EXW vs FOB: Which Shipping Incoterm Is Better? (Comparison)Jun 15, 2022
If you're an Amazon seller, then you know that shipping is a critical part of your business. But with so many options available, what's the best way to ship?
In this article, we'll compare EXW vs FOB shipping incoterms and help you decide which option is best for your business.
EXW vs FOB: Understanding the difference
EXW and FOB are among the most popular shipping incoterms options for international trade. Each has its own transport costs and shipping process.
Let's take a quick look at exactly what each one is.
What does EXW mean in shipping terms?
EXW stands for "Ex Works". This means that the buyer is responsible for all transport and local costs, including pick up from the seller's premises (e.g. a manufacturer's warehouse).
If you're an Amazon seller or a private label brand owner, you may well be ordering stock from Alibaba and wondering what does EXW on Alibaba mean.
It simply means that the price you have been quoted is solely for the product, and doesn't include any transport costs. You will be responsible for all costs and logistical movements from the supplier's warehouse.
What is FOB shipping?
The international trade term FOB stands for "Free On Board" and means the seller is responsible for placing the goods on board the shipping vessel at the port of departure.
With a FOB shipment, the seller pays all local costs and deals with all export documents and customs clearance on departure.
Then, once the goods are on board the vessel the buyer takes responsibility.
FOB shipping will generally be more expensive than EXW shipping as the seller will incur more costs, but it can be more cost-effective overall.
The Pros of EXW Shipping
When opting for EXW shipping terms there are some benefits to be had.
Lower unit cost
With an EXW shipment you will typically pay a lower unit price to your supplier.
This is due to the fact that there are fewer expenses involved for them meaning they can offer you a more attractive price.
Of course it should be remembered that there will then be extra costs for you as a result, but we'll save that for the cons!
By having clarity over the pricing of each individual stage of the manufacturing and shipping process you can take control of your costs and optimize for profitability.
This also gives you the opportunity to shop around for the bests deals on things like a shipping company, rather than being tied into whatever your supplier can offer.
The Cons of EXW Shipping
Each method for international shipments also has its downsides, and EXW is no different.
Higher collection fees
Generally speaking, a freight forwarder will charge more than a manufacturer or supplier for the pickup and delivery of goods to the vessel.
A supplier will often have a company truck they can use and save costs whereas employing the services of a freight forwarder can attract additional fees.
It's important to compare all costs for each shipping method so you can see which is the most cost-effective overall.
Ex Works pricing may be more favorable on a per unit basis, but when you add the extra customs clearance and transportation costs in the origin country it may eventually become more expensive.
More to manage
Using Free On Board terms means your supplier is handling some of the burden of detail that you otherwise would have to.
They obtain export licenses, deal with export documentation, and include all this extra work within the overall unit price.
The pros and cons of Ex Works shipping should be carefully considered, just like those of Free On Board shipping.
The Pros of FOB Shipping
FOB shipping is a popular choice for many new eCommerce sellers for a number of reasons.
Less moving parts
Just like there is more to manage with Ex Works shipping, Free On Board terms eliminate a lot of the detail and logistical moving parts that can easily bog an eCommerce seller down.
If you want to focus on growing sales and building your brand you don't want to get bogged down into the detail of international trade terms and responsibilities.
By opting for FOB shipments, you eliminate a lot of this extra work.
Often cheaper in total
When a supplier offers FOB, the shipping costs from factory to the vessel are often much lower and as such the overall expense of an order can be lower.
When a freight forwarder picks up goods from a manufacturer's factory there can be unexpected surcharges that increase the transportation cost as well as additional costs that lead to a higher total cost to you the buyer.
The Cons of FOB Shipping
Similarly, FOB shipping comes with its own set of downsides.
Less clarity on pricing
As you grow your business and want to scale operations up, you will need to have a close eye on each line item in your budget to optimize for greater profitability.
By lumping all product and export costs into one amount you don't have the same visibility as EXW pricing and as such less ability to be able to optimize each area of costs.
Risks of miscommunication
Employing the services of a freight forwarder ensures your shipment will be fully checked and organized in a logistics-friendly way.
Leaving the arrangement of exporting to your supplier could leave you open to details being missed causing problems down the line.
In our experience this is rare, but can happen.
How do you calculate FOB price?
When a supplier offers FOB shipping they will calculate the price of the goods and shipping from their factory to the vessel.
They will also include any other ancillary charges, such as customs clearance documentation and licenses, in this total unit cost.
To calculate the FOB price the buyer pays you simply need to know two things; the price of the goods and the cost of shipping from the supplier's factory to the vessel.
You can find out the cost of shipping by asking your shipping forwarder for a quotation to directly compare the two options.
How do you calculate EXW price?
To calculate the EXW price simply take the unit cost from your supplier and add on the cost of shipping from their factory to you.
You will need to get a detailed breakdown of freight costs and the costs associated with export documents and clearance as you will also be responsible for these.
Once you have quotes on both EXW and FOB shipping terms you can compare the two.
FOB vs EXW: Which is better?
The best incoterm for you will depend on a number of factors unique to your business.
Consider your priorities when making a decision and weigh up the pros and cons of each to see which is the best fit.
Do you prioritize low prices or ease of doing business?
Are you selling low-cost items where every penny counts or more expensive items where your focus is on providing a seamless customer experience?
If price is your primary focus then both terms should be carefully compared, as each can offer unique pricing.
However, if you prioritize ease of doing business then FOB shipping terms may be a better fit as they require less work on your part.
Do you have the resources to manage logistics?
Do you have the in-house expertise or are you willing to outsource to a forwarder to manage logistics?
If you don't have the resources to manage logistics then FOB terms may not be a good option as you will be responsible for arranging shipping.
However, if you are willing to outsource or have the in-house expertise then FOB terms could work well for you.
What is your view on risk?
Are you comfortable with taking on more risk in exchange for potentially lower costs or do you prefer to play it safe?
If you are willing to take on more risk then EXW terms may be a good option as you will be responsible for arranging transport from your supplier all the way to the final destination.
However, if you prefer to play it safe then FOB terms may be a better fit as the supplier will be responsible for transportation to port.
In conclusion, there is no one-size-fits-all answer to the question of whether FOB or EXW terms are better.
It depends on your individual business needs and priorities.
Weigh up the pros and cons of each option to see which is the best fit for you.
If you'd like day-to-day support with key decisions like deciding between EXW vs FOB shipments, consider joining us inside Brand Builder University.
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