Trade is the essence of business and economic stability, but what you may not know is that it’s not as simple as buying and selling! You need to agree on shipping costs, assumed risks, responsibilities and a whole lot of terms that would have your head spinning.
Well, worry no more! At Mars Freights, logistics is our business and as a service to humanity, we’ve put together this post to help you understand the two most common and preferred freight forwarding methods.
You can also watch as Inco-Man demystifies these methods in our animated video below.
Ok…so you bought or sold an item, congratulations! Now you
must move that item from its origin to its destination. The
best way to do that is to negotiate at the point of purchase
how that’s going to be accomplished.
In order for both parties to understand and agree on the
particulars, you both need to speak the same language and
agree on what the desired outcome is in terms of communicating
the tasks, roles and risks.
And that’s where Incoterms come in. These are a series of
predefined commercial terms published by the International
Chamber of Commerce, and with that you can rest assured that
expectations are met and you wont find yourself charged with
an insurance policy that you hadn’t agreed on.
So what does this all really mean? Here’s a real life
example:
You’ve purchased some goods from a factory in China (point A),
and want them delivered to your business headquarters set up
in Oman (point B), There are a number of ways your freight
forwarding company can do this.
Let’s see what’s the difference between EX Works (a.ka. EXW) and Free on Board (FOB) which are the two most popular methods in the above situation.
1- EX Works
With this method you the buyer (point B) are assuming all the costs of transport from the seller’s (point A) place of work to its final destination (point B). The freight forwarding company you appoint, will handle all export documentation, and although as a buyer you are assuming the maximum risk, this pays off with the control and reduced cost of shipping, making you the most competitive in your market. You will also have routing control over your shipping and as you will purchase the necessary insurance, you will realise good gains from that too.
2- Free on Board (FOB)
Free on board is probably the most important and most used.
FOB means that the seller fulfils its obligation to deliver
when the goods have passed over the ship’s rail, at a
particular port of shipment and requires that the seller
clears the goods for export.
What that mean in our example above is basically that; the
seller in China is responsible for all transport costs from
his location of business (warehouse, factory etc) to the
Chinese port (whether it be air or sea). This will also
include custom clearance to get the goods on board. Once the
goods are on that plane or ship making their way to you in
Oman, the seller is released from any responsibility.
You the buyer will now have to assume the costs of getting the
goods from the Oman port to your place of business. This
includes insurance costs, shipping costs paid to your
appointed freight forwarding company and any additional costs
that arise from transportation of the goods from port to your
location.
So there you have it. Two very important freight methods that can make you feel at ease when chartering the trade business. For more freight term clarification, watch our complete video here.
Next month, we’ll talk about how you can apply freight forwarding methods to shipping your high valued items, be it furniture, jewellery or your latest acquisition from Christie’s.