The Bottom Line: Successfully managing Incoterms—Part 2

   This column, which continues from the September issue, addresses the importance of successfully managing Incoterms and how to prevent unnecessary headaches within global supply chains.
   First, a company must fit the right Incoterm into its contract. There are 11 Incoterms: Ex-works, FCA, CPT, CIP, DAT, DAP, DDP, FAS, FOB, CFR, and CIF.
   They are separated into two areas: those that can be used for all modes of transit and those that can only be used for sea and inland waterway transport.
   In an import transaction where the Ex-works term is used, the importer takes responsibility and liability at the earliest point in time. If an importer requests a DDP transaction, then it takes responsibility and liability, from a shipping perspective, at the latest point in time.
   The 11 Incoterms move the needle of responsibility and liability down the line in the supply chain to anywhere from origin, port of export, gateway of arrival, final destination, and any point in between, to which both parties agree.
   What’s critical is that the seller and buyer use the Incoterm that represents what they have intended as a result of the sale and purchase order negotiation. This will more clearly define risk and costs for  both parties.
   Risk is the peril cargo faces when transiting within the global supply chain, both in motion and at rest. Shippers can acquire cargo or marine insurance to help them mitigate their financial exposure to loss or damage in the global supply chain.
   All of the Incoterms discuss the point at which risk of loss and damage passes from seller to buyer. Only two terms—CIF and CIP—bring insurance into the equation. In both instances, the seller is obligated to acquire marine insurance covering the risk of loss and damage during the transit period from origin to the named CIF/CIP destination point.
   One should note that marine insurance is not an “off-the-shelf” product and must be made to fit the exposures specific to the nuances of a company’s risk profile within its supply chain. 
   In the CIF/CIP Incoterm option, the seller needs only to provide a minimal level of coverage and the quality of the insurance company or underwriter is never brought into the discussion. This can create significant exposure, however, when not completed comprehensively or responsibly.
   Specifically written into the prologue of the Incoterms manual, section 4, is that Incoterms do “not deal with the transfer of ownership of the goods.”
   This is often a misunderstood issue with Incoterms in that many believe “title” is transferred within the context of the Incoterm point of the trade. This is not true.
   Title needs to be addressed as a separate and independent concern within the structure of a sale or purchase order/contract/agreement.
   Trade compliance has also become an important responsibility for both importers and exporters. Most Incoterms mention responsibility for clearance of the goods for export or import. This would bring in certain trade compliance responsibilities, but not necessarily all of them, and certainly is not as “clear and concise” as it needs to be.
   In the United States, both the importers and exporters need to take responsibility for trade compliance and be proactive in this endeavor. Transferring this responsibility to a third party is both risky and fraught with financial exposure.
   The F.O.B. term for both importers and exporters raises several concerns. We discussed the obvious one in domestic trade in Part I of this column.
   The other area of concern relates to when a shipper’s responsibility ceases in an F.O.B. transaction, such as when a vessel arrives and loads late.
   For example, a shipper in China sells goods F.O.B. Hong Kong, delivers the goods to the port on July 1, and anticipates a July 2 loading. The shipper is advised after delivery on July 1 that the vessel is running late and the goods will now not load until July 10.
   According to Incoterms 2010, F.O.B. Rule B5, if the shipper notifies the buyer of the loading modification, delivery has been affected at that point, and not 10 days later when actually loaded on board as the F.O.B. term intended. This means that risk of loss and damage has passed at an earlier time than originally agreed to by the buyer. The buyer would need to make sure that its cargo insurance has attached at that earlier point in time, when risk has been transferred to them.
   On the export side, when a shipment’s loading is delayed, it’s critical for the exporter’s logistics department to quickly notify the overseas buyer of that fact, so delivery to the terminal can affect a legal delivery under the F.O.B. term if a sailing is delayed.
   Internally, for companies large and small, it’s a best practice to assign at least one person with responsibility to understand Incoterms and create protocols on how they will be used and managed within that company’s purchase and sales orders.
   In addition, internal training programs should be established to make sure everyone who has a global supply chain interface also has a basic understanding of Incoterms and their application to risk, cost, and competitive advantage. NIWT.org customizes Incoterms training for both large and small companies engaged in international business.
   Managing Incoterms will prove to be an invaluable risk management tool in developing standard operating procedures in the global supply chain. More importantly, correct use of Incoterms can create competitive advantages for companies that understand and apply the options strategically.