Understanding Incoterms®

Being a Procurement Professional, Buyer or Purchaser, it is good to understand International Commercial Term, in short we called it Incoterms® as this could helps us make a better decision in procuring materials especially from international market. Below is a sample of the Incoterms® reference chart which we would be referring to.

                                   


What is Incoterms®?

So what is Incoterms®? They are guidelines that helps define the roles and responsibility of each individual party (sellers or buyers) for any good delivery under a sale agreement for dosemtic or international.

International Chamber of Commerce, in short ICC, first introduce Incoterms® in 1936 and today, it has been widely used by all companies for their trade.

What are Incoterms® used for?

Incoterms® allows one parties to clarify and understand what roles and responsibilities that they play a part in a sales agreement i.e transportation cost, liability concern such as who bear the risk before, during and after etc.

The implement of Incoterms® significantly help to reduce misunderstanding between parties and this has greatly reduce any dispute among them.

As said earlier, Incoterms® was first introduced in 1936 and the last revision was made in September 2010 and took effective on January 1st, 2011. Earlier Incoterms® still can be used but you need to specify clearly in any agreement to avoid any dispute. I would recommend to use the latest version since i would say almost all industries know about the changes and would have made appropriate changes.


Which Incoterms® to use for your trade?

In Incoterms® 2010, it was now being more organized, categorizing them into 2 main categories via mode of transport, allowing one to refer easier and correctly.

Group 1 - the following terms are applicable to any mode of transport i.e. Sea, Land or Air

• EXW Ex Works
• FCA Free Carrier
• CPT Carriage Paid To
• CIP Carriage and Insurance Paid To
• DAT Delivered at Terminal
• DAP Delivered at Place
• DDP Delivered Duty Paid

Group 2 - the following terms are only applicable to waterway mode i.e. by ocean

• FAS Free Alongside Ship
• FOB Free on Board
• CFR Cost and Freight
• CIF Cost, Insurance, and Freight

With the helps of these Incoterms®, you can consider the risks and benefits or different term in your business case analysis when you are doing sourcing internationally. Usually for international market, supplier would usually for for EXW, FOB term as they do not want to be liable for any issue arise after hand changes i.e. no need to worry about cargo damage, loss of shipment. However, using such term, the price will tend to be better than other term like CIF, DAP where supplier need to ensure goods are delivered to you at their cost, any issues arises and they are liable.

So do take note of this portion when you negotiate for your purchase. Cheers!

To read more about Incoterms®, you can read it up at: http://www.export.gov/faq/eg_main_023922.asp