Overview of the Industry
At present, the international shipping industry is contributing to approximately 70% of the overall world trade. Ever since technological advancements started taking over the world, the shipping industry has been one of the very few industries in the market to witness a massive rise in its operational activities. It facilitates a major proportion of the export/import activities in the world ad is also responsible for successful intercontinental trade. Additionally, the shipping industry is also known to be the most cost-effective industry, especially for long-distance transportations.
CIF Meaning: Explained
According to The International Commercial Terms (Incoterms) formulated by the ICC (International Chamber of Commerce), CIF stands for cost, insurance and freight as far as the shipping industry is concerned.
In simpler words, CIF meaning can be further broken down by stating that it is an added expense paid by the seller of a product that includes the costs, insurance, and freight of an order placed by the buyer, throughout the transit phase of the supply chain process. However, once the goods are loaded on the buyer’s ship, all potential risks involved with the order are directly transferred onto the buyer.
Uses of CIF in the shipping industry
The CIF Incoterm is usually a part of the contract between a buyer and a seller. All the terms in the CIF meaning are monetary and add to the overall total cost of the goods to be sold. The CIF term is more specific to maritime shipping only that is the transportation of goods through the ship or another water conveyance comes under CIF coverage.
CIF implications and benefits
- About CIF meaning cost, insurance and freight, a major benefit for the buyer if CIF is present in the contract are it minimizes the risks involved for the buyer greatly as well as reduces the overall shipping costs of the goods.
- However, on the downside, this also means that the buyer’s control on the entire supply chain process involved with the goods purchased is very low, which can result in an increased possibility of goods getting damaged during transit if not packed well.
- Additionally, the lack of involvement in the entire process also increases the buyer’s dependency on the seller. Especially when the buyer is unaware of the correct documentation required during shipping imports like Importer Security Filing in the U.S., and does not prepare in advance, he is the only one who gets penalized.
- The seller bears a major part of the entire brunt i.e. the entire amount of CIF meaning the cost, insurance, and freight of the shipment making it a rather expensive addition to the contract.
- Moreover, the duties of the seller are one too many, increasing the burden on the seller alone for delivering the goods in the right quality and quantity, without any damages. Seller’s duties include:
- Maintain the time frame given i.e. no delays in loading shipping containers with the goods
- To prepare for smooth clearance for export goods
- Insurance of the goods, in case of any loss or damage during the transit
- Proof of delivery and loading of goods to the buyer
- The entire payment of the delivery of goods to the port named in the agreement
- Ensure correct packaging and protection for all goods
Add CIF to the contract: Yes or No?
According to the statistics, as far as the implementation of CIF is concerned, sellers have claimed to find it fairly unsuccessful for the supply chain coordination for goods like fresh produce as the estimation method of shipping time, quality of the produce, and the dip and rise in demand are not solely dependent on the customers. It is also dependent on the weather, season and availability of the same.
For the buyer, it also does not prove to be the most successful contractual term as the seller is responsible for the majority of the risks. This is because the CIF meaning suggests, sellers can easily charge a premium price to the buyers on the overall goods price to balance out their costs. This can result in increased costs for the buyer.
However, the upside of CIF in the contract for all goods is higher in general, and so adding CIF is a good idea for every stakeholder involved in the process.
As the name suggests, CIF meaning, in literal terms is understood to be the monitory weightage on the buyers and sellers to maintain healthy trade relations in the shipping industry. However, it is not just limited to that, as the true CIF meaning is the division of risks involved from the time the delivery shipment leaves the home base till the time it reaches its final destination. It is also an added benefit to the customer and the shipping industry as it assures timely deliveries, growth of the industry, efficient logistics, etc.