The Simple Guide To Understanding Incoterms

INCOTERMS

Last post i discussed some of the most important shipping and trading documentation that you need to be aware of if you indulge in import/export activities and i intend to complete this section by introducing you as well to the most common shipping terms that are used when you are making a deal or an order with a supplier anywhere in the world.

It’s important to understand these terms very carefully so that you will know your rights in case something goes wrong,mainly all manufacturers and suppliers in the world are familiar with the different shipping terms,but what about the new importers,what about those who never imported before and need more information so that they are carefully armed with information that can prevent many problems from happening?

Here is a small and easy to understand guide that will explain all you need to know about Incoterms.

The international shipping terms, Incoterms or International Commercial Terms as they are universally referred to are rules and series of pre-defined commercial terms published by the International Chamber of Commerce(ICC).

They are widely used in International commercial transactions between buyers and sellers.The Incoterms rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods between the buyers and sellers.

Many of the information you will read here is already available on the internet and many other websites,but i want to explain them in an easy and memorable way so that you can easily digest them and be ready when the time comes to negotiate them with your supplier,most of the explanations found here won’t be scientific or filled with industrial or commercial jargon,just an easy exploration with small examples to make it easier for you to understand and remember them.

Incoterms have been published and updated several times,the recent being the Incoterms® 2010 (Affiliate Link),i will be discussing the basics here but for a more-in-depth understanding and knowledge of the subject,you may want to read the book in the link above published by the ICC themselves,but please note that all the info available in the book can be found freely on the web but not easily.

So let’s start with the most basic Incoterms you need to know and which are used 90% of the time in any international or national transactions between buyers and sellers.

1-EX-Works (Factory Price)

EX-WORKS refers to the price of the product only at the premises of the factory,for example if you make a contract with a factory or supplier to supply you with 100Pcs of LED Lamps,and the price is 2$/Piece ,if the contract terms is EX-WORKS that means that this is the price of the product only,it doesn’t include any other additional costs,such as transport of the goods to the port,any documentation you might need,custom clearance at the port,freight and shipping costs of the goods or any other expenses ,so it basically means that this is the basic product price,my advice to you is to never use the EXWORKS Incoterm with any supplier as it puts all other cost obligations in your hands,which might result in wrong calculations and wrong estimations for the product’s final price.

Using EXWORKS means that you 90% of the time won’t be able to estimate the final cost of a product you import,so that you can calculate its’ profit margin,which is what we need to avoid at all costs,many suppliers will try to convince you to use this method so that once they release the products to you,they are not obligated to it anymore.

So stay away from this Incoterm and don’t use it with any suppliers,unless your are an expert who know what they’re doing,but if your are just starting out ,please refrain from using it.

2-FOB (Freight On Board)

FOB or Freight on Board is the Incoterm used to describe a price of a product including all other associated costs with it but excluding shipping,this is the most widely used Shipping Term among importers and exporters and for good reason.

The primary reason that this Incoterm is used for is that it allows you to a large degree to control your product’s cost structure ,so as to make it easier for you to calculate profit margins on the go,so going back to our previous example,it’s very easy when you compare it with an EXWORKS price,so let’s assume that this same supplier or even a similar one has agreed to give you the same price of 2$/Piece but this time on FOB terms,does it make a difference ? It sure does and ALOT !!! Because now you don’t need to bother yourself estimating how much you will need to pay for a certain document,or transportation,or even custom clearance and other related costs,all you need to know is the shipping charge,and this is very easy to know as well,whether through express companies if you will use Air Shipping,or freight forwarders if you will use sea.

Therefore my recommendation if you will start importing is to use FOB terms always,it’s easier for you to manage and remove all headaches associated with transferring the goods,making the documentation,and all other related things which believe me will cost you TIME & MONEY more than you expect.

N.B. If you intend to ship a container that includes different kinds of goods from different suppliers,it’s advised to use EXWORKS so as not to increase costs of the goods,if you need more info on this point please let me know.

3-CNF or CFR (Cost & Freight)

C&F or Cost & Freight is one of the best Incoterms or shipping terms that you can use as well,to easily remember it’s significance or meaning just think (FOB+ Shipping Costs) that’s all there is to this term,it’s basically similar to FOB in that it includes all other costs associated with the product itself,but not only that,it also takes into account shipping expenses which means that if a supplier told you the price/piece is 2$ C&F that means that the total amount of money that you will pay for the goods if we use the above example is 200$ for the 100 Pieces covering all costs from manufacturing the product itself,the documentation,trucking,seals,and SHIPPING as well.So if you want ease of mind and want a fairly easy way to import products i recommend going this way,but everything that is good in practical life always has a disadvantage,and what is it here you may ask ?

It’s the Shipping amount,because shipping value and costs change weekly,so it’s very difficult to anticipate whether the price you paid for shipping is overpriced or not,shipping this week when you asked for a quotation might be 200$,but when your goods were produced and shipped the freight cost was 130$,that’s an extra cost of 70$ that you have already paid for,on the other hand ,the opposite can happen so the freight or shipping price might have increased to 250$,so this time you saved 50$ that you were going to pay eventually if you didn’t pay ahead for shipping ,therefore factories and suppliers always provide a higher price on shipping than the norm because they too can’t anticipate it’s movement and must make sure that they cover their costs,so basically C&F is a double edged sword to you and the supplier as well,although it can make your process very smooth and easy,it can incur a little extra cost that you might benefit from saving if your shipments or orders are a lot in quantity,so use at your own discretion.

4-CIF (Cost,Freight & Insurance)

CIF as an Incoterm refers to (C&F + Insurance),which means that if anything goes wrong or happens to the goods during transport,you are eligible for a claim of total value equal to the amount of Invoice.

This table is from Wikipedia that pretty much sums up what everything means,it’s pros and cons.

Incoterms,shipping terms,international shipping terms

So there you go,these are the most widely used Incoterms and shipping terms especially between overseas buyers and sellers,each has their advantage and disadvantage and only you by time and experience will know which is the right one for you,but if you are just starting i prefer that you go with the route of CIF to learn things,then gradually move step by step to FOB,so that you can later decide on your shipping amount and can calculate your costs easier,if your quantities are going to be large,you are going to need a freight forwarder,especially if you don’t visit the country your are importing from by yourself,i will be covering this in a future post.

Again this is a glimpse from Incoterms but at the same time that’s mainly what you need to know about the subject,but if you are interested to learn more on the subject and go deep into the different set of rules that are in place especially if it’s your first time,i recommend buying the book Incoterms® 2010(Affiliate Link),given the reviews on it,it pretty much sums up all what you need to know,i took a glimpse but didn’t read it all as i was already familiar with 90% of it’s content.

If you need any help or have any questions,please don’t hesitate to contact me below through the comments.

If you like what you’ve read and felt that it’s useful,please share it among your friends especially if you are a student and this what you are learning,i’m sure it will be of help.

 

Cheers,,,

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