Choose an Incoterm

Oct 2

When importing products, one of the most important decisions to make is which Incoterm (International Commercial Term) to use for your transactions. The Incoterm defines the responsibilities of both the buyer and seller during the shipping process, outlining who is responsible for what tasks, including transportation, customs clearance, insurance, and risk of loss.

Choosing the right Incoterm for your sale is crucial because it directly impacts your landed costs—the total cost of getting your goods to their final destination. Let’s dive into how Incoterms work, why they matter, and how to select the right one for your business.

1. What are Incoterms?

Incoterms are a set of standardized international trade terms published by the International Chamber of Commerce (ICC). They are widely used in contracts for the sale of goods, specifically in international shipping and freight logistics. Incoterms cover the cost and responsibility split between the buyer and the seller in the shipping process, including:

Transport costs
Customs duties
Insurance
Risk of damage or loss during transit

There are 11 main Incoterms, each offering different levels of responsibility and cost division. Some terms place the responsibility on the seller, while others place it on the buyer.

2. Types of Incoterms and Their Impact

To make an informed decision, you need to understand the key Incoterms and their implications for your costs and responsibilities. Below are some of the most commonly used terms:

EXW (Ex Works): The seller makes the goods available at their premises. The buyer assumes almost all responsibility for the shipment, including transportation, customs clearance, and insurance. While EXW offers the buyer the most control, it also means more upfront costs and complexities.
FOB (Free on Board): Under FOB, the seller is responsible for delivering the goods to the port of shipment and loading them onto the shipping vessel. After the goods are on board, the responsibility shifts to the buyer, who assumes the risks and costs of international transportation, including freight, insurance, and import duties.
CIF (Cost, Insurance, and Freight): CIF places more responsibility on the seller. The seller is responsible for the cost of the goods, transportation to the destination port, and basic insurance coverage. The buyer handles costs once the goods arrive at the destination port, including customs duties and local transportation.
DDP (Delivered Duty Paid): DDP is the most comprehensive term for the buyer. The seller is responsible for all costs, including transport, customs duties, and taxes, until the goods are delivered to the buyer’s premises. This provides the buyer with more certainty about total costs but can be more expensive for the seller, as they bear all risks and expenses.

3. How Incoterms Affect Landed Costs

The Incoterm chosen directly affects your landed costs, which are the total costs incurred to bring a product from the supplier to your business. Landed costs include:

Product cost
Shipping fees
Customs duties
Insurance
Port fees and taxes
Other associated costs

For example:

EXW (Ex Works) will result in a higher landed cost for the buyer because they will be responsible for almost all shipping and logistics, including freight, customs, and insurance.
DDP (Delivered Duty Paid) results in a higher upfront price because the seller assumes all the shipping costs, but it may be beneficial for buyers who prefer a fixed cost.

Choosing an Incoterm that fits your business model and cash flow is critical to ensure that your costs are predictable and manageable.

4. Choosing the Right Incoterm for Your Business

Here are a few factors to consider when selecting the right Incoterm:

Cost Control: If you have strong logistics capabilities and can manage freight and customs duties, terms like FOB or EXW might be beneficial, as they give you control over the shipment process. However, if you prefer a more hands-off approach, CIF or DDP might be better, as they reduce your involvement in the logistics process.
Risk Management: Different Incoterms assign different levels of risk. With EXW, the risk is primarily with the buyer. If you are unsure about managing risk or logistics, opting for an Incoterm like CIF or DDP can offer you more assurance that the seller is handling many of the risks and responsibilities.
Market Dynamics: Some industries or countries may have specific customs procedures, tariffs, or regulations that make certain Incoterms more efficient or practical. Understanding the market dynamics of where you are importing from and selling to will help guide your decision.
Cash Flow: Incoterms affect the timing of payments and who bears the costs at various stages. For example, with DDP, you will have a clearer understanding of total costs upfront, while EXW or FOB will give you more flexibility in paying for different aspects of the shipment as they occur.

Conclusion

Selecting the appropriate Incoterm is a key factor in your overall supply chain strategy. It will influence your total landed costs, the division of responsibilities between you and the supplier, and the overall risk involved in transporting goods. Understanding these terms helps you plan for all eventualities and avoid unexpected costs and delays.

Need guidance on selecting the right Incoterm for your business? Don’t hesitate to send us a question on the “Messages” tab at portal.supplychainshark.com.

Owen Haacke