How to effectively use Incoterms
To assist with buying and selling overseas, the International Chamber of Commerce created Incoterms®. Find out how to use Incoterms effectively.
Incoterms serve to minimise confusion
With numerous global languages and cultural differences, communicating where the obligations, risks and costs transfer from seller to buyer when importing or exporting can be complicated.
Incoterms® assist in minimising the confusions, as they are internationally- recognised terms.
Understanding and accurately using the correct Incoterm® is critical, as a simple misunderstanding can end up costing you.
Importing may seem easy, but be careful.
Importers who are inexperienced may find the C & D terms (CFR, CIF, CPT, CIP, DAT, DAP & DDP) convenient and helpful, as depending on the Incoterm® used, the seller pays for all the freight charges, insurance and delivery accordingly. You may be thinking “Great, this importing thing is easy, my supplier arranges everything!”
But just hang on a minute.
"Understanding and accurately using the correct Incoterm® is critical, as a simple misunderstanding can end up costing you. "
Shippers account for these additional charges in the rates they give you. They ensure they have covered the cost of the freight, insurance, currency fluctuations and delivery in their price. As a result, importers frequently pay higher prices when the seller selects the freight and insurance company. You are left unaware of the breakdown of charges, and the insurance cover your supplier pays for may not cover you for all eventualities. Also, consider this, it will be difficult to submit a claim when you have not taken out the policy!
One of the most common groups of Incoterms® is the F Group (FCA, FAS & FOB). With these Incoterms®, the importer is responsible for shipping and insurance. This gives importers more control to manage and track their shipment, providing them with better supply chain management and influence over the choice in: shipping lines, insurance options and transit times; which can all vary in cost.
This is not to say always choose an F Incoterm®, but, always look at the different options and do not opt for what seems to be the easy choice. Investigating the most efficient and economical way for your business may just give you the competitive advantage in your industry.
Three fundamental details you should remember
- Ensure you and your suppliers are clear on the agreed Incoterm®.
- Ensure you are aware of what costs you are responsible for with the chosen Incoterm®.
- Always compare Incoterm® options as each scenario can contribute to significant savings or revenue loss, by not investigating which is best for your situation.
As you can see, if you understand Incoterms®, you can use them effectively, and to your advantage.
What are your thoughts on the effective use of Incoterms®?