It’s no secret that logistics can be confusing for new eCommerce sellers. There are many different terms and acronyms to know, and it may seem like a lot of information to keep up with.
For those who ship products directly to their customers, understanding the difference between the FOB and EXW Incoterms® is key in order to ensure they’re meeting their obligations.
We’re back with another Incoterm® blog after our blog about DDP! This blog will cover what FOB and EXW stand for, FOB vs Ex Works and how you should use them!
What Are FOB And EXW In Incoterms® And What Do They Stand For?
Firstly, let’s clarify what Incoterms® are. Incoterms® is a set of trading terms that define the relationship and responsibilities between buyers and sellers in commercial transactions. There are currently 11 Incoterms® and they were established by the International Chambers of Commerce, meaning that they are accepted and standardly used worldwide.
The term FOB stands for “Free On Board”. In Incoterms®, this means that the seller is responsible for packing and loading the goods to the buyer’s preferred method of transport at the shipping site and may be responsible for them throughout the journey until it reaches its destination. The buyer assumes all responsibility once the shipment is on board, but until then, the seller continues to control the products.
In EXW, or “Ex Works”, a seller does not hold the obligation to load the goods at a buyer’s preferred method of transport. Rather, the seller and buyer make arrangements for the goods to be accessible for transportation that the buyer will arrange and pay for. The alternative is that the goods are accessible for the buyer themself to pick up personally.
Sourcing Products Overseas Through FOB And Ex Works
In the case of sourcing products from overseas under these two different terms, it becomes even more important for new eCommerce sellers to understand what they are responsible for.
When sourcing products under FOB, when your ordered goods are packed and ready, your supplier will arrange for them to be transported to the port. Normally, this will cost more than an EXW arrangement because your supplier will save some of your time and effort.
With EXW on the other hand, you as a buyer are responsible for arranging pickup of your ordered goods from the factory of your supplier. It would make the most sense for you to work with a freight forwarder when dealing with sourced products from other countries because they take care of so many of the difficult negotiations and paperwork that would take up your valuable time as a business owner.
It would also be much easier for you to have people to approach for any questions. Freight forwarders understand all of the pros and cons of each arrangement because they are experts at what they do. Working with a freight forwarder also means that any issues along the way will be taken care of without your direct involvement, and what you are paying them covers all liabilities of transportation risks.
Why Choosing The Right One Matters?
Firstly, it should be clear that you cannot choose the Incoterm® all by yourself. To save yourself from headaches, you have to be responsible in clear communication with both your buyers and also the suppliers you source products from over the terms of shipment.
Arranging the right Incoterm® for these transactions is crucial. Without knowledge of what they mean and when to use them, you could risk committing an error in your shipping processes that will definitely lead to delays and customer dissatisfaction, which can affect your business routine when you have to deal with the headaches that come with rearranging the shipment terms.
If you don’t pay attention and choose any Incoterm® thinking that they don’t make a difference, it can lead to confusion and conflict later on, or even cause an issue that will prevent you from fulfilling your end of the deal.
For example – if you are sourcing products from overseas and they list it as EXW, but you expected FOB because it’s more convenient for you – there could be a serious issue. You would assume that the supplier would take care of the customs, yet that would be your responsibility and you may be unprepared to deal with it.
How Do These Arrangements Affect Your Business?
Not only does the Incoterm® seriously affect the actual transport of shipments, but it also affects how you would be pricing your items because of the shipment expenses that you would have to take into consideration.
For example, if you are using FOB pricing and your supplier is located in the US (so all prices would be listed as USD), it’s important to factor in that number into what you want to sell it for so you can guarantee yourself a profit margin.
If the goods come from overseas, however, they will have their value in their currency first, and then you would have to take the USD price into consideration.
Even though this is simply one example of how these terms can affect your business fiscally, it should be obvious that understanding the Incoterms® guide could make a huge difference for any new eCommerce seller working with international suppliers.
The Best Practices For Dealing With Incoterms®
- Always start with thorough research of all 11 Incoterms®
- Remember that you can’t just choose any Incoterm® by yourself – you have to arrange and negotiate it with who you are transacting with
- Analyze each transaction and pay close attention to which Incoterm® makes sense for the given situation – they won’t always be the same
If you’re a new eCommerce seller, it can be hard to know which logistics setup will work best for you. You will learn over time that what works between you and your overseas supplier won’t always be the same arrangement between you and a buyer.
This article has provided some insights into the differences between FOB and Ex Works Incoterms® so that sellers understand how they affect their business fiscally and logistically, especially across international borders.
The key takeaway is this: before finalizing any deals with suppliers or buyers, make sure all parties are on the same page about what terms should apply to each shipment in order to avoid confusion and conflict later down the line.