July 7, 2020
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1
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Trade Tip: Incoterms Matter - Buying CIF vs. FOB

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When looking to increase the profitability of your business it is important to consider the effects incoterms have on your ability to make money. Cost, Insurance & Freight (CIF), and Free on Board (FOB) are two common incoterms that define the respective shipping responsibilities of the supplier and the buyer in a trade transaction. When goods are purchased CIF, the supplier (often the manufacturer) covers the cost of the goods, their insurance and any costs associated with their transportation to the port of destination specified in the contract. Alternatively, goods can be purchased FOB, in which case the seller’s responsibility is terminated once the goods are cleared for export and on board the ship at the port of shipment, and the buyer is responsible for the transportation and insurance of the goods.


Which incoterm you choose comes down to whether it’s better to outsource the transportation process to an established multinational manufacturer or to piece together a solution on your own. Essentially, this is a question of tradeoffs: Is it more profitable to spend your time finding the next trade or figuring out how to optimize your current one? For agile resellers who primarily make their money through trading, the answer is clear: To maximize profit, it is important to maximize the volume of trades you do. In order to maximize the volume (or number) of trades, a reseller needs to spend as much time finding new contracts as possible. Spending lots of time worrying about international transportation gets in the way of that. Ultimately, it is far more profitable to focus on growing the size of the pie, rather than trying to optimize each slice.


There is another benefit to CIF over FOB that may be even more obvious. Multinational suppliers have established relationships with global logistics providers. As a result, they may be able to get a better deal on a better service than what is available to resellers who purchase goods FOB. So, efficiency and opportunity costs aside, even after the supplier marks up the price to pass on to the reseller, the simple monetary cost of buying CIF may be lower than what could be done with FOB.


In the current climate, with markets and supply chains both heavily affected by the COVID-19 pandemic, CIF is more valuable than ever. Quality logistics are in high demand, making it incredibly challenging to find reputable logistics providers willing to work with small businesses at a fair price. Fortunately, large suppliers have existing relationships with reputable and efficient logistics providers. More specifically, many trades involved in the COVID-19 response, such as vaccines and diagnostics kits, require a temperature-controlled supply chain (also known as “cold chain”). When goods are purchased FOB, it is the responsibility of the reseller to ensure the capability and legal responsibility of the logistics providers to provide cold chain. Purchasing CIF alleviates this burden because, again, most large suppliers already have relationships with companies that provide this service.


The best part about CIF is that Kountable’s partners already structure CIF deals for our members. And if a supplier isn’t already in our network, usually all you need to do is ask!

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