EX Works (EXW) vs. Free on Board (FOB): Which Incoterm is Best for Your SMB Shipping?

EX Works (EXW) vs. Free on Board (FOB): Which Incoterm is Best for Your SMB Shipping?
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The complexities of international shipping can be challenging for small and medium-sized businesses (SMBs), especially when using terms like Ex Works (EXW) and Free on Board (FOB). The choice between these two can significantly affect your SMB’s shipping strategy, depending on your goals and objectives.

In this post, specifically tailored for SMBs engaged in import and export operations, we will provide valuable insights on these two shipping Incoterms. Understanding these terms is essential whether you work with a freight forwarder or handle the process independently. This knowledge will not only help you navigate the shipping landscape with confidence but also enable you to evaluate your potential partners and make informed decisions that optimize your import and export activities.

What Is EX Works (EXW)?

Ex Works (aka EXW) is an international trade term that describes a scenario where a seller makes a product available at a designated location, and the buyer is responsible for covering the transport costs. 

EX Works (EXW) is one of the 11 international commercial terms (Incoterms) established by the International Chamber of Commerce (ICC)

As the seller, under EXW terms, your responsibility is to prepare the goods for collection at your premises. Therefore, in this case, the seller is not responsible for loading the goods on the buyer’s designated vehicle, clearing the goods for export, or contracting for carriage. Once the goods are ready for pick-up, all risks and costs transfer to the buyer. This term provides the minimum obligation for the seller, making it a viable option for businesses looking to mitigate their risk.

When to Use EXW

Choosing EXW as an Incoterm can benefit the seller in specific situations. This choice largely depends on your business’s capabilities, the location’s complexity, and the logistics involved. In other words, if it’s challenging for the seller to configure the goods for sale at the shipment point, they may opt for an easier EXW. It’s worth noting that while this term can simplify the process for sellers, it places more responsibility on the buyer. Understanding when to use EXW can be crucial for optimizing your shipping and business strategy.

When the Buyer Has Robust Logistics Capabilities

One of the best scenarios in which to use EXW for the buyer is when their business has a solid logistics infrastructure and the capacity to manage the entire shipping process. Because the buyer assumes all responsibilities for transportation and customs clearance under EXW, it can be beneficial for them if they have existing logistics processes and relationships in place.

If the seller has limited resources for managing shipping logistics or wants to reduce associated risks when shipping the goods that are being sold, opting for EXW allows them to focus on their core operations. However, this also means the buyer must be capable and willing to handle all shipping logistics. 

When the Seller’s Location is Difficult to Access for Transport

EXW can also be a smart choice when the seller’s location is difficult to access for transportation. If the seller’s premises are located in an area that is difficult to reach or requires special transport arrangements, using EXW places the responsibility of managing these complications on the buyer.

This ensures that you, as the seller, are not responsible for arranging difficult transportation or bearing the associated costs and risks. However, it’s essential to communicate these circumstances clearly to the buyer upfront so that they can make the necessary logistical arrangements.

Advantages and Disadvantages of Using EXW

In an EXW agreement, the seller is only responsible for ensuring that the goods are available at their premises. The buyer assumes all other responsibilities, including shipping, loading, export, and import duties.

Here are some detailed advantages and disadvantages of using EXW:

For the Buyer

Advantages:
  • Cost Control: Since the buyer handles transportation and insurance, they have more control over these costs. They can choose their preferred providers and negotiate rates.
  • Flexibility: The buyer has full control over the logistics chain, including the choice of carrier, routing, and scheduling. This can be an advantage if the buyer has specific logistics requirements or wants to consolidate shipments.
  • Transparency: With EXW, the buyer knows all the costs associated with shipping and handling because they are responsible for arranging and paying for them. This can provide more clarity and predictability compared to some other Incoterms.
Disadvantages:
  • Increased Responsibility: The buyer is responsible for all aspects of shipping, including loading the goods at the seller’s premises, which may require additional resources or expertise.
  • Potential Extra Costs: If the buyer is not familiar with the export regulations in the seller’s country, they could face unexpected costs or delays.
  • Increased Risk: Since the buyer takes responsibility for the goods as soon as they leave the seller’s premises, they bear all the risk during transport. This includes damage, loss, or delays.

For the Seller

Advantages:
  • Minimal Responsibility: The seller only needs to make the goods available at their premises. They don’t have to worry about shipping, insurance, or export procedures, which simplifies their process.
  • Reduced Costs: The seller does not have to bear the costs of shipping and insurance, which can result in cost savings.
  • Lower Risk: The risk transfers to the buyer as soon as the goods are made available. This means the seller is not responsible for any damage, loss, or delays that occur after that point.
Disadvantages:
  • Reduced Control: Since the seller is not involved in the shipping process, they have no control over the logistics chain. This could potentially impact the timing of delivery and overall customer satisfaction.
  • Potential Delays: If the buyer is not experienced in handling shipping or export procedures, it could result in delays. This could potentially impact the seller’s cash flow and customer relationships.
  • Difficulty in Providing Complete Service: Some buyers prefer a one-stop solution where the seller handles everything, including shipping. In an EXW arrangement, the seller can’t provide this service, which could be a disadvantage in some markets.

When considering EXW, both buyers and sellers should weigh these advantages and disadvantages in light of their specific situation, capabilities, and the nature of the goods being shipped.

What Is Free on Board (FOB)?

Free on Board (FOB) is a trade term defined by the International Chamber of Commerce (ICC). Under the FOB terms, the seller is responsible for the delivery of goods onto the ship, clearing for export, and bearing all costs until the goods are onboard. Once the goods are on board, all risks are transferred to the buyer.

Using FOB offers several benefits and drawbacks, and it is up to the buyer and seller to be familiar with those that may impact them directly.

What Are Three Different Types of Free on Board?

There are three different types of Free on Board designations.

FOB (Port of Loading)

Under the Incoterms 2020 standard, FOB is used with a specific port of loading, and it means that the seller is responsible for the transportation of the goods to the port of shipment and the loading costs, with the buyer assuming risk once the goods are loaded on board the ship.

FOB Origin

In North American usage, “FOB Origin” means that the liability for the goods transfers from the seller to the buyer as soon as the goods are safely on board the transport.

FOB Destination 

As used in North American commerce, “FOB Destination” implies that the transfer of liability from the seller to the buyer occurs the moment the goods are removed from the transport at the destination.

When to Use FOB

The decision of whether to use FOB largely depends on your business’s circumstances and logistics capabilities. 

Listed below are examples of scenarios where FOB could be a viable option:

When the Seller is Close to a Port and Has Shipping Expertise

As a seller, if your business is near a port and you have expertise in managing logistics, FOB can be an excellent choice. This proximity and expertise allow you to efficiently deliver goods to the port and load them onto the vessel, reducing the time and costs involved.

When the Seller Prefers to Limit its Responsibilities

FOB is also beneficial if, as a seller, you prefer to limit your responsibilities after the goods have been loaded onto the vessel. This term allows you to pass on the risks and costs associated with the transit, insurance, and delivery to the buyer’s location once the goods are onboard.

When the Buyer Wants More Control Over Freight Carrier and Costs

FOB is an excellent choice for buyers who want greater control over both the freight costs and the carrier shipping the goods.

What Are the Advantages and Disadvantages of Using FOB?

There are several advantages and disadvantages to using FOB, but they are distinct depending on whether you are a buyer or a seller.

For the Buyer

Advantages of FOB for the Buyer:
  • Control over Freight Costs: Once the goods are loaded on the ship, the buyer has control over the freight costs. They can negotiate rates with different carriers or choose a preferred carrier to ensure a more cost-effective and efficient shipping process.
  • Control over Freight Carrier: The buyer has the ability to select the freight carrier and routing options, which can allow for more flexibility and reliability in their supply chain.
  • Potential for Lower Costs: Buyers may have access to lower shipping rates due to volume discounts if they frequently ship goods.
  • Risk Transfer: The risk of damage or loss of goods is transferred from the seller to the buyer only after the goods are loaded on the vessel. Therefore, during the initial stages of the shipping process, the risk remains with the seller.
Disadvantages of FOB for the Buyer:
  • Increased Responsibility: The buyer is responsible for arranging and paying for the main carriage, insurance, unloading costs, and transportation from the port to the final destination, which may increase their logistics workload.
  • Liability for Damages during Main Carriage: Once the goods are loaded onto the ship, any damage, loss, or delay during the main carriage is the buyer’s responsibility.
  • Potential Higher Costs: If the buyer doesn’t have sufficient volume to negotiate lower rates, the shipping costs could be higher than if the seller had arranged the shipping.

For the Seller

Advantages of FOB for the Seller:
  • Control until Loading: Sellers have control over the goods until they are loaded onto the ship, which can reduce the risk of damage or loss.
  • Lower Shipping Responsibility: Once the goods are loaded onto the ship, the seller is no longer responsible for them, reducing the need for the seller to manage logistics beyond the initial loading.
  • Clear Cut-off Point: The responsibility is clearly transferred from the seller to the buyer when the goods are loaded onto the ship, which can reduce potential disputes over damage or loss.
Disadvantages of FOB for the Seller:
  • Initial Freight Costs: Sellers are responsible for the costs of delivery to the port and loading the goods onto the ship.
  • Risk During Initial Transport: The risk of loss or damage to goods during transport to the port and loading onto the ship falls on the seller.
  • Reliance on Buyer’s Carrier: If the buyer’s chosen carrier has delays or issues, the seller may need to hold goods longer than expected, which could lead to increased storage costs or scheduling issues.
  • Potential Lost Opportunity to Negotiate Better Freight Rates: If the seller frequently ships goods, they may have been able to negotiate a better freight rate or use a preferred carrier to ensure a more efficient shipping process. With FOB, it is the buyer who controls the process.

What is FCA in Relation to EXW and FOB?

Free Carrier (FCA) is a trade term in international commerce stipulated by Incoterms 2020, where the seller’s obligations are fulfilled once the goods are handed over, cleared for export, and ready for shipment to the carrier nominated by the buyer at the specified place. 

FCA differs significantly from Ex Works (EXW) and Free on Board (FOB) in relation to responsibility:

EXW

Under EXW, the seller is responsible only for making the goods available at their premises or at a named place (factory, warehouse, etc.). The buyer bears all costs and risks involved in transporting the goods from the seller’s location to the destination, including loading, transport, unloading, insurance, and customs duties. 

FCA

FCA (Free Carrier), on the other hand, extends the seller’s responsibility to include delivering the goods, cleared for export, to the carrier chosen by the buyer at the named place.

FOB

Under FOB, the seller is responsible for getting the goods on board the vessel at the port of shipment. Risk passes from seller to buyer once the goods are on board, and the buyer is responsible for freight and insurance. 

FCA vs. FOB: What’s the difference?

When comparing FCA (Free Carrier) and FOB (Free on Board) trade terms, the main distinction lies in the logistics operations at the point of shipment. 

In Free Carrier (FCA), the seller’s responsibility is to deliver the goods, cleared for export, to the carrier chosen by the buyer at the named place. The buyer then arranges for the loading of the goods onto the carrier. 

As for FOB, Free on Board involves the seller not only delivering the goods to the port of shipment but also taking charge of loading them onto the vessel. 

In both cases, there are logistical operations involved, such as export clearance, documentation, and ensuring the goods are loaded on the carrier or vessel. Differences between the two terms revolve around who is responsible for carrying out these tasks.

The specific details and responsibilities can be further defined in the sales contract or agreement between the buyer and seller, and logistics providers such as freight forwarders can assist with these operations. 

Simplifying Import and Export with Ship4wd

As an SMB-focused service provider, Ship4wd’s mission is to empower and support your import and export operations. Our global reach allows us to provide you with a comprehensive international shipping solution to and from almost anywhere in the world, while our tracking system will allow you to keep track of the progress of your shipments at all times.

Whether you require assistance in arranging the shipment under FOB terms or coordinating the transportation process in line with Ex Works requirements, we are here to support you every step of the way. Furthermore, our extensive experience allows us to be effective in navigating the complexities of import and export documentation, which leads to proper compliance and smooth operations.

At Ship4wd, we place a high priority on providing our customers with exceptional customer support. Our dedicated support team is available 24/7 to assist with any questions or concerns you may have about your shipments or navigating our platform. To further simplify your shipping experience, our platform also provides secure online payments, comprehensive insurance options, and flexible financing plans.

You can rely on Ship4wd as your trusted partner in international trade. Sign up with Ship4wd today and discover how our expertise and comprehensive services can unlock the full potential of your SMB.

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