By Clifford F. Lynch
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
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.
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.
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.
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.
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
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
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.