Incoterms, or International Commercial Terms, are a set of three-letter trade terms standardized by the International Chamber of Commerce (ICC). Using these terms properly will allow clear communication of the tasks, costs, and risks associated with transporting goods between your supplier (Seller) and your company (Buyer). It is important to keep in mind that Incoterms, alone, do not take jurisdiction over the law governing the contract or define the price payable, currency, or credit terms between parties.
How Can Knowledge of the Incoterms Benefit Your Company?
With any high-growth technology company, it is essential to mitigate supply chain risks, and knowing the details behind Incoterms can eliminate logistics inefficiencies that can occur when engaging in global trade. Incoterms simply outline who is responsible for what part of the supply chain and thus which organization is paying for what part of the supply chain. Even a simple misunderstanding of an Incoterm can create drastic obstacles that can cost your company thousands, or even millions, of dollars in unexpected charges. We encourage you to understand the strategic cost and risk tradeoffs of having a supplier, or your company, manage more or less of the supply chain. The goal should not be to simply place the most supply chain responsibility on one party or another. Rather, your company should strategically allocate responsibility of specific parts of the supply chain to those organizations that will generate the overall best Total Value of Ownership (TVO).
What Are Some of the Most Common Incoterms?
Below is a list of the most common Incoterms our team comes across on a daily basis. We strongly recommend sticking to one of the below terms for simplicity and ease of ongoing supply chain management.
(Free on Board) is used for maritime transportation and indicates the Seller is responsible for paying the delivery and loading of goods onto a vessel arranged by the Buyer. Once the shipment is loaded, all risk and liability of charges are transferred to the Buyer who will cover the costs of freight, insurance, unloading, and transporting the goods to the final destination.
(Ex Works) indicates that the Seller is responsible only for making the goods at their facilities. Once the goods are produced, all risk and liability of charges are transferred to the Buyer for transporting the goods to the final destination. This Incoterm is used most often when making an initial quotation for a good without any logistics costs and places maximum responsibility on the Buyer.
(Cost and Freight) is another term in which the transfer of goods between Seller and Buyer is conducted entirely by water. CFR indicates that the Seller assumes all risk and liability of charges for transporting the goods to a named port. Once the goods arrive at this port, the Buyer assumes all risk and costs associated with transporting the goods to the final destination.
(Cost, Insurance and Freight) refers to the same conditions indicated in CFR with the exception that the Seller is required to purchase insurance to cover any loss or damages incurred in transporting the goods to the port.
(Delivered Duty Paid) indicates that the Seller is responsible for transporting the goods to an agreed-upon destination (potentially your contract manufacturer and/or your plant) and pays all costs associated up to the final delivery point, including import duties and taxes. Once the goods are delivered to the final destination, all risks and responsibilities are transferred to the Buyer, including unloading. This Incoterm places maximum responsibility on the Seller.
Keep in mind that the latest Incoterms were updated in 2010 by the ICC, and any terms defined before this revision may have been changed. It is essential for high-growth companies to use these terms properly to avoid under-compensating for logistics costs. We hope this high-level overview provides you a better understanding of these critical logistics terms and allows you to make more informed strategic supply chain decisions as your business scales.