Freight management is now one of the most important activities of the company. This is because logistics is an increasingly strategic area within organizations. After all, the consumer wants to receive your product in the most agile and simple way possible.
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Therefore, the hiring of freight must consider aspects that go beyond the price charged for the transportation of the goods. So, in addition to assessing the quality of service, the carrier’s reputation, and payment terms, it is essential to consider who is responsible for delivery.
In this scenario, it is worth knowing the concepts of Cost, Insurance and Freight (CIF), and Free On Board (FOB). CIF freight and FOB freight differ, among other things, by the time the payment is made – and the consequences of that. Do you want to understand how each of these modalities works? Read the following post!
What are CIF freight and FOB freight?
In Portuguese CIF means “cost, insurance, and freight”. This modality is paid at the origin, and the seller is responsible for the risks and costs of transportation until the delivery of the goods to the recipient. The end consumer, in general, prefers to use the CIF, although it is more expensive because it does not have to deal with handling and other details.
FOB freight, in literal translation, means “free onboard”. The seller’s liability ends when the goods are dispatched. It is the buyer, then, who assumes the costs and risks of transport from shipment, since the supplier’s liability ends when the product enters transport. It is a more favorable alternative for sellers.
Thanks to its characteristics, each modality is more common in different markets and circumstances. CIF freight, for example, is more popular in business-to-consumer (B2C) businesses or with a high volume of shipments to different customers – the complexity of organizing different freight makes FOB barely viable. For this reason, CIF is the most used in e-commerce: the end customer pays for the goods and freight in one go.
FOB freight is more used in business-to-business (B2B) deliveries, especially when it comes to high value-added cargo or very high freight cost. It is common in industries that buy products from different suppliers and that already have preferred carriers (which collect the products directly from the suppliers).
When to use each freight
Whoever sells to the final consumer knows that this customer has little or no practice with cargo transportation. For this reason, CIF is the best option in this case: after all, even if the value of the product is slightly higher for the customer, the supplier should be responsible for transport until delivery – this means offering added value to the product and can be the difference between selling and losing space to the competition.
When the recipient is a company, on the other hand, it is likely that he knows the cargo transportation procedures and has partnerships with carriers (with more interesting payment and price conditions). The best shipping option for this case is probably FOB.
Who makes payments
The CIF and FOB freight are included in the International Commercial Terms (INCOTERMS). They represent the determinations of the International Chamber of Commerce, which is the body responsible for regulating trade between different countries.
When CIF freight is negotiated, whoever sends the cargo (the supplier) has the responsibility to pay for the freight and insurance of the goods. This payment is then made at the origin of the transport. Thus, the value of the product, the cost of freight, and transport insurance are included in the sale price.
If the customer chooses FOB freight, he is responsible for paying for the transport and insurance of the goods. It is common for this payment to be made upon receipt of the product. An example of FOB for the final consumer is the “Freight to Pay”, from the Post Office.
What are the costs of each freight?
In CIF freight, the price is already embedded in the cost of the goods and is passed on to the customer as a single value. The supplier can inform, in the invoice, that the freight is CIF. Thus, he defrays the cost of shipping and absorbs all expenses without the customer having to pay additional costs.
FOB, as it is not included in the price of products, has the value specified in the invoice. Once indicated in the document, it comprises the basis for calculating taxes such as the Social Integration Program (PIS), the Tax on Industrialized Products (IPI), the Tax on Operations Relating to the Circulation of Goods, and on the Provision of Services (ICMS) and Contribution to the Financing of Social Security (Coffins).
How monitoring is done
It is common that, in the case of CIF freight, the customer does not accompany the transport, since the control is the responsibility of the supplier. On FOB freight, on the other hand, the seller may not want to monitor delivery, since the buyer is responsible for their safety.
In Brazil, especially in road transport, the majority of transportation freight made in the country is of the CIF type. In this case, the company needs to track the status and prepare actions for problems with agility. A good practice is to keep the customer informed.
There are many differences between CIF and FOB freight, but the most relevant is related to the cost of freight, responsibilities for contracting transportation, and care of cargo. Therefore, the manager must know the characteristics of each type of freight to know which is the best option in each situation.
Knowing when to choose CIF freight and FOB freight can then be the company’s competitive advantage in its market strategy. It is essential to be attentive to the client’s needs to be able to offer him the best alternative at all times.