Actually, Incoterms would be more than just a short blog. I always recommend that any office dealing with international trade, be it a transporter, a trader or international procurement, should have a basic Incoterms book close by. It’s not cheap, and you will probably only use it once a year, but that one time will save you heaps of pain and ensure that you are on the correct path.
That being said, there are many excellent visual graphics available from large forwarding organisations or on the web which highlight the main points of cost and risk (and insurance) transfer that relate to the term. These should, however, always be used with caution as they vastly oversimplify things, as we will see later.
That being said, there are many excellent visual graphics available from large forwarding organisations or on the web which highlight the main points of cost and risk (and insurance) transfer that relate to the term. These should, however, always be used with caution as they vastly oversimplify things, as we will see later.
I once had a client who insisted that they wanted to use the DAP (Delivered at Place) term because the company was extremely risk averse and wanted to put any risk on the suppliers to deliver to their remote site. They could not see the hidden risk and costs this would add to the whole project and only realised when they were $16m USD down. On large projects, a wrong term, or a term not clearly defined, can have massive repercussions across the whole project.
Another mistake is not ensuring a clear definition of the term. It is fine to have the term DAT (Delivered at Terminal) but then you need to define where at the terminal and who is going to pay for the offloading of the truck at that point on the terminal. The supplier will argue that once he enters the gate he can offload, while you may have wanted your goods under cover!
The major Incoterms remain EXW (Ex Works) FOB (Free On Board) and CIF (Cost, Insurance and Freight). Although, I believe CFR (Cost and Freight) remains woefully underused. Why on earth would you want to buy something and then let someone else insure it for you? So you can then deal with their insurance agent when something goes wrong? Surely it is better to have your own insurance to deal with it if required, where you have leverage and a relationship? There are, however, times when CIF is valuable, particularly as a small dealer regularly importing from a large seller but that needs to be carefully and precisely evaluated.
As a simple rule, make sure your sales contract has understandable and very clear instructions regarding where the handover of costs, risk and insurance takes place. Incoterms provide this and I recommend them but, even then, ask yourself, “how could this be misunderstood?” before you finalise the agreement. There is plenty of case law to show you just how people have misunderstood or manipulated this in the past… do NOT become one of them!
As always, I look forward to your feedback and input relating to transport, logistics and materials management.
Another mistake is not ensuring a clear definition of the term. It is fine to have the term DAT (Delivered at Terminal) but then you need to define where at the terminal and who is going to pay for the offloading of the truck at that point on the terminal. The supplier will argue that once he enters the gate he can offload, while you may have wanted your goods under cover!
The major Incoterms remain EXW (Ex Works) FOB (Free On Board) and CIF (Cost, Insurance and Freight). Although, I believe CFR (Cost and Freight) remains woefully underused. Why on earth would you want to buy something and then let someone else insure it for you? So you can then deal with their insurance agent when something goes wrong? Surely it is better to have your own insurance to deal with it if required, where you have leverage and a relationship? There are, however, times when CIF is valuable, particularly as a small dealer regularly importing from a large seller but that needs to be carefully and precisely evaluated.
As a simple rule, make sure your sales contract has understandable and very clear instructions regarding where the handover of costs, risk and insurance takes place. Incoterms provide this and I recommend them but, even then, ask yourself, “how could this be misunderstood?” before you finalise the agreement. There is plenty of case law to show you just how people have misunderstood or manipulated this in the past… do NOT become one of them!
As always, I look forward to your feedback and input relating to transport, logistics and materials management.