What is an Incoterm?
International Commercial Terms (Incoterms) are 11 trading terms or rules that define the responsibilities of sellers and buyers in a trading transaction.
🚨 Incoterms do get updated from time to time and the last recent update was 2020. Here we explain the 2020 version of the terms.
Note: DDU (Delivered Duty Unpaid) is an old incoterm but it is still widely used in 2020.
Rules for any transport mode:
Why do Incoterms exist?
They determine your purchase prices and also clearly define the responsibility of cost and risk for the buyer and seller.
🚨 The terms are negotiated and are mentioned in the sales contract!
What are some popular Incoterms for the buyer?
Buyers commonly choose or prefer the following:
#1 - FOB
FOB (Free on Board) gives you (the buyer) control of your goods at relatively low shipping costs since you get to pick the freight forwarder of your choice.
The seller takes over the harder part, that is getting the goods onto the ship and arranging export clearance.
Works best for shipping bulk or breakbulk goods such as oil, grains, coal, or bagged cement. For containerized cargo, it’s better to use FCA terms.
#2 - EXW
Gives you complete control over the goods, as there is only one party responsible for arranging your cargo’s departure.
With other terms it's usually a collaboration between the supplier and forwarder, which may increase the risk of miscommunication.
Works best for local or within borders transportation of goods, or for buyers who want complete control over their goods and their transportation.
#3 - DPU
DPU, previously known as the DAT (Delivered at Terminal), is a popular choice if the buyer does not want to or does not know how to arrange for transportation and insurance.
Under DPU the buyer is only responsible for 2 things: import clearance & duties, and unloading costs at the final destination.
Works best for LCL or consolidated shipments with multiple receivers - the seller can unload the goods, separate the shipments, and make them available to the buyers.
🚨 Keep in mind that these popular terms may not be the best for your type of goods.
You can find out more about each term below:
Overall, they can be organized into 4 groups:
When you negotiate an Incoterm with your supplier, do remember that what works best for you may not be the best for them (and vice versa!)
Try to come to a mutual understanding and clearly define the responsibilities before finalizing the sales contract.
Rajitha Reniguntla is a supply chain enthusiast from Hong Kong. With a curious mind, she's an avid learner carrying a knack for exploring and breaking down complex ideas. She loves to learn about new things and always aims to enhance the customer experience. Outside of work, she enjoys cycling, doodling and listening to podcasts!