4 Ways Incoterms Empower Your Supply Chain

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When it comes to international freight, few letters leave more shippers-glassy eyed than the 11 three-letter abbreviations that make up incoterms. Put simply, incoterms define who is responsible for transporting, insuring, and paying duties on an individual shipment. Used correctly and to your advantage they can increase revenue, limit risk, and empower your supply chain. One could argue that they're the three most important letters on any commercial invoice.

1. Incoterms are situational - Incoterms are not one size fits all. Smart shippers will utilize the right terms to mitigate risk, increase cash flow, and leverage volume. In order to use incoterms to your advantage, you first have to understand what each individual term covers.

For example, a shipper with significant volume from a dedicated port may be leaving substantial savings on the table by buying on terms with prepaid freight (C & D terms). Allowing their supplier to select carriers limits a shipper's ability to control costs. Were a shipper to use a term that grants them control at the port, such as FOB, they could now negotiate through their own carrier network. A shipper would then have the ability to build their own consolidations, choose their own service level, and use that freight volume to obtain lower rates now and in the future.

On the other hand, shippers that make sporadic purchases from a particular supplier or region may not have the resources to arrange transportation. A shipper that is purchasing their first container from Mumbai may be best suited using a more inclusive term such as CIF. That same shipper could always change terms in the future depending on what best suits their needs.

2. Challenge the terms – Many forwarders, suppliers, and even internal staff may have a "preferred incoterm." This usually occurs with forwarders who are only familiar with a couple of common incoterms, suppliers looking to maximize their profits, and general unfamiliarity with the terms by your logistics department. Due to this, it isn't uncommon to find yourself in a situation where the term being suggested to you may be less than ideal. Push back against this type of thinking as the one person who should know their supply chain best is you.

3. Specify the delivery point – Once you've selected the incoterm that best suits your needs you still need to define the named place. If your supplier is near Qingdao but you need the goods shipped FOB from Shanghai it is imperative that this is outlined in the sales contract. Failing to do so can increase cost and delay the arrival of your goods. The named place should follow the three letter incoterm abbreviation. In the example above, our shipper's incoterms would be FOB Shanghai. In large cities and areas with multiple ports it is crucial that you be specific.

4. Incoterms cover risk not title nor contract – Risk and title of goods are two separate matters and should not be confused for one another when using incoterms. In addition, incoterms don't replace a contract. A buyer still needs to confirm what the goods are, their price, consequences for breach of contact, customs laws, etc. Also, while some incoterms do include insurance, it is typically at the minimum coverage allowed by law.

Want to find out how Incoterms can work for your supply chain? Contact a trusted adviser at Aborn & Co.

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