For those supply chain managers working for firms that engage in foreign trade, one of the major concerns is likely to be the delivery arrangements – in particular, the potential for confusion surrounding the responsibility for freight, insurance, customs charges, and damage in transit. To assist in understanding, the International Chamber of Commerce has published 11 International Commercial Terms, or Incoterms, which are internationally recognized and have clearly defined both the buyer’s and seller’s obligations in common transactions.
Last revised in 2010, the new terms are divided into two groups – seven terms which apply to any mode of transport and four which are to be used for ocean and inland waterway transport only. Some managers have been confused by the terms; but hopefully, the following list and explanations will aid in understanding.
INCOTERMS FOR ALL MODES (7 terms)
Ex-Works means the buyer assumes total responsibility for the shipment. Delivery is accomplished when the product is handed over to the buyer’s representative at the plant or DC. The buyer is responsible for freight costs, insurance, export and import clearance, and all customs charges.
FCA (Free Carrier) provides that the seller fulfills his responsibility when he delivers the product to the carrier.
CPT (Carriage Paid To) provides that the seller pays transportation costs and export clearance charges, but the buyer pays for insurance.
CIP (Carriage and Insurance Paid To) This term is used primarily for multimodal moves and is the same as CPT, except the seller must also purchase cargo insurance in the buyer’s name.
DDP (Delivered Duty Paid) This is the maximum obligation that can be assumed by a seller. The seller is responsible for all risks and charges up to the consignee’s door.
DAT (Delivered at Terminal) (new) Delivery is accomplished when goods are unloaded and placed at the disposal of the buyer at a named terminal.
DAP (Delivered at Place) (new) Delivery is accomplished when goods arrive and are ready for unloading at the destination.
(Note: These last two terms replace the 2000 Incoterms for Delivered at Frontier, Delivered Ex – Ship, Delivered Ex – Quay, and Delivered Duty Unpaid.)
INCOTERMS FOR OCEAN AND INLAND WATERWAY TRANSPORT (4 terms)
FOB (Free on Board) means that the seller is responsible for getting the goods to a port. The buyer bears the cost and responsibility from that point on.
FAS (Free Alongside Ship) requires the seller to deliver the product alongside a given vessel at a port.
CFR (Cost and Freight) deals with the cost of the merchandise as well as the freight costs. The seller is responsible for the product and the transportation costs to the destination port.
CIF (Cost, Insurance, and Freight) provides that the seller pays for insurance in addition to the product and transportation costs.
A clean understanding of these terms is important. They have been designed to cut down on the uncertainty arising from differing interpretations of terms of sale from one country to another. The new terms can be found at several locations on the internet, and free, printable charts are readily available.