Which Terms Are Best for You?
Understanding Incoterms, Whether you’re a Supply Chain Manager or an international export or import shipper, you’re likely familiar with Incoterms. Incoterms were specifically designed to regulate the shipment and delivery process by carefully managing various aspects of the process, such as delivery costs and insurance policies. In addition, Incoterms help to transfer the risks of damage from the seller to the buyer to ensure a smooth delivery and shipment process every step of the way.
With so many types of incoterms available, it can be a challenge to select the right terms for your unique shipping needs. There are also many different questions you must ask yourself throughout the process in order to make the best decision. Do you plan on shipping your goods via a ship, barge, or other maritime vessel? Do you know which type of insurance is most appropriate for your needs? No matter what your answers to these questions are, choosing the best Incoterms is crucial to your success. Here’s everything you need to know about the most popular terms for both shippers and buyers.
Understanding the Definitions of Incoterms
Each Incoterm is unique. And it is crucial for every export and import shipper to understand the key differences between each term. By understanding the definition of every term, you will be able to make the most appropriate decision for your needs.
Here is a brief overview of every Incoterm and what you can expect from each individual term. These terms apply to nearly every mode of transport, including domestic shipping and worldwide shipping. As a result, you can analyze each term to determine which one most closely matches up to your needs.
Free Carrier (FCA)
According to Free Carrier guidelines, the seller has the responsibility of loading their goods onto the buyer’s transport and safely delivering these goods to the port and export clearance. Each seller must also decide whether to offer the goods at its own premises or at another designated area. As soon as the goods are in the buyer’s possession, the buyer must bear any risks involved in the process.
Ex Works (EXW)
Under Ex Works policy, sellers are required to allow buyers to access their goods at their own premises or at a factory or warehouse. Unlike Free Carrier, EXW does not state that the seller is responsible for loading the goods on the buyer’s transport or delivering them to export clearance.
From the moment the buyer obtains the goods up until they deliver them to their destination, all potential costs and risks fall on the buyer.
Carriage Paid To (CPT)
After delivering their goods to the port and export clearance, the seller must transfer them to the carrier at a specified place. According to Carriage Paid To Incoterm guidelines, the seller is responsible for two main costs: the price of insurance coverage and any costs associated with safely delivering their goods to the carrier.
Another variation of CPT is Carriage and Insurance Paid To (CIP). This Incoterm has the same general guidelines as CPT. However, it also stipulates that sellers obtain a higher level of insurance to protect themselves from the possible risks.
Delivered at Place (DAP)
In simple terms, DAP states that the seller is fully responsible for ensuring that their goods reach the destination without any problems. Once the goods reach their destination, the buyer must bear all the costs and risks of clearing customs and unloading all the goods.
Delivered Duty Paid (DDP)
Once the goods have been completely cleared for import and are ready to be unloaded, the seller is responsible for any costs and risks associated with delivering the goods to their final destination. DDP Incoterms pose a higher risk than usual for both the seller and importer. The main risk that the seller faces is being unfamiliar with how to clear goods for import in their destination country. Meanwhile, the importer might be wary of trusting the seller to complete the process successfully, which puts the importer at risk as well.
Incoterms for Waterway Transport
The above Incoterms could be applied to any type of transport. But many shippers might be wondering which terms are unique to waterway transport. The following terms are suitable for both sea and inland waterway transport. Of course, these terms are highly versatile and adaptable to various shipping situations.
Here is what you need to know about each key term.
Free on Board (FOB)
When following Free on Board guidelines, sellers must first ensure that all of their goods are completely cleared for export. Next, the seller confirms that the goods are properly placed on the vessel at the designated port. Once the seller safely delivers the goods, all risks and costs associated with the shipment process are transferred to the buyer.
Free Alongside Ship (FAS)
The Free Alongside Ship Incoterm is extremely similar to the Free on Board term. The seller still has to make sure that their goods are cleared for export. Moreover, all costs and risks are transferred to the buyer once the seller delivers the goods. However, the main difference is that the seller must place the goods alongside the ship or other vessel at the designated port rather than on the vessel, as implied by the name Free Alongside Ship.
Cost, Insurance and Freight (CIF)
After clearing the goods for export, the seller places them on the ship or other designated vessel and delivers them to the carrier. Throughout the process, the seller is fully responsible for insurance, freight, and any other relevant costs associated with delivering goods.
Once the buyer begins unloading the goods at the port and clearing them for import, they assume any costs and risks associated with the process. All risks fully transfer to the buyer once the goods are secured on the ship or other vessel and are present at the port.
Cost and Freight (CFR)
The guidelines for CFR Incoterms are almost identical to the CIF policy. CFR does not include the insurance requirement found in CIF Incoterms. Of course, this is crucial for shippers and Supply Chain managers to be aware of. The seller is therefore only responsible for the cost of freight while delivering goods under CFR policy. And they are not obligated to purchase the minimum level of insurance as they are under CIF policy.
How To Choose the Best Incoterms for Your Needs
Now that you have a better understanding of each Incoterm. Therefore, you can begin to narrow down your options and select the term that is best for your shipping needs. Before you begin, it’s well worth your time to take a few important questions into consideration. Here are some vital aspects to think about while choosing the right Incoterm for you.
Mode of Transportation
The first and most straightforward step is deciding which mode of transportation you will be using. Incoterms are organized based on the type of vessel they require, so be sure to make your decision accordingly.
When shipping goods via a ship or barge, it is best to opt for FAS, FOB, CFR, or CIF Incoterms. Each of these terms is specifically on behalf of sea and inland waterway transport.
Alternatively, be sure to look into which terms are appropriate for air or railway transport if you’re not planning on shipping your goods via a waterway. Being prepared ahead of time will help ensure that your goods reach the right destination without any delays or difficulties.
Ensure to deliver the goods to the buyer without any signs of damage. That is one of your main responsibilities as a seller. In case of damage anyway, it is crucial to protect yourself from the repercussions. Investing in the right insurance is one of the most reliable ways to keep yourself covered in case of damage to your goods.
When looking for the best insurance for your needs, keep in your mind that not all policies are created equal. Take the time to carefully review each policy in question and verify that it matches up to your unique goals and needs. By protecting your goods from the very start, you can have peace of mind throughout the entire shipping process.
Getting the Results You Want From Your Incoterms of Choice
Each of these Incoterms can help you navigate the shipping and delivering process with a greater sense of confidence. No matter which term you ultimately choose! It is vital to make sure that you select the Incoterm that most closely matches your individual goals and needs.
Be sure to take the time to do your research on each term before you make a choice. Consequently, it will be easier for you to select the right term for your shipping situation. On the other hand, it will be also helpful for you to steer clear of obstacles throughout the delivery process