Incoterms

Having spent numerous years as a Sales Executive for a large Freight Forwarder, I was always shocked at the lack of understanding in regards to Incoterms. I would ask people what their shipping terms were on a particular lane and they typically didn’t know. Sometimes they would know that it was Door or Port, but they had no idea of Incoterms or how the costs might differ between various terms. They would often think they were buying on FOB terms, but they would say things like FOB Door or FOB Factory, which is an incorrect use of the FOB term. I was meeting with people that had titles like Supply Chain Manager, International Logistics Manger, Purchasing Managers, Sales Managers, and even with higher level VP’s and Presidents of Small Companies. These are positions where it is essential to have a basic understanding of Incoterms. The titles and levels of management didn’t seem to matter too much, I have honestly found less than 20% of people in these positions truly understood Incoterms. I don’t think this is an abnormal finding I would be willing to be that most people in these positions have only a slight understanding of Incoterms. Ask your team today to explain Incoterms, you might be surprised at their responses.

Wake Up Call

If the lack of understanding Incoterms is not shocking to you, it should be. I don’t know how you can properly perform your functions within an organization without a clear understanding of Incoterms. If you are a manager of an organization, you need to make sure you educate everyone involved with supply chain management, purchasing, sales, logistics, distribution and even higher level managers on Incoterms. Failure to understand Incoterms can cost companies thousands of dollars or more.

As an example, I had one customer that asked about shipping an Air Export Shipment on DDP terms. I advised them that we could help with the shipment, but that they should consider CPT shipping terms otherwise they would be responsible for destination charges as well as duties and taxes on the shipment. This particular shipment was going to Europe, which has a high VAT (Value Added Tax) not to mention duties and high costs of delivery. In this organization the sales and logistic departments were not on the same page as to the liabilities and costs of a DDP shipment and the shipment ended up costing them approximately an additional $80,000.00 USD in shipping costs that were not anticipated, mostly consisting of VAT. Can your business afford these mistakes?

Incoterms 2010 Basics

Incoterms 2010 is the latest version as updated by the International Chamber of Commerce. Incoterms are not law, but they are provided as a guide to help shippers/sellers and consignees/buyers understand who is responsible for both the Costs and Risks of Transportation. Incoterms are not meant to replace a contract, they are meant to define how the delivery of goods is to be handled. It is appropriate to use Incoterms in a contract but the Incoterms do not in themselves create a contractual obligation.

An often overlooked part of Incoterms is that they must be accompanied by a named place. Saying EXW or FCA alone is not sufficient, but EXW Ningbo or FCA Hamburg are more appropriate. After all, if you just say FOB, for Instance, it could be FOB New York or FOB Los Angeles or FOB Santiago, Chile. Without a named place it is subject to interpretation and misunderstandings. The more description you include the better off you are. I often encourage people to put a full description such as EXW Company XYZ Warehouse, 123 International Street, Shanghai, China or FCA DFW Airport. If you do not specify the exact location, airport or ocean port the details could cost you money. I had another customer that liked to sell on FOB East Coast Ports. Which port would that be? If your product is in New York, if the customer picks Savannah, it’s going to cost you a bunch of money for leaving the terms undefined and open to interpretation.

Incoterms 2010

Below is a list of Incoterms

EXW, FCA, CPT, CIP, DAT, DAP, DDP - Multimodal Terms (Ocean, Air, Truck, Rail, Etc.)

FAS, FOB, CFR, CIF - Ocean Freight Only Incoterms

It’s important to note the mode of transportation when deciding on Incoterms. FOB Tokyo Narita International Airport is an incorrect use of the Incoterms. FCA Tokyo Narita International Airport would be a better use of the Incoterms meant for an Air Shipment.

Just some basics when looking at Incoterms. There are 4 groups, the “E” terms, “F” terms, “C” terms, and “D” terms. For the most part, for standard business that moves in ocean containers or airfreight, you will typically not be using FAS or DAT, these are more for larger bulk shipments and specialty types of arrangements. DAT may be a good Incoterm to use when delivering to a border station such as Mexico, but we won’t go into that now. FAS is a term that really is for large Break Bulk type shipments.

Below are brief descriptions on the most common terms, these are not meant as a full description of the Incoterms, but a quick at a glance guide to help demystify any confusion on the terms.

E Terms: EXW- This is the only E term, it means that the buyer will load at the shipper’s door. This is often times called incorrectly FOB Door. The correct term for FOB Door is EXW.. named place.. I typically tell people to negotiate product prices on EXW terms to give you a clear cost of the product, you can then back up to F terms if you decide to buy.

F Terms: FCA & FOB- Both F terms are very similar. The seller pays to get the product up to a certain point normally an airport, ocean port, Container Freight Station, or other named place that is normally a logistics warehouse of some sort. FCA is essentially the FOB of Airfreight and FOB is only for Ocean Freight. I typically encourage people to buy on F terms.

C Terms: CPT, CIP, CFR, & CIF- The C terms will have the seller delivering the goods up to a destination port/airport/terminal or other named destination point. CPT and CIP are the multimodal terms, and CFR and CIF are the ocean freight terms. Anytime you see an “I” in the Incoterms that is for Insurance. The only difference between CPT & CIP as well as the only difference between CFR and CIF is the insurance. In CIP and CIF, the seller most purchase cargo insurance to cover the product during shipment. I typically encourage people to sell on C terms.

D Terms: DAP & DDP: The D terms define delivery beyond the airport, ocean port, or terminal. DAP will get the product to the door (or other named place) but will not include destination customs clearance or any applicable duties and taxes that may be applicable at destination. DAP used to be called DDU (Delivered Duties Unpaid). DDP is when the seller handled everything, door to door including all applicable duties/taxes, or other government fees. I typically tell people to avoid the D terms and it should be a mandated rule to avoid DDP at all costs unless absolutely necessary. DDP has a significant amount of risk involved when you decide to be responsible for destination customs. Do you have an import permit? Do you have a business Tax ID in the destination country? What will the duties and taxes be at destination? DDP can be very problematic.