Some of the most crucial elements of your shipment, regardless of whether it is a domestic or international shipment, are the freight terms used to describe how it is handled.
As important as it is, I find that this knowledge is often overlooked and dismissed, often leading to catastrophe for the buyer. So, today I thought I would compare and contrast two of my favorite incoterms to help you determine which is right for your shipment as well as understand the risk and responsibility hand-off.
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Incoterms, short for international commercial terms, are the international rules that govern the handling of your shipments, determining who carries the responsibility for a shipment and when it is transferred from seller to buyer. It is important for both the seller and the buyer to have a firm understanding of these terms because they will have a direct impact on your costs and risks.
Two of the most popular Incoterms in both domestic and international shipping are Ex Works/Ex Factory (EXW) and Free on Board (FOB). While both terms may seem similar, the delegation of obligations and responsibilities are very different.
Ex Works/ Ex Factory (EXW)
When shipping under Ex Works, also known as Ex Factory (EXW) the buyer’s responsibility begins at the supplier’s dock. The buyer is responsible to organize pickup of the shipment as well as trucking, delivery to the terminal, customs, and freight. All responsibility and risk will be held by the buyer under this Incoterm.
If you’re a buyer looking to have goods shipped internationally using Ex Works we strongly recommend working with a freight forwarder in the same country that you’re operating from for insurance and control reasons. It is important to remember that local charges for transportation of the goods to the departure port will likely not be included in price of goods.
Typically, buyers using EXW do so because they may feel uncomfortable with pricing of local charges provided by the seller or they would like to have more control when dealing with any local issues that may arise. A lot of times this is an issue of comfort and trust. Ideally, the shipper will have a local network that they rely on and trust. But, if for some reason you’re not comfortable with them having that level of control, then EXW is not the way to go.
Free on Board (FOB)
Unlike EXW, Free on Board (FOB) places the responsibility for local charges such as packaging, loading charges, delivery to port, export duty and taxes, and origin terminal charges on the seller. Most sellers will build the cost of these fees into the cost of the product they’re selling. Most experienced sellers have a local network that it is easier for them to utilize.
Through contracts or just a repeat business relationship, sellers are often able to get better pricing on some of the local charges that a buyer might not have access to otherwise. Most sellers are very familiar with their own local charges and know when they are being given the best price. This Incoterm is highly recommended when a buyer is importing goods from overseas.
Though FOB and EXW are two of the more popular Incoterms that importers and exporters may utilize that might not mean that they are the best for your shipment.
An experienced international freight forwarder will review your shipment and ensure that you’re shipping with the incoterms that make the most sense for your shipment.
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