Regarding FOB vs CIF incoterms, I found an interesting article in the latest edition of the ChaINA magazine (published by the Global Supply Chain Council).
It warns importers against accepting CIF (Cost-Insurance-Freight) shipping terms rather than the more conventional FOB (Freight On Board) terms. There are two reasons for that.
First, importers often end up paying the freight twice (once to their supplier, and then again in abnormal port & terminal charges):
International freight forwarding companies are quick to offer suppliers extremely low or zero dollar freight rates, or even refunds or kickbacks for making bookings. It is not uncommon for suppliers to receive a payment of US$30 per cubic meter or tonne of cargo they book with a freight forwarder as an incentive. And how do the international freight forwarding companies recover these losses on freight? They charge exorbitant fees to the final importer of the cargo.
Second, it often favors less-than-optimal shipping arrangements:
The other downside to this situation is the inefficiencies it creates in the supply chain. Imagine you are a supplier with 25 cubic meters of cargo to send to your buyer. The terms are CIF and there is no instruction as to the shipping mode to be used. The most economical and efficient method of shipping would be a 20′ Full Container Load (FCL). Shipping as an FCL offers better protection for the cargo by reducing double handling, and would also enable the buyer to take earlier delivery at destination by avoiding the need to wait for a consolidated container to be unpacked. But with the supplier being offered an incentive to ship as LCL (loose cargo) it’s not hard to see why the more profitable option is usually chosen.
Author: Chris Chalmers, CEO of Tomax Logistics.
Do you have any thoughts or experiences about FOB vs CIF? Let me know in the comments.
PS: if you have an interest in supply chain and sourcing topics, you should consider attending the CHaINA ’11 Live conference.
PPS: You can read even more incoterms here: Types of Incoterms [Guide]