Incoterms

[raro]

Dear mods, maybe you can make this one a sticky as the question pops up again and again and the general public doesn't know much about it...

There are plenty of those incoterms around, but in real life only four of them apply on a regular basis: EXW, FOB, C&F (resp. CIF, more about this later) and DDU.

A shipment can generally be devided into 3 parts:

1) local handling in the country of origin

2) sea- or airfreight

3) local handling in the country of destination.

When you buy merchandise abroad, you can agree with your supplier (or vice versa if you export it is just the other way around...) who pays for which part of the shipment. At the same time, also the ownership of the cargo is defined in the incoterms.

EXW = Ex Works. the shipper pays nothing, all charges from the shipper's warehouse are billed to the receiver of the cargo ("consignee"). The ownership is transferred in the moment the cargo is picked up at the shipper's premises.

FOB = Free On Board. Shipper pays for all handling up to the moment the cargo is inside the aircraft or the ship. Also the ownership is transferred. If the container falls off the hook and crashes onto the boat, the shipper has delivered. If it crashes onto the pier, the cargo was not delivered. Consignee pays for sea- or airfreight and the local handling in the destination country.

C&F, CIF = Cost And Freight or Cost, Insurance, Freight: Shipper pays for the local handling in the country of origin and the air- or seafreight. If the consignee wants the shipper to insure the cargo, the term is CIF. If the consignee wants to insure or no insurance is required, the term is C&F.

DDU = Delivered, Duty Unpaid: Here the shipper pays everything from his warehouse to the warehouse of the consignee. In colloquial terms it is also called "free house". Please note the unpaid duties. This is still up to the consignee. If the shipper agrees to cover also the duties (which happens not that often) the term would be DDP.

"Door to door": This is usually either EXW or DDU, depending from which side you look at it. A freight forwarder should be able to arrange shipments worldwide from door to door through either through their own offices or an agent network. Technically, if you want something to be picked up in Timbuktu to ship to Khon Kaen, the freight forwarder of your trust would need the address of your supplier and forward this to his nearest agent to arrange the pick-up of your cargo. This remote-controlled process is for a freight forwarder a daily routine.

Wich incoterm is the best?

This depends on your individual situation. As a small shipper, you might not want to deal with freight forwarders and sell EXW. Then again, you want to provide a good customer service and sell on CIF terms, taking the burden dealing with us shipping guys off your customer. If you buy on DDU terms, you do not have to deal with any of the transportation, but at a premium. The shipper will include the shipping costs into his calculation and usually add a small mark-up to cover the risk of freight rate increases. Those can happen overnight and sometimes unannounced! More about that in another post.

Insurance: Regularly, a freight forwarder would NOT insure the cargo. This is because most industrial customers do have a general liability insurance that also covers transportation risks. As explained above, the incoterm also determines the moment the ownership (and risk!) is transferred from the shipper to the consignee. If you buy CIF and the delivery truck at the destination side has an accident, the shipper's insurance is no longer covering the risk! The truck should have a general liability insurance, but the coverage might not be enough for your high-value cargo. Do yourself a favour and insure the cargo, it does not cost much and makes you sleep better!

[WilliamJarvis]

or you could just read:

http://www.fta.gov.au/Default.aspx?ArticleID=692

[raro]

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