One can say that FOB has many advantages associated with it, both for importers and exporters alike . There are fewer risks taken by importing companies who decide to work under this mode than those who go with other options such as CIF or DDP. This is because the exporting company only ships the products once they are paid, while under other modes there might be some hostilities that can result in delays or even worse. However, many people find DDP to be the ideal mode for their business because it shows them exactly how much money is required to do business with a certain country.
Do you wonder why so many companies are moving away from the age-old mode of doing business, which is free on board? Well, it is because there are tons of benefits to being done under this new mode. First of all, one has to understand that FOB was a very popular term in international trade used for years and years . In time it has changed a bit and now DDP is the one that rules international trade. The change from FOB to DDP may seem minimal, but this new mode of doing business opens up more opportunities for both importer and exporters alike.
One of the major advantages for companies to move on with DDP is the fact that they deal with their own risks and not transfer them to a third party. This means that if something goes wrong, then the importing company is to blame for it and not the exporter. Another advantage of this mode is that there are no hidden costs involved, which can increase the prices of products sometimes to an extent where the prices cannot be justified. In addition to this, there are no sunk costs for the importing company which means that they have to pay only when the shipment is received in their warehouse and not before it.
One of the other reasons why companies prefer moving on with DDP is because they have full control over when and where their products are going to be shipped. This gives them the chance to better organize their inventory and never end up with out of stock products. Moreover, they can ship their items according to their own terms which shows that this mode is flexible in nature . It is also cost-effective for companies because all the expenses are calculated beforehand, so there are no hidden costs for them.
On the other hand, exporters may find themselves at a small disadvantage when compared to DDP. However, it does not mean that FOB is better than DDP, but rather than some disadvantages people might see while doing business under this mode. The major one is that the company has to pay insurance on shipments until they reach the exporting country's shoreline or airport whereas under FOB they would have to pay it only while the shipment is in transit. In other words, exporters should not for a second think that they are at a disadvantage when doing business under FOB, because there are better advantages awaiting them as well.
One of the advantages that exporters have when doing business under FOB is that they pay a very small amount as freight, which is usually a few cents for each kilogram. On the other hand, the importing company has to bear all shipping costs and this can be very expensive sometimes. Another advantage of FOB over DDP is that companies will not have to deal with customs clearance unless their shipment reaches its destination port whereupon they receive it from the exporting country's own organisation.
While both DDP and FOB sound pretty good, one cannot ignore that there are several other modes used in international trade as well, such as CIF. However, even though these might seem better than DDP and FOB , they simply do not work for companies that are small or medium-sized. This is because large companies usually take bulk orders and they never end up with out of stock products, but it is not the same with smaller companies. One should also keep in mind that CIF stands for cost, insurance and freight which means that the price quoted by the exporter includes all these expenses , unlike FOB or DDP where there are no hidden costs involved.
Overall, one can say that FOB has many advantages associated with it, both for importers and exporters alike . There are fewer risks taken by importing companies who decide to work under this mode than those who go with other options such as CIF or DDP. This is because the exporting company only ships the products once they are paid, while under other modes there might be some hostilities that can result in delays or even worse. However, many people find DDP to be the ideal mode for their business because it shows them exactly how much money is required to do business with a certain country.