When you begin negotiations with a new supplier you face a choice: do you let your shipper choose providers and pay for shipping, or do you negotiate with and pay a freight forwarder yourself? To make this choice, you’ll need to consider the incoterms for each option.
The most common Incoterms for having your supplier pay the majority of the costs are:
- DAP (Delivery at Place)
- DDP (Delivered, Duties Paid)
- CIF (Cost, Insurance, and Freight)
The common Incoterms for paying shipping for yourself are:
- EXW (Ex-Works)
- FOB (Freight on Board)
It can be hard to make this decision based purely on incoterms, because in some cases the rates and transit times will be nearly identical. However, there is more to consider than just rates and transit times in order to select the best incoterm for your import. Let’s look at some pros and cons of the options.
Incoterms where your supplier pays most of the shipping costs
- Suppliers may have premium rates with certain freight forwarders or cargo lines such as DHL or FedEx. They get attractive rates when they are big manufacturers with constant international shipments. Big cargo lines such as DHL and FedEx offer these manufacturers better rates to get the freight. What you might not know is that your supplier may also get some commission for the cargo with such cargo lines, therefore you can still negotiate a bit extra on the rates.
- Certain suppliers do not negotiate nor quote with different freight forwarders. There is the chance that there is a better rate somewhere else.
- You have to pay for shipping directly to the supplier, most likely without credit terms.
Incoterms where you pay most of the shipping costs
- You have better control of the cargo and the budget. When you are the payer, a freight forwarder will provide you with tracking info and document copies instantly. This isn’t always the case when supplier pays as you’ll have to wait while the forwarder is authorized to share documents.
- You can request credit terms to the forwarder, and you can request value added services at any moment.
- If it’s your first time working with a particular supplier, you have not yet built a trusting relationship and you don’t know how smoothly they operate. Therefore, using the EXW incoterm and paying for all the shipping costs out of pocket can be a risk. For example, the supplier could simply not load the truck that arrives to pick up your cargo at origin – and you’d still be responsible for at least the trucking cost. In addition, customs clearance at origin could involve additional fees if the supplier’s clearance process is not well-practiced, and you’d only find out after the first clearance. If you still prefer to pay for shipping, it is safer to use FOB terms where the origin costs are paid by your supplier, and you start paying from the moment the cargo arrives at port.
It is not possible to say the above pros and cons will apply in every instance. You need to evaluate your own circumstances, your suppliers, your credit terms, and your freight forwarders. But when you are not sure of which shipping option to follow, remember the above recommendations.