The International Chamber of Commerce (ICC) developed a set of terms known as Incoterms, which define the responsibilities of buyers and sellers at each stage of the shipping process. They appear on the Bill Of Lading (BOL) to show who is responsible for paying certain costs that come along the way in the shipping journey.
While Incoterms help clarify who is responsible for the freight at various points, understanding them fully can be complex. The main focus is to determine who controls the cargo and at which point in the transaction. Each Incoterm specifies the responsibilities, costs, and risks assigned to either the buyer or the seller.
While there’s a total of 11 different Incoterms, in this blog, we will focus on some of the more commonly used Incoterms: EXW, FOB, DDP, CFR. If you have questions about other incoterms, please see our previous blogs on this topic or contact us today and we’ll reach out!
Key Takeaways:
- Understand what incoterms are and what each means.
- Learn how switching incoterms works and the possible benefits.
- Examples of how each incoterm works.
Incoterms from an importer’s point of view
FOB (Free on Board), also know as “port to door,” means that the supplier is responsible for all charges up to the point the cargo is loaded onto the ocean vessel, at which point the buyer assumes control once the goods are en route to the destination country. This is a common practice because it splits the responsibilities clearly: the exporter controls transportation and local charges at the origin, while the importer controls transportation and local charges at the destination.
This Incoterm can only be used for goods transported by sea or inland waterway.
Example: Imagine you have a shipment from Japan with New York being the destination. Under these terms, the supplier (seller) in Japan is responsible for all costs and logistics up until the goods are loaded onto the vessel at the port. Once the cargo is on the vessel, the responsibility shifts to the buyer. Simply put: the buyer takes over responsibility once the goods are loaded onto the vessel and headed to the NY destination.
EXW (ExWorks), also known as “door to door,” means once the seller makes the goods available, the buyer assumes all risk and cost for the duration of its journey. This includes all of the foreign transportation, customs clearance, taxes and duties.
This Incoterm can be used for any mode of transportation.
Example: Imagine you have a shipment originating from Shanghai and destined for the Port of Los Angeles. Once the seller makes the goods available, the buyer takes on all responsibility for the shipment, from that point all the way to the destination.
DDP (Delivered Duty Paid), means the seller takes responsibility for all costs and risks (including duties, customs clearance), until the goods reach the buyer at the specific destination.
This Incoterm can be used for any mode of transportation.
Example: when a company in the U.S. buys from a supplier (seller) overseas, the supplier (seller) agrees to handle and assume all control, until the shipment(s) reach the buyer at their specific destination.
From an exporter’s point of view:
CFR (Cost and Freight), also known as “door to port”, means the seller (which is the exporter in this case), would be responsible for arranging and paying for the cost of transporting the goods that is local to them. Once the seller delivers the goods onto the ship, the responsibility shifts to buyer. See below for an example of this. Note: the buyer is also responsible for paying for insurance, if needed, as insurance is not included in CFR terms.
This incoterm can only be used for goods transported by sea or inland waterway.
Example: A company in the U.S. is exporting a shipment from JAXPORT to a port in Brazil. Under these terms, the seller in the U.S. would be responsible for arranging and paying for the cost of transporting the goods from JAXPORT to the designated port in Brazil. Meaning, the buyer in Brazil would arrange and pay for the cost of transporting the goods from the port in Brazil to their warehouse, as well as duties, customs clearance, taxes once they arrive. The buyer is also responsible for getting and paying for insurance, if needed, as insurance is not included in CFR.
Ask yourself: Should I switch incoterms? And if so, how do I switch incoterms properly?
Switching Incoterms
Less isn’t always more. If you have some bargaining power when selecting the Incoterms for your shipments, there are a few key things to consider. Opting for the lowest costs isn’t always the best choice when it comes to Incoterms. The cheaper the option, the less control you have over the vendors and shipping methods used. Giving up this control can result in an impact of quality and increase your risk.
While EXW is the most expensive it does allow you and your team to have complete control over vendor selection and shipping methods used. If that’s something that aligns with your company needs, that is a great option. But if that one is not for you, FOB is another great term for companies that want to make sure they have a significant amount of control over their shipment but also want a more cost-friendly option regarding the costs associated with vendor activities conducted in the foreign country.
DDP is one of the lower costs Incoterm options. It is an extremely cheap option if you’re the buyer, however, it is difficult to find a seller who wants to pay for the entire transit. It also increases your risk, since you will have less control over the transaction – meaning, the seller may choose the lowest cost vendors throughout the way, which can impact the quality of the journey.
Service Perspective
We understand the complex, and sometimes confusing, nature of Incoterms. Which is why understanding more about them can allow you to make more informed, cost-effective, and risk-conscious decisions for your company. This is also why working with a freight forwarder, like InterlogUSA, can be incredibly helpful when navigating Incoterms because we bring expertise and can provide clarity on which Incoterm best suits your needs. Should your situation change, and you need to evaluate the possibility of switching Incoterms, our team is in a great position to assist with that.
Ultimately, a forwarder acts as a valuable partner to ensure smoother, more cost-effective transactions while minimizing confusion or potential errors in applying Incoterms.
Do you have other questions about incoterms? Contact us today to go over your options.
Interlog continues to stay up to date on this and the latest in the market, to provide our customers and readers with the latest industry news. Should you have any questions regarding this, please send an email to our team today: support@interlogusa.com . Additionally, we have our weekly market updates that can provide you with relevant freight news, updates, developments across the industry, and more.