Supply Chain Glossary

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Incoterms


Source: Procurement Glossary
Author: Paul Rogers
Institute: CIPS - UK

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Incoterms is shorthand for International Commercial Terms and is a registered trademark of the International Chamber of Commerce [ICC].  Incoterms is a series of pre-defined rules relating to particular terms used in international commercial transactions to ensure that both parties understand their rights and obligations.  The primary intention of Incoterms is to clarify ‘who does what’ and ‘what each pays for’ in terms of the transportation, insurance and delivery of goods, especially across international boundaries or where the parties do not have a trading history.  The terms were updated in 2011 and the number of terms was reduced, but there are still ‘E’ terms, ‘C’ terms, ‘F’ terms and ‘D’ terms.

The ‘E’ term is EXW, for ‘ex-works’, and means that the seller makes the goods available for collection from their premises.  This method places maximum obligation with the buyer and minimum with the seller.  ‘F’ terms, for example FCA, (free carrier at a named place of delivery) means that the seller hands over the goods, cleared for export, to a carrier at a named place as decided by the buyer.  The seller pays for delivery of the goods to the named place, and risk passes to the buyer when the goods are transferred to the nominated carrier from the seller.  The buyer has significant obligations with this method and typically uses a 3PL logistics provider to manage the supply chain from receipt of the goods to delivery at the buyer’s location.  ‘C’ terms, for example CIP, (carriage and insurance to a named place of destination) mean that the seller pays for delivery and insurance to the named point of destination, but risk passes earlier in the supply chain, when the carrier receives the goods from the seller.  ‘D’ terms, such as DDP, (delivered duty paid to a named place of destination), means that the seller bears the responsibility for delivering the goods to a named place in the country of the buyer, with all logistics and insurance costs paid, as well as import duties and taxes.  This method places the maximum obligation with the seller and the minimum with the buyer.

Many buyers choose to ask suppliers to quote prices on more than one basis.  For example, a buyer might ask for two quotations, the first on the basis of ex-works at the supplier’s facility [Incoterm: EXW] and the second quotation on the basis of the goods being delivered to the buyer’s premises [Incoterm: DDP].  By using the Incoterms, EXW and DDP, both the supplier and the buyer are clear as to what is covered in the quotations as regards transportation, insurance and delivery.   Comparison of the two quotations allows the buyer to determine if it is more cost effective to engage a freight-forwarder to manage the supply chain or rely upon the supplier.

 

 

 

 

 

 

 




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