can go a long way. By putting all your eggs in the supplier basket, you’re tying yourself to that supplier. It may be harder to switch factories in the future if necessary if you’re unaware of all the details of your transactions.

As you can see, there are benefits to choosing FOB and CIF. It just depends on your own specific situation. However we hope this article makes this area a bit clearer.

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Comments

7 Responses to “To FOB or CIF, That is the Question”

Digging Deeper - Actual Landed Costs Examined Part 2 of 3 : SourceJuice on February 2nd, 2008 3:40 am

[…] the value of purchase terms in using FOB or CIF for their shipments. SourceJuice article “To FOB or CIF, That is the Question” is a quick read and a great source of […]
Mike Strawson on February 13th, 2008 11:51 pm

Hi. I enjoy many of your articles, and endorse your advice. However, in this one you appear to have goofed! FOB means FREE ON BOARD, not FREIGHT on board, and CIF means COST, INSURANCE AND FREIGHT not CARGO insurance and freight. Please see INCOTERMS 2000, published by the International Chamber of Commerce. These are internationally accepted definitions - even in USA!.

Best wishes, and please keep up the good work.
Mike Strawson
THE Export Trainer Ltd
Lincoln
England
The SourceJuice Team on February 14th, 2008 12:38 am

Thanks Mike! Actually we’re just keeping our readers on their toes! All kidding aside, we’ve corrected the mistake and thanks for pointing it out!
The Right Suppliers at the Right Price; RFQ Strategy and Cultural Considerations : SourceJuice on February 18th, 2008 10:12 pm

[…] essentially means ‘finished and available at the factory’. SourceJuice wrote an article comparing FOB and CIF, detailing what’s included and what’s […]
Alison Xu on March 10th, 2008 2:34 pm

It is very helpful article.
It make the question answer straight and simplified.

Thanks.

Alison
Incoterms Definitions - the basics to the advanced | SourceJuice on July 19th, 2008 8:46 am

[…] use either FOB or CIF and aren’t sure of the exact differences. SourceJuice wrote an article To FOB of CIF That is The Question which may be of […]
import export business on August 6th, 2008 12:04 pm

As an aside, some interesting economic questions are raised by the fact that in some cases international production chains are managed almost entirely within a single multinational corporation (roughly 40 percent of U.S. merchandise trade is classified as intra-firm) and in others they are built through arm’s-length transactions among unrelated firms. But the empirical evidence in both cases suggests that substantial productivity gains can often be achieved through the development of global supply chains.