Tuesday, February 11, 2014

International Commercial Terms - Incoterms

When I think of global supply chain networks I not only think about the goods and services being manufactured and transported, I also think about who is paying for them, how they are being paid for, and who is considering the terms of the common contractual sales process.  International Commercial Terms or Incoterms are a way of controlling who pays for the commercial transactions when sourcing a good from another country where taxes, duties, and tariffs need to be considered.  These goods usually travel by ocean freight/international air and could involve multiple ports.  Incoterms are defined as a set of international rules used in foreign trade, limited to matters relating to the rights and obligations of the parties to the contract of sale with respect to the delivery of goods sold.

Incoterms fall into 4 main categories, all of the below have multiple exact definitions.

Group 1 = the “E” or Ex Works.  The seller only makes the goods available to the buyer at the seller’s own premises.
Group 2 = the “F” or Free on Board/Alongside Ship/Carrier.  The seller is called upon to deliver the goods to a carrier/port appointed by the buyer – the port of export.
Group 3 = the “C” or Cost, Insurance, and Freight.  The seller has to contract for carriage, but without assuming the risk of loss of or damage to the goods or additional costs due to events after shipment and dispatch.

Group 4 = the “D” or Delivered.  The seller has to bear all costs and risks needed to bring the goods to the place of destination.

The most common terms are EXW (Ex Works), FCA (Free Carrier to the named place), FOB (Free on Board), and DDU (Delivery Duty Unpaid).  In my experience, buyers would seek agreements for EXW or FOB.  EXW has the minimum obligation for the seller with the buyer taking on the most responsibility.  The seller is not responsible for loading the goods if it is not agreed in contract of sale.  This is common for large global organizations with a sophisticated supply chain.   They most likely have local partners or divisions in place to pick up the goods and get them to the nearest port of export.  The other is FOB, where the seller delivers the goods at the named loading port.  This is common for organizations that have refined supply chain in their local country and can get the goods to the destination manufacturing facility once delivered to the destination port.  Documentation must be presented to customs in the country of destination with full details, ex. FOB Shanghai.  All of these terms influence price both from a logistics and administrative standpoint.  Imagine how much less expensive a final cost of a product is for a buyer if the last step for the seller was to get the finished goods to their dock at the end of the facility (EXW).  There are added costs once the seller has to transport the goods to the port of export (FOB).

If you were the buyer in charge of a large global distributor of goods, which would you pick?  It depends on the country you are dealing with and if you have a local partner/division for assistance.  Most of my projects were FOB, so the buying organization only had to hold the risks and responsibility of transporting the goods from the destination port to their facility.  They were OK with the seller figuring out and adding in the costs from the facility to the export port.

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