What are Incoterms and How Do They Impact Your DTC Brand?

Learn about Incoterms and how they affect your DTC brand's shipping. Find out how these terms can make negotiations with factories smoother and improve your overall logistics.

What are Incoterms and How Do They Impact Your DTC Brand?
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Hello everyone!
I hope you've had a great week so far!
Today, I'd like to write a new blog related to Incoterms. Every industry has its own terminology, and the logistics industry is no exception. Whether you're new to this industry or have been in it for a while, I bet this is a term you hear all the time.
For new DTC brands, have you ever wondered about the various ways to deal with factories when it comes to settling the shipping details and determining who does what? If so, I wholeheartedly believe that Incoterms are the key for you to communicate effectively with your factory. As a buyer, you don't always have to handle every aspect of bringing your goods to your warehouse, especially in the context of private labels with some ASEAN factories.
Okay, I don't want to take up too much time. Let's dive into it!

What are the Incoterms?

Incoterms, short for International Commercial Terms, are a set of standardized three-letter trade terms that are published by the International Chamber of Commerce (ICC). These terms are widely used in international commercial transactions to define the responsibilities and obligations of buyers and sellers regarding the delivery of goods.
Incoterms are essential because they provide a common set of rules that can be used by businesses around the world. They help to avoid misunderstandings, disputes, and costly mistakes that can arise from differing interpretations of trade terms in different countries.
In terms of history I mean revision of this Incoterms below is the journey of it:
The history of Incoterms dates back to the early 20th century, and they have evolved over time to meet the changing needs of international trade. Here is a brief timeline of the history of Incoterms:
1923: The first set of international trade terms, known as "Incoterms," was introduced by the International Chamber of Commerce (ICC). These terms were aimed at standardizing and clarifying the terms commonly used in international contracts.
1936: The Incoterms were revised and updated for the first time to reflect changes in international trade practices. This version included new terms and adjustments to existing ones.
1953: Another revision of Incoterms took place, incorporating further changes to accommodate the evolving nature of global trade.
1967: Incoterms underwent a significant revision to address the increasing complexity of international transactions. This version introduced terms like FAS (Free Alongside Ship) and FOB (Free On Board).
1976: Incoterms were once again updated to adapt to the changing business environment. This revision clarified existing terms and introduced new ones, such as FCA (Free Carrier).
1980: The Incoterms were revised to include further adjustments and updates, emphasizing the need for clarity in contracts and international transactions.
1990: The ICC released the seventh version of Incoterms, which included modernization of terms and aimed at reducing confusion in international trade practices.
2000: Incoterms 2000 was introduced, streamlining and updating the rules to better reflect contemporary trade practices. This version emphasized the use of electronic communication in transactions.
2010: The eighth version, Incoterms 2010, was released, incorporating more user-friendly language and emphasizing the importance of choosing the appropriate term for the specific transaction. This version clarified the division of costs and risk between the buyer and seller.
2020: The most recent version, Incoterms 2020, was published by the ICC. This version addressed contemporary issues in international trade and made further clarifications to improve the understanding and application of the rules.
Here are the key takeaways:

  • Incoterms are a set of rules you can choose to use or not in your trade; it is up to you, as there are no laws that mention that you have to use them all the time. 
  • Highly recommend using Incoterms in your trade, as they are common worldwide. They definitely ease your procurement journey, as the end goal is to have stock to start our online business, isn't it?
  • Incoterms have many versions over time, so when you are with your factory, please make sure you mention the version of Incoterms. For example, "FOB Shanghai, China - Incoterms 2020.

Again if you want to get the practical sharing/case study please visit my ebook: E-Book #2: Complete Guide to Understanding Incoterms (thefutureecom.com)

What areas are Incoterms cover?

When it goes into this Incoterms covers 4 main areas as following:

  1. Transportation Costs: Specifies which party is responsible for specific transportation costs.
  2. Delivery Point: Indicates where the risk and responsibility transfer from the seller to the buyer.
  3. Insurance: Indicates whether the seller or buyer is responsible for obtaining insurance coverage for the goods during transit.
  4. Customs Clearance: Specifies which party is responsible for clearing the goods through customs.

What areas are NOT Incoterms covered?

Incoterms can be used within contracts to define and agree upon shipping terms and responsibilities, but they do not represent a sales contract between a Buyer and a Seller. There are additional details that must be agreed upon alongside them.
Some of the common trade details not covered by Incoterms include:

  • Pricing details, such as those of the goods
  • Exact payment details, such as the method or currency of payment
  • Details on the quality or condition of goods
  • Legal implications of contract breaches

Please ensure that you understand this point, and do not anticipate Incoterms to serve as the sales contract between you and your factories.

Whom do these Incoterms govern?

At first, we might conclude that when using Incoterms, only the seller and buyer are governed by them. However, behind the scenes, there are actually a total of seven parties involved, including the seller and buyer. I will mention all of them here:

  1. Seller: The party selling the goods. The seller's responsibilities include producing and delivering the goods in accordance with the terms specified in the chosen Incoterm.
  2. Buyer: The party purchasing the goods. The buyer's responsibilities, costs, and risks depend on the chosen Incoterm.
  3. Freight Forwarder: An intermediary involved in the logistics of transporting goods. Depending on the chosen Incoterm, the buyer or seller may be responsible for contracting with a freight forwarder to arrange transportation.
  4. Carrier: The entity responsible for transporting the goods. The carrier can be chosen by either the buyer or the seller, depending on the selected Incoterm.
  5. Insurance Provider: In transactions where insurance is required (e.g., CIF - Cost, Insurance, and Freight), the buyer or seller may arrange for insurance coverage for the goods during transit.
  6. Customs Authorities: Both the buyer and the seller may need to interact with customs authorities for clearance and compliance with import/export regulations. The specific responsibilities depend on the chosen Incoterm.
  7. Bank: In certain transactions, letters of credit or other payment mechanisms facilitated by banks may be involved, especially when dealing with terms like DDP (Delivered Duty Paid).

Key Incoterms Terms 2020

EXW - Ex-Works
In an Ex-Works (EXW) arrangement, the seller minimizes responsibility, placing a greater burden on the buyer. Goods are made available for pickup at the seller's factory or fulfillment center, and delivery occurs when the merchandise is released to the buyer's 3PL (third-party logistics provider). The buyer is responsible for coordinating with their freight forwarder for insurance and export clearance.
FAS - Free Alongside Ship
Under Free Alongside Ship (FAS) terms, the buyer assumes all transportation costs and the risk of goods loss. FAS requires the seller to clear goods for export, typically done through their 3PL. Companies using FAS terms commonly rely on their 3PL for export clearance.
FCA - Free Carrier
In Free Carrier (FCA) transactions, the seller arranges transportation but acts at the buyer's risk and expense. Unlike FOB, where the choice of 3PL or carrier is the buyer's, in FCA, the seller selects and collaborates with the 3PL or carrier. The buyer may instruct its carrier to issue a bill of lading with an on-board notation to meet letter of credit terms.

FOB - Free On Board
A widely used term, Free On Board (FOB) involves the seller using their 3PL to move goods to the port or designated origin point. FOB specifically refers to ocean or inland waterway transportation. Delivery occurs when the seller releases goods to the buyer's forwarder, marking the start of the buyer's responsibility for insurance and transportation.
CFR - Cost and Freight
In Cost and Freight (CFR), the seller covers carriage costs up to the named destination port. Risk transfers to the buyer upon loading goods on the ship. The seller is responsible for origin costs, export clearance, and freight to named ports. CFR is suitable for non-containerized sea freight and inland waterway transport.
CIF - Cost, Insurance, and Freight
Similar to CFR, CIF has the seller insuring the goods during the maritime phase. The seller usually chooses the forwarder in this arrangement.
CPT - Carriage Paid To
CPT transactions involve the seller's obligations similar to CIF, with the addition of the seller buying cargo insurance, naming the buyer as the insured during transit.
CIP - Carriage and Insurance Paid To
Primarily for multimodal transport, CIP relies on the carrier's insurance, requiring the seller to purchase minimum coverage. 3PLs often act as carriers under this agreement.
DPU - Delivered At Place Unloaded
Under DPU, the seller delivers unloaded goods to the named destination, covering all transport costs and assuming all risks until arrival. Terminal charges after unloading are typically the seller's responsibility.
DAP - Delivered At Place
DAP requires the seller to place goods at the buyer's disposal for unloading at the named destination. The risk shifts to the buyer upon arrival, and all carriage expenses up to the agreed destination point are covered by the seller.
DDP - Delivered Duty Paid
DDP terms are used in intermodal or courier-type shipments. The seller manages all tasks from manufacturing to the buyer's door, including insurance, costs, risks, and payment of duty and fees.

Final Thoughts

As DTC brands scale up to a professional level, it is crucial to incorporate Incoterms into your vendor management. Personally, I believe this will standardize your operations. Having worked with some prominent DTC brands, which are fast-growing, I've observed that managing vendors can be a challenging aspect in stabilizing logistics.
At first glance, Incoterms may seem complex, but once you understand them, they prove to be easy to comprehend and apply in your work.
The above sharing is very standard, and I don't want to change much of it initially. However, by the end of this week (today is 07 APR 2024), I will inform you about my new small ebook dedicated to Incoterms, including some major insights for practical application in your work. The content in this ebook is derived from my daily work, and I haven't seen it shared anywhere else. If you come across it in the future, perhaps someone took inspiration from me, hehe!
In any case, see you in the next blogs! Stay tuned!

 

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