C. F. Lynch & Associates

"Incoterms" One of the Most Valuable Tools of the (Foreign) Trade

By Clifford F. Lynch

DC Velocity, May, 2010

Except possibly for the economy, no recent development has challenged the supply chain manager like the growth in international shipping. As business has spun out of its purely domestic orbit, transportation managers have been caught up in the tumult. Their jobs have changed; they need new tools, new services, and new skills.

For those new to the foreign trade game, one of the biggest concerns is likely to be the delivery arrangements – in particular, the potential for confusion regarding who’s responsible for freight, insurance, damage in transit, and the like. To simplify matters, the International Chamber of Commerce has published a set of standard terms of sale known as the International Commercial Terms, or Incoterms. Designed to cut down on uncertainty arising from differing interpretations of terms of sale from one country to another, these 13 internationally recognized terms clearly define both the buyer’s and seller’s obligations in a number of common transactions.

Incoterms are sometimes divided into four groups, based on where responsibility transfers from one party to the other. For instance, the E term (there’s just one) covers transactions in which the seller simply turns the goods over to the buyer at the seller’s premises. The F terms, by contrast, are used in cases where the seller will deliver the goods to a carrier of the buyer’s choosing, and the C terms apply to cases where the seller arranges for transportation and assumes responsibility for the goods until they reach the destination port. The D terms cover arrangements in which the seller bears the costs and risks of delivering goods beyond that destination port.

What follows is a short summary of the Incoterms.

E 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 shipper’s plant or DC. The buyer is responsible for freight costs, insurance, export and import clearance, and all customs charges.

F 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.

FCA (Free Carrier) provides that the seller fulfills his responsibility when he delivers the product to a carrier.

FAS (Free Alongside Ship) requires the seller to deliver the product alongside a given vessel at a port.

C Terms

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.

CPT (Carriage Paid To) is similar to CIF, except that the buyer pays for insurance. The seller, however, is responsible for export clearance.

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.

D Terms

DAF (Delivered at Frontier). In this case, delivery is accomplished when products are cleared for export at a named frontier or border point. The buyer takes delivery here and is responsible for clearing customs into the destination country.

DES (Delivered Ex Ship). The seller’s duties are discharge when the ship arrives at the destination. The buyer assumes responsibility for unlading and import clearance.

DEQ (Delivered Ex Quay). This is similar to DES, except the seller assumes responsibility for getting the goods off the ship.

DDU (Delivered Duty Unpaid). The seller provides transportation and risk assumption to the destination, except the buyer must pay customs duties and taxes.

DDP (Delivered Duty Paid). This is the maximum obligation that can be assumed by a seller. The seller is responsible for all risk and charges up to the consignor’s door.

Information on Incoterms can be found on a number of carriers’ (and other) websites. UPS Inc. offers a particularly helpful chart at www.ups-scs.com/tools/incoterms.pdf.



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