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.