If you are a small or medium-sized business (SMB) who is buying from an overseas supplier, there's a good chance you're buying under either Free On Board (FOB) or Ex Works (EXW) terms of sale – the two most commonly used purchase terms in global trade. In this article, we'll explore the distinctions between EXW vs FOB and how they can positively or negatively impact how you manage logistics.

First, a word about Incoterms. There are 11 of them and they simply spell out the responsibilities of buyers and sellers in global trade. They say who is responsible for paying for and managing the transportation, insurance, documentation, customs clearance, and other logistical activities.

Ex Works is the term that places a minimum responsibility on sellers, only requiring them to make the goods available for pickup at a designated location – usually their factory or warehouse. Buyers, also known as consignees, assume all costs, risks and paperwork requirements involved in transporting the goods from the seller’s destination to the final delivery point.

For buyers, engaging with an experienced freight forwarder is strongly recommended – especially for smaller companies without the resources or expertise to handle the shipping on their own.

Why Choose Ex Works Terms of Sale?

EXW terms are frequently used for exports from the U.S. Sellers like it because it puts almost all the work and risk on the buyer. Sure, the seller is responsible for helping the buyer obtain all necessary export licenses and other required paperwork, but basically sellers can book the sale and move on.

Buyers may prefer EXW because it yields the lowest selling price, since they are only paying for the product and packaging and no related logistics, insurance, or other costs. They may also feel that, by controlling transportation, they can arrange better rates than the seller, who is not motivated to find the most economical carrier. You can have situations where sellers earn a commission on purchased transportation services.

If you're an SMB, you may lack the resources required to manage the most efficient logistics process – particularly at the origin location. In these cases, an experienced freight forwarder can be your best friend.

In fact, buyers working under Ex Works terms of sale may actually ask the seller to recommend a top freight forwarder in the market, simply because they have no clue where to start. Over the years, I.C.E. Transport’s U.S. offices have helped many foreign buyers manage U.S. export shipments based on referrals from U.S.-based suppliers. In such cases, buyers get the best of both worlds: a low purchase price AND the ability to leverage the local knowledge and freight buying power of an experienced forwarder.

For freight moving to Eastern Europe or the UK, I.C.E. Transport will often handle the entire door-to-door shipment, leveraging office locations in the UK, Poland and Lithuania to handle all transportation requirements at destination.

Free On Board as an Option for Terms of Sale

With Free On Board (FOB) terms of sale, the seller retains responsibility for all charges and risks until goods are loaded onto the ship at the origin port. For buyers, it seems like a logical alternate purchase term if the company is less experienced with international shipping and lacks logistics partners at origin. But buyers need to be careful about over-reliance on the seller if they want to keep their supply chains running smoothly.

We've already talked about the cost concerns related to seller-managed transportation at origin. But there is also a service component. As a buyer, you want your goods delivered in a timely manner. Under FOB, a seller may rely on only one or a few carriers to transport goods to the port. During a busy period, they may lack the capacity to move loads in a timely manner, causing your shipment to miss a sailing date and delaying that shipment a week or more.

Alternatively, under Ex Works terms of sale you can work with a freight forwarder like I.C.E. Transport, which has developed relationships with hundreds of carriers across all major U.S. seaports.

It's worth noting that heavyweight or oversized shipments (e.g., machinery, farm equipment, etc.) can be especially susceptible to delays under FOB terms if the supplier does not have relationships with specialized carriers needed for such loads. A freight forwarder that is an expert in shipping for oversized equipment can help here.

EXW vs FOB Terms of Sale

Here's an easy reference chart showing the distinctions between Free On Board and Ex Works terms of sale.

Free on Board or Ex Works: How to Decide

If you're struggling with whether EXW or FOB is the right purchase term for you, here are some factors to consider. Depending on your specific situation, these factors may dictate your choice:

• Buyer’s experience with managing logistics in the seller’s country. If this experience is strong, EXW can work. But if you are less experienced in global trade, FOB may be a better option.
• Relationship with supplier. If you have a strong, long-term relationship with the seller and trust their ability to coordinate shipment details at origin, you may be more apt to choose FOB. Less confident? Choose EXW.
• Control over costs. If you want this control as a buyer, it's EXW, which allows you to choose transportation partners and negotiate rates directly.
• Risk tolerance. Ex Works terms of sale come with more control, but also more risk for the buyer. If you want to deflect some of that risk, opt for FOB.

The Right Freight Forwarder Can Streamline Your Ex Works Shipments

Ex Works terms of sale put more work, responsibility and control on the buyer. Large shippers may welcome this because they have the shipping and trade compliance staff to economically manage the details. SMBs, on the other hand, may struggle to manage the added details on their own.

The good news is that a freight forwarder like I.C.E. Transport can essentially serve as your global shipping department, handling logistics, paperwork, customs clearance, and tracking from the factory to final delivery, if needed. Check out our eBook: The Small Business Survival Guide to Global Shipping.

Need advice on whether to ship under EXW vs FOB terms of sale? Contact the experts at ICE Transport today to start a conversation.