Managing the global supply chain for a business – no matter how big or small – is no joke! Freight shipping alone is a source of so many questions for the uninitiated. It’s full of complex jargon, including a bunch of esoteric three-letter acronyms such as CIF, EXW, and FOB. Those are incoterms, and they are what we’ll talk about today.
In short, incoterms are rules that govern the responsibilities of buyers and sellers. These are important to understand not simply because you need to know a bunch of acronyms, but because understanding them helps you understand the steps in the freight shipping process.
There are nine places that goods can pass through as part of the freight process, in this order:
- Works – the factory
- Carrier – transportation to the next transport vessel
- Alongside Ship – next to the cargo shipping
- On Board – on the cargo ship
- Border – crossing the border into the destination country
- Arrival – arriving at the port of entry
- Terminal – the terminal at the port
- Destination’s Place – a drop-off location of the buyer’s choice
- Buyer’s Warehouse – a final storage location for the inventory
Incoterms determine at which precise point goods stop being the responsibility of the seller and start being the responsibility of the buyer. This has all kinds of implications for if goods are lost in shipping, insurance policies, and more. Indeed, the precise incoterms you go with can even be used as a bargaining chip when negotiating prices with your supplier.
One last detail before we jump right into incoterm definitions. Fulfillrite specializes in order fulfillment. We don’t directly work with freight shipping. We instead source that work to our industry partners like Shapiro. However, the vast majority of our customers have to go through this process, so it’s our best interest to make sure you’re informed!
EXW – Ex Works
Ex Works is the simplest of all incoterms, but it’s also the least favorable for the buyer. Under Ex Works terms, the seller relinquishes all responsibility of your goods once they’re done manufacturing them. They place the goods somewhere convenient and then the buyer is responsible for collecting the goods, clearing them for export, and so on.
FCA – Free Carrier
Free Carrier terms are essentially Ex Works plus. Under Free Carrier terms, goods are delivered by the seller to a carrier. The carrier can be anyone agreed upon by all parties to take goods where they need to go. As soon as the carrier has the goods, the buyer assumes responsibility.
CPT – Carriage Paid To
Carriage Paid To is very similar to Free Carrier. The only difference is that instead of the buyer arranging the main carriage, the seller arranges the main carriage.
CIP – Carriage And Insurance Paid To
CIP terms are even more favorable than the ones before. Under CIP terms, the seller delivers goods to the carrier. The seller is required to pay for the costs of carriage. On top of the above, the seller is also required to contract insurance to cover the risk of losing or damaging goods during the carriage.
A lot of people like these terms because the buyer pays for the costs of the freight, but the seller assumes the risk of damage during transport.
DAT – Delivered At Terminal
Under Delivered at Terminal terms, the seller assumes all the risks and responsibilities of delivering goods to the destination terminal. Within this context, a terminal could be a warehouse, container yard, rail or air cargo terminal. The seller assumes a lot of risk this way. The buyer must move goods from the terminal to their final location.
DAP – Delivered At Place
Under the Delivered at Place terms, the seller assumes almost all responsibility. The seller delivers goods to their final destination. The one responsibility that the buyer maintains is that they must clear the goods for import.
DDP – Delivered Duty Paid
Finally, DDP terms are the absolute easiest of all. Under DDP terms, the seller assumes all responsibility. All the buyer has to do is collect the goods. That’s it!
FAS – Free Alongside Ship
There are a few terms that are only related to sea and inland waterway transport. They are FAS, FOB, CFR, and CIF.
Under FAS terms, the seller is responsible for transporting goods to the cargo ship. Under FCA terms, sellers are responsible for loading goods onto the first means of transport. The two are very similar, but FAS gives the seller slightly more responsibility. Once goods are alongside the ship, responsibility passes on to the buyer.
FOB – Free On Board
Free On Board is a common incoterm for buyers and sellers to agree upon when shipping by sea. This is how buyers and sellers “meet in the middle.” Once goods are loaded on the vessel, the seller relinquishes responsibility to the buyer. The risk of loss or damage passes once the goods are on the vessel. The buyer then takes care of everything from there – the import process and arranging local transportation.
CFR – Cost and Freight
Cost and Freight is like FOB terms but a little bit better for the buyer. Ownership of the goods and who deals with damaged or lost goods is identical for CFR and FOB. Under FOB terms, the buyer pays for the cost of freight transportation. Under CFR terms, the seller pays for the cost of freight transportation.
CIF – Cost, Insurance, Freight
The final incoterm is CIF. Cost, Insurance, and Freight are exactly what it sounds like. It is almost identical to CFR terms, except the seller must ensure the goods for a certain minimum amount.
Don’t let incoterms intimidate you! Freight shipping can be extraordinarily complex, but these eleven terms make it far easier to understand. Built into just a handful of acronyms, you can easily see who is responsible for transporting goods, who pays for what, and who to contact if something goes wrong. This is why the global supply chain runs as smoothly as it does.