6 Negotiating with Your Supplier: Terms to Protect Your Company
What are Incoterms? 11 Terms of shipment and delivery for use in contracts for B2B sales/purchase goods Developed by the International Chamber of Commerce Effective as of January 1, 2011 What Use is Most Effective? Always use in the Abbreviated Form i.e. CIF Accompanied by a Precise Geographic Place i.e. 50 United Avenue, Anycity, IL USA Lists the Current Version of Incoterms: Incoterms 2010. Are Incoterms Part of International Law? No. In fact, they must be specified in order to apply. What is the Purpose of Incoterms? Division of: Costs, Risks and Responsibilities between sellers and buyers. Greatly reducing the potential for seller-buyer misunderstandings.
Incoterms: Useful Definitions Pre-Carriage Inland transportation on the seller s side. a. International: from the place where the shipment starts to the departure point on seller s side. b. Domestic: from the place where the shipment starts to subsequent carriage. Main Carriage a. International: transportation from the point of departure on the seller s side to arrival point on buyer s side. b. Domestic: subsequent transportation beyond pre-carriage On-Carriage a. International: transportation from the arrival point on the buyer s side. b. Domestic: subsequent transportation beyond main carriage.
Incoterms: Overview of F-Terms International Use: The buyer contracts for main carriage. They are therefore in charge of carrier and usually also forwarder selection. Transfer of Risk Seller s Disadvantage: Buyer s appointed forwarder should file Electronic Export Information (EEI) HOWEVER The seller is tasked with filing Export Clearance Buyer s Advantage: Control of Main Carriage Frequent carrier selections offer lower freight costs Responsible for 10+2 reporting
Example of FOB (Free On Board) SHIPMENT/DELIVERY TERMS FOB Port of Shanghai, China, Incoterms 2010 MERCHANDISE TOTAL Export Packing Pre-carriage to port Terminal Handling US$ 20,000.00 250.00 500.00 150.00
Incoterms: Overview of C-Terms International Use: The seller contracts for main carriage and is in charge of forwarder selection. Seller s Advantage: They are in the position to give instructions to carrier and forwarder THEY appoint. Export reporting is a seller responsibility Position to negotiate favorable freight rates Transfer of Risk Buyer s Disadvantage: Must be an experienced buyer to obtain low freight costs Risk of responsibility for condition of goods while in transit Supplier is responsible for 10+2 reporting.
Example of CIF (Cost, Insurance & Freight) SHIPMENT/DELIVERY TERMS CIF Port of Tacoma, USA, Incoterms 2010 MERCHANDISE TOTAL Export Packing Pre-carriage to port Terminal Handling Main Carriage Insurance US$ 20,000.00 250.00 500.00 150.00 3500.00 135.00
Incoterms: Overview of D-Terms International Use: The seller contracts for main carriage and is in charge of carrier/forwarder selection. Transfer of Risk Seller s Advantage: Contract for transportation Export reporting Buyer s Disadvantage: Risk is far less than with C-Group rules Suppliers provide 10+2 reporting No control over freight
Example of DAP (Delivered At Place) SHIPMENT/DELIVERY TERMS DAP 50 United Avenue, Anycity, WI, USA Incoterms 2010 MERCHANDISE TOTAL Export Packing Pre-carriage to port Terminal Handling Main Carriage Delivery Insurance US$ 20,000.00 250.00 500.00 150.00 3500.00 450.00 135.00
Example: EXW (ExWorks) Immediate Transfer of Risk Seller s Advantage: Only requirement is to provide goods when promised. Buyer s Disadvantage: Coordination of origin inland transportation Filing of export declarations Responsible for all origin & destinations charges Buyer Advantage: Control of Goods Door to Door Using Nominated Logistics Partner
Example: EXW (ExWorks) SHIPMENT/DELIVERY TERMS EXW 200 Overseas Lane, Shanghai, China Incoterms 2010 MERCHANDISE TOTAL US$ 20,000.00
Incoterms & Insurance Know the point in transit at which the seller has fulfilled its obligation so that risk of loss has passed to the buyer Control the insurance locally, buy on FOB or CFR and sell on CIF Exposure to countless financial risks when cargo is not insured
Incoterms & Insurance Recovering losses from the carrier s limited liability: Air - $20.00 per kg Ocean - $500 per shipping unit Protect your financial interest with All Risk insurance coverage Protects against physical loss or damage to the cargo from external causes Insurance is calculated by C + I + F + 10% value $0.58 per $100 value $10,000 (merch) + $4,000 (freight) + $81.20 (insurance) = $15,489.32 (policy amount)
Incoterms: Full Overview