Incoterms are internationally recognized, used worldwide in both international and domestic contracts for the sale of goods. Incoterms first originated back in 1936, but have been adjusted, added to, subtracted from, and seen increased uptake over the years. Recently, most changes seemed to take place towards the end of a decade; for example, the changes made in 2010 were effective in 2011 and the most recent changes announced this year will be effective in 2020.
It would not be surprising if you have not thought about Incoterms before, nor had to take part in a discussion about them, since they are typically used for international movements to (somewhat) standardize communication across what is most likely multiple languages and keep the tasks, responsibilities, and ownership of goods clear for all parties. However, the use of Incoterms domestically is on the rise as more and more shippers realize their benefit and usage in managing their freight movements and identifying exactly when they are responsible for the goods. Add in the explosive growth of global commerce that many shippers are experiencing, and you’ll see why Incoterms should be added to your knowledge base as soon as possible.
What Incoterms Are Not
Before we delve deeper into Incoterms and their usage or importance and why they are now entering the parcel sphere, it is important to note what they are not, to avoid any over-reliance on their use. Incoterms do not constitute a contract in themselves, and they do not supersede the law governing the contract, address currency, credit terms, or price payable. Therefore, Incoterms themselves are not law or a higher power governing the entire buyer-seller relationship.
How to Best Leverage Incoterms
Incoterms are a tool used to clearly inform the sales contract to define the respective obligations, costs and risks involved in the delivery of goods from seller to the buyer. Incoterms are also a fantastic tool to have when entering any negotiation with your seller, as the actual price of the goods being purchased can and often is influenced by the associated Incoterm. Now, you may be curious as to how Incoterms will impact your buying price from your supplier, so let us take a look at a quick example.
The Impact of Incoterms
Let’s say you are looking to purchase a quantity of 50 units from a supplier based in Asia. If your discussion is based purely on the product, the seller will assume you are only talking about the costs of manufacture, profit for the seller, and nothing further. If you expect the product to be delivered to your site in the USA, but the supplier is only focused on the cost of manufacture, then you are immediately going to have trouble making any settlement on price that will work for both sides and result in a positive-sum relationship. If we take this back to the start of your negotiations, both sides confirm that the Incoterm used will be EXW (better known as Ex Works), where both buyer and supplier are aware of the cost being discussed is product only and not transportation to the buyer’s facility. The buyer then knows that full responsibility and cost lies on their side.
Now, you may be thinking that as a parcel shipper, Incoterms sound like they have more to do with freight modes like ocean or possibly air, but this is quickly changing, and the parcel industry is adopting the use of Incoterms much like any other. When moving goods internationally, it is vital that the risk and transfer are clear for both sides, as discussed in the example above. To make our example more parcel-specific, let’s say your website is getting hits from all over the world. This is a great sign that your market is expanding and your customer base is moving outside of the domestic boundaries you once operated in. However, if you are treating the orders in the exact same way, regardless from where they originate, then your pricing for that customer and chance of the product reaching them in the timeframe you promised on your website might result in an unhappy customer and an expensive mistake.
If you begin selling internationally, you need to make your Incoterms clear with your end customer. The end customer, of course, will not be negotiating the price with you as in our initial example with a buyer and a supplier. Instead, they just need to know the final price they will be charged, as they have already made the determination that your product offering matches exactly what they are looking for and will satisfy their needs. However, if they make their determination on your website’s price of $100, but this price ignores all duties charged and any other costs associated with the global sale, you’re going to be hit with an invoice for these charges. Since you already promised your end customer a price of $100, it would certainly damage the customer relationship if you attempted to tell them that the price has changed. But absorbing the cost of these extra charges is hardly ideal, either, especially if the goods are returned or rejected!
You can avoid the above scenario by ensuring you have organized your parcel movements and priced accordingly. If you know that shipping to the UK has a duties charge every time a shipment cost is over a certain threshold, you can factor this into your pricing before it is presented to the end customer, ensuring you know your profit margins and that the burden and risk does not land on your lap.
So, what Incoterm should be used in this situation? You probably need to use Delivered Duty Paid (DDP), which means that the seller bears all responsibility and cost of delivering the goods to their end destination. This means you have full control of your product until it is in the hands of your customer.
If you wish to improve your Incoterm knowledge and know the best ones to use for each situation, you should familiarize yourself with the latest set of terms and what they mean for the buyer-seller side. This can be done by accessing the International Chamber of Commerce website. The Incoterms are about to change as we move into 2020, so this is a perfect opportunity to get researching and ready for the coming decade!
Dominic McGough is the Managing Partner for enVista’s Europe, the Middle East and Asia (EMEA), and Asia-Pacific (APAC) offices. In his role, he is responsible for delivering transportation strategy, operations, and systems consulting for shippers, transportation intermediaries (3PLs, forwarders, IMCs, etc.), and private equity firms.
This article originally appeared in the Fall, 2019 issue of PARCEL.