SCM Management General Diagram.

Incoterms

From Wikipedia, the free encyclopedia

The Incoterms rules or International Commercial Terms are a series of pre-defined commercial terms
published by the International Chamber of Commerce (ICC) relating to international commercial law. They
are widely used in International commercial transactions or procurement processes as the use in
international sales is encouraged by trade councils, courts and international lawyers.[1] A series of three-
letter trade terms related to common contractual sales practices, the Incoterms rules are intended
primarily to clearly communicate the tasks, costs, and risks associated with the transportation and
delivery of goods. Incoterms inform sales contract defining respective obligations, costs, and risks
involved in the delivery of goods from the seller to the buyer. However, it does not constitute contract or
govern law. Also it does not define where titles transfer and does not address the price payable, currency
or credit items.

The Incoterms rules are accepted by governments, legal authorities, and practitioners worldwide for the
interpretation of most commonly used terms in international trade. They are intended to reduce or
remove altogether uncertainties arising from different interpretation of the rules in different countries.
As such they are regularly incorporated into sales contracts[2] worldwide.

The first work published by the ICC on international trade terms was issued in 1923, with the first edition
known as Incoterms published in 1936. the Incoterms rules were amended in 1953,[3] 1967, 1976, 1980,
1990, and 2000, with the eighth version Incoterms 2010 [4]'having been published on January 1,
2011. The ICC have begun consultations on a new revision of Incoterms, to be called Incoterms
2020.[5] "Incoterms" is a registered trademark of the ICC.

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Incoterms 2010[edit]

Incoterms 2010 is the eighth set of pre-defined international contract terms published by
the International Chamber of Commerce, with the first set having been published in 1936. Incoterms
2010 defines 11 rules, down from the 13 rules defined by Incoterms 2000.[6] Four rules of the 2000
version ("Delivered at Frontier", DAF; "Delivered Ex Ship", DES; "Delivered Ex Quay", DEQ; "Delivered Duty
Unpaid", DDU)[7] were removed, and are replaced by two new rules ("Delivered at Terminal", DAT;
"Delivered at Place", DAP) in the 2010 rules.

In the prior version, the rules were divided into four categories, but the 11 pre-defined terms
of Incoterms 2010 are subdivided into two categories based only on method of delivery. The larger group
of seven rules may be used regardless of the method of transport, with the smaller group of four being
applicable only to sales that solely involve transportation by water where the condition of the goods can
be verified at the point of loading on board ship. They are therefore not to be used for containerized
freight, other combined transport methods, or for transport by road, air or rail.

Incoterms 2010 also formally defined delivery. Before, the term has been defined informally but it is now
defined as the point in the transaction where the risk of loss or damage to the goods is transferred from
the seller to the buyer.

Incoterms in Government Regulations[edit]

In some jurisdictions, the duty costs of the goods may be calculated against a specific Incoterm (for
example in India, duty is calculated against the CIF value of the goods,[8] and in South Africa the duty is
calculated against the FOB value of the goods[9]). Because of this it is common for contracts for exports to
these countries to use these Incoterms, even when they are not suitable for the chosen mode of
transport. If this is the case then great care must be exercised to ensure that the points at which costs
and risks pass are clarified with the customer.

Defined terms in Incoterms[edit]

There are certain terms that have special meaning within Incoterms, some of the more important ones
are defined below:[10]

Delivery: The point in the transaction where the risk of loss or damage to the goods is transferred from
the seller to the buyer

Arrival: The point named in the Incoterm to which carriage has been paid

Free: Seller has an obligation to deliver the goods to a named place for transfer to a carrier

Carrier: Any person who, in a contract of carriage, undertakes to perform or to procure the performance
of transport by rail, road, air, sea, inland waterway or by a combination of such modes

Freight forwarder: A firm that makes or assists in the making of shipping arrangements;

Terminal: Any place, whether covered or not, such as a dock, warehouse, container yard or road, rail or
air cargo terminal

To clear for export: To file Shippers Export Declaration and get export permit

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Variation of Incoterms[edit]

Parties adopting Incoterms should be wary about their intention and variations. The desire of the parties
should be expressed clearly and casual adoption should be refrained. Also, making additions or variations
to the meaning of a certain term should be carefully done as parties' failure to use any trade term at all
can produce unexpected results.[11]

Rules for any mode of transport[edit]

EXW Ex Works (named place of delivery)[edit]

The seller makes the goods available at their premises, or at another named place. This term places the
maximum obligation on the buyer and minimum obligations on the seller. The Ex Works term is often
used when making an initial quotation for the sale of goods without any costs included.

EXW means that a buyer incurs the risks for bringing the goods to their final destination. Either the seller
does not load the goods on collecting vehicles and does not clear them for export, or if the seller does
load the goods, he does so at buyer's risk and cost. If the parties agree that the seller should be
responsible for the loading of the goods on departure and to bear the risk and all costs of such loading,
this must be made clear by adding explicit wording to this effect in the contract of sale.

FCA Free Carrier (named place of delivery)[edit]

The seller delivers the goods, cleared for export, at a named place (possibly including the seller's own
premises). The goods can be delivered to a carrier nominated by the buyer, or to another party
nominated by the buyer.

In many respects this Incoterm has replaced FOB in modern usage, although the critical point at which
the risk passes moves from loading aboard the vessel to the named place. It should also be noted that the
chosen place of delivery affects the obligations of loading and unloading the goods at that place.

If delivery occurs at the seller's premises, or at any other location that is under the seller's control, the
seller is responsible for loading the goods on to the buyer's carrier. However, if delivery occurs at any
other place, the seller is deemed to have delivered the goods once their transport has arrived at the
named place; the buyer is responsible for both unloading the goods and loading them onto their own
carrier.

CPT Carriage Paid To (named place of destination)[edit]

CPT replaces the C&F (cost and freight) and CFR terms for all shipping modes outside of non-
containerized seafreight.

The seller pays for the carriage of the goods up to the named place of destination. However, the goods
are considered to be delivered when the goods have been handed over to the first or main carrier, so that
the risk transfers to buyer upon handing goods over to that carrier at the place of shipment in the country
of Export.

The seller is responsible for origin costs including export clearance and freight costs for carriage to the
named place of destination (either the final destination such as the buyer's facilities or a port of
destination. This has to be agreed by seller and buyer, however).

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If the buyer requires the seller to obtain insurance, the Incoterm CIP should be considered instead.

CIP Carriage and Insurance Paid to (named place of destination)[edit]

This term is broadly similar to the above CPT term, with the exception that the seller is required to obtain
insurance for the goods while in transit. CIP requires the seller to insure the goods for 110% of the
contract value under at least the minimum cover of the Institute Cargo Clauses of the Institute of London
Underwriters (which would be Institute Cargo Clauses (C)), or any similar set of clauses. The policy should
be in the same currency as the contract, and should allow the buyer, the seller, and anyone else with an
insurable interest in the goods to be able to make a claim.

CIP can be used for all modes of transport, whereas the Incoterm CIF should only be used for non-
containerized sea-freight.'

DAT Delivered At Terminal (named terminal at port or place of destination)[edit]

This Incoterm requires that the seller delivers the goods, unloaded, at the named terminal. The seller
covers all the costs of transport (export fees, carriage, unloading from main carrier at destination port
and destination port charges) and assumes all risk until arrival at the destination port or terminal.

The terminal can be a Port, Airport, or inland freight interchange, but must be a facility with the capability
to receive the shipment. If the seller is not able to organize unloading, they should consider shipping
under DAP terms instead.

All charges after unloading (for example, Import duty, taxes, customs and on-carriage) are to be borne by
buyer. However, it is important to note that any delay or demurrage charges at the terminal will generally
be for the seller's account.

DAP Delivered At Place (named place of destination)[edit]

Incoterms 2010 defines DAP as 'Delivered at Place' - the seller delivers when the goods are placed at the
disposal of the buyer on the arriving means of transport ready for unloading at the named place of
destination. Under DAP terms, the risk passes from seller to buyer from the point of destination
mentioned in the contract of delivery.

Once goods are ready for shipment, the necessary packing is carried out by the seller at his own cost, so
that the goods reach their final destination safely. All necessary legal formalities in the exporting country
are completed by the seller at his own cost and risk to clear the goods for export.

After arrival of the goods in the country of destination, the customs clearance in the importing country
needs to be completed by the buyer at his own cost and risk, including all customs duties and taxes.
However, as with DAT terms any delay or demurrage charges are to be borne by the seller.

Under DAP terms, all carriage expenses with any terminal expenses are paid by seller up to the agreed
destination point. The necessary unloading cost at final destination has to be borne by buyer under DAP
terms. [14][15]

DDP Delivered Duty Paid (named place of destination)[edit]

Seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all
costs in bringing the goods to the destination including import duties and taxes. The seller is not

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responsible for unloading. This term is often used in place of the non-Incoterm "Free In Store (FIS)". This
term places the maximum obligations on the seller and minimum obligations on the buyer. No risk or
responsibility is transferred to the buyer until delivery of the goods at the named place of destination.[16]

The most important consideration for DDP terms is that the seller is responsible for clearing the goods
through customs in the buyer's country, including both paying the duties and taxes, and obtaining the
necessary authorizations and registrations from the authorities in that country. Unless the rules and
regulations in the buyer's country are very well understood, DDP terms can be a very big risk both in
terms of delays and in unforeseen extra costs, and should be used with caution.

Rules for sea and inland waterway transport[edit]

To determine if a location qualifies for these four rules, please refer to 'United Nations Code for Trade
and Transport Locations (UN/LOCODE)'.[17]

The four rules defined by Incoterms 2010 for international trade where transportation is entirely
conducted by water are as per the below. It is important to note that these terms are generally not
suitable for shipments in shipping containers; the point at which risk and responsibility for the goods
passes is when the goods are loaded on board the ship, and if the goods are sealed into a shipping
container it is impossible to verify the condition of the goods at this point.

Also of note is that the point at which risk passes under these terms has shifted from previous editions of
Incoterms, where the risk passed at the ship's rail.

FAS Free Alongside Ship (named port of shipment)[edit]

The seller delivers when the goods are placed alongside the buyer's vessel at the named port of
shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from
that moment. The FAS term requires the seller to clear the goods for export, which is a reversal from
previous Incoterms versions that required the buyer to arrange for export clearance. However, if the
parties wish the buyer to clear the goods for export, this should be made clear by adding explicit wording
to this effect in the contract of sale. This term should be used only for non-containerized seafreight and
inland waterway transport.

FOB Free on Board (named port of shipment)[edit]

Main article: FOB (Shipping)

Under FOB terms the seller bears all costs and risks up to the point the goods are loaded on board the
vessel. The seller's responsibility does not end at that point unless the goods are "appropriated to the
contract" that is, they are "clearly set aside or otherwise identified as the contract goods."[18] Therefore,
FOB contract requires a seller to deliver goods on board a vessel that is to be designated by the buyer in a
manner customary at the particular port. In this case, the seller must also arrange for export clearance.
On the other hand, the buyer pays cost of marine freight transportation, bill of lading fees, insurance,
unloading and transportation cost from the arrival port to destination. Since Incoterms 1980 introduced
the Incoterm FCA, FOB should only be used for non-containerized seafreight and inland waterway
transport. However, FOB is commonly used incorrectly for all modes of transport despite the contractual
risks that this can introduce. In some common law countries such as the United States of America, FOB is

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not only connected with the carriage of goods by sea but also used for inland carriage aboard any "vessel,
car or other vehicle."[19]

CFR Cost and Freight (named port of destination)[edit]

The seller pays for the carriage of the goods up to the named port of destination. Risk transfers to buyer
when the goods have been loaded on board the ship in the country of Export. The Shipper is responsible
for origin costs including export clearance and freight costs for carriage to named port. The shipper is not
responsible for delivery to the final destination from the port (generally the buyer's facilities), or for
buying insurance. If the buyer does require the seller to obtain insurance, the Incoterm CIF should be
considered. CFR should only be used for non-containerized seafreight and inland waterway transport; for
all other modes of transport it should be replaced with CPT.

CIF Cost, Insurance & Freight (named port of destination)[edit]

This term is broadly similar to the above CFR term, with the exception that the seller is required to obtain
insurance for the goods while in transit to the named port of destination. CIF requires the seller to insure
the goods for 110% of their value under at least the minimum cover of the Institute Cargo Clauses of the
Institute of London Underwriters (which would be Institute Cargo Clauses (C)), or any similar set of
clauses. The policy should be in the same currency as the contract. The seller must also turn over
documents necessary, to obtain the goods from the carrier or to assert claim against an insurer to the
buyer. The documents include (as a minimum) the invoice, the insurance policy, and the bill of lading.
These three documents represent the cost, insurance, and freight of CIF. The seller's obligation ends
when the documents are handed over to the buyer. Then, the buyer has to pay at the agreed price.
Another point to consider is that CIF should only be used for non-containerized seafreight; for all other
modes of transport it should be replaced with CIP.

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Previous terms from Incoterms 2000 eliminated from Incoterms 2010[edit]

While these terms do not feature in the current version of Incoterms it is possible that they may be seen
in sales order contracts. Care must be taken to ensure that both parties agree on their obligations in this
case.

DAF Delivered at Frontier (named place of delivery)[edit]

This term can be used when the goods are transported by rail and road. The seller pays for transportation
to the named place of delivery at the frontier. The buyer arranges for customs clearance and pays for
transportation from the frontier to his factory. The passing of risk occurs at the frontier.

DES Delivered Ex Ship[edit]

Where goods are delivered ex ship, the passing of risk does not occur until the ship has arrived at the
named port of destination and the goods made available for unloading to the buyer. The seller pays the
same freight and insurance costs as he would under a CIF arrangement. Unlike CFR and CIF terms, the
seller has agreed to bear not just cost, but also Risk and Title up to the arrival of the vessel at the named
port. Costs for unloading the goods and any duties, taxes, etc. are for the Buyer. A commonly used term
in shipping bulk commodities, such as coal, grain, dry chemicals; and where the seller either owns or has
chartered their own vessel.

DEQ Delivered Ex Quay (named port of delivery)[edit]

This is similar to DES, but the passing of risk does not occur until the goods have been unloaded at the
port of discharge.

DDU Delivered Duty Unpaid (named place of destination)[edit]

This term means that the seller delivers the goods to the buyer to the named place of destination in the
contract of sale. A transaction in international trade where the seller is responsible for making a safe

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delivery of goods to a named destination, paying all transportation and customs clearance expenses but
not the duty. The seller bears the risks and costs associated with supplying the goods to the delivery
location, where the buyer becomes responsible for paying the duty and taxes.

VMI and CMI

are examples of a more passive collaboration between the customer and the supplier. Although some
relationships in the past feature more active collaboration with a text-book style VMI, these are more an
exception than the rule.

DemandPlanning.Net recommends its customers a modified VMI that incorporates a more rigorous focus
on promotional planning, event modeling and sales-force oriented collaboration. Our implementation of
promotions-focused VMI will help you drive better integration into your supply chain while achieving your
customer's stated goals.

VMI Vendor Managed Inventory

The Definition Tests of Collaboration

Vendor Managed Inventory is a program in Information Sharing Yes!

which:
Visibility into the future
the supplier generates the customers order, Maybe!

based on shared information on customer

demand and inventory and

upon mutually agreed conditions

The supplier obtains the EDI transactions from the Customer for Sales, Shipments, and Inventory on a
daily or weekly basis through the EDI 852. He may also get the sales forecasts through the EDI 830. But
typically the supplier generates his own DC level replenishment forecast based on the historical data.
Finally, the supplier's VMI analyst may try to incorporate some promotional intelligence into the forecast
through discussions with the sales team and in rare cases, with the customer's replenishment analyst.

VMI Benefits

Person ordering, the VMI planner at the manufacturer, knows the products. This translates into a more
efficient replenishment plan

VMI results in efficient ordering and delivery of new products. Because the DC level pipe-fill is known
along with a reasoned guess on the replenishment volumes, VMI provides a more accurate forecast for a
new product launch.

More visibility into Customer inventory levels provide better info to manage supply constraints.

Increased sales at retail due to better in-stock levels. This also results in Inventory Optimization for the
customer. However, note that the better in-stock levels assume that forecast volatility is known through
some sort of collaboration process or information-gathering mechanism. (See this as an issue below.)

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a. Improved DC In-Stock
b. Improved Retail In-Stock

Reduced customer administrative costs, since the replenishment work is transferred to the supplier. This
is purely a benefit to the customer, but many a times this acts as a major catalyst for the establishment of
a VMI relationship.

VMI The Issues

Long-term forecasts are still generated through the suppliers crystal ball. Because the customer does not
give much forecast guidance or intelligence on promotional or market events, unexpected retail or
inventory volatility will hit in-stock levels.

Little collaboration on the forecast (very rarely)

Customer gives you the data and the inventory policy and the supplier does the rest!

The success of the program rests on the suppliers creativity and initiative and a good internal consensus
process with sales staff on the field.

How is Co-managed Inventory (CMI) different from VMI?

CMI is similar to VMI except the supplier manages the replenishment process and develops forecasts in
the customers system. A key example of this process will be the supplier process adopted by Wal-mart as
well as the JDA E3 process used by the Drug Chains like Eckerd, Rite-Aid and CVS.

Customer provides system access to the supplier

Supplier has visibility to POS at the store level, Store and DC inventory

Supplier reviews info and generates order in the customer's system

The key difference is that order placed by the supplier is still a recommendation and is not a firm order
until approved by the customer. In a VMI process, the order generated by the supplier on the customer's
behalf is a firm order to deliver product and bill the customer.

VMI and CMI - The Challenge

The traditional continuous replenishment process (CRP) activity does not truly generate a demand plan
that can be integrated into the manufacturers Supply Chain for production planning purposes.

Too tactical and short-term oriented and typically focuses on the next two to four weeks.

More emphasis on order placement and replenishment based on near term activity

Although VMI and CMI are constrained by criticisms of short-term focused and being too tactical, in
practice they have been very popular because of their low cost to implement. The key is to leverage the
low-cost implementation while driving consensus and collaboration and bringing the focus on
promotional planning and management.

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Contract Management:

Contract management is a strategic management discipline employed by both buyers and sellers whose
objectives are to manage customer and supplier expectations and relationships, control risk and cost, and
contribute to organizational profitability/success. For successful service contract administration, the
buyer needs to have a realistic degree of control over the suppliers performance. Crucial to success in
this area is the timely availability of accurate data including the contractors plan of performance and the
contractors actual progress

Letter of Credit:

A Letter of Credit is a document in which the importer's bank essentially promises to pay the exporter if
the importer does not pay. The creditworthiness of the bank is substituted for the creditworthiness of the
importer. However, the concept is substantially more complex than this. The promise is not made upon
the exporter meeting certain conditions (or the importer not meeting certain conditions), but it is made
on the documents of the transaction: This is the reason why a Letter of Credit is often called a
Documentary Letter of Credit. The bank is under no obligation to pay even though delivery has been
made and the importer has obtained control of the merchandise; similarly, the bank has to pay even
though the merchandise may be shoddy or not fit for sale. The bank is obligated to pay only if the
documents are in order. The Letter of Credit is therefore a contractual agreement between the Issuing
Bank and the beneficiary, independent of the underlying relationship between the exporter and the
importer; only the documents relating to the exporter-importer transaction matter. This obviously means
that extreme care must be taken in handling the documents related to a Letter of Credit; otherwise, it
triggers a very time-consuming and expensive process of amendments and corrections to the Letter of
Credit.[1]

The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication no. 600
("UCP") are rules that apply to any documentary credit ("credit") (including, to the extent to which they
may be applicable, any standby letter of credit) when the text of the credit expressly indicates that it is
subject to these rules. They are binding on all parties thereto unless expressly modified or excluded by
the credit[2]

There are two types of Letters of Credit[3].

1 - A revocable Letter of Credit can be revoked without the consent of the Exporter, meaning that it may
be cancelled or changed up to the time the documents are presented. A revocable Letter of Credit affords
the Exporter little protection; therefore, it is rarely used.

2 - An irrevocable Letter of Credit cannot be cancelled or changed without the consent of all parties,
including the Exporter. Unless otherwise stipulated, all Letters of Credit are irrevocable. A further
differentiation is made between Letters of Credit, depending on the payment terms[4]. If payment is to be
made at the time documents are presented, this is referred to as a sight Letter of Credit. Alternatively, if
payment is to be made at a future fixed time from presentation of documents (e.g. 60 days after sight),
this is referred to as a term, usance or deferred payment Letter of Credit.

Instead of arranging a new L/C for each separate shipment, the buyer establishes a L/C
that revolves either in value (a fixed amount is available which is replenished when

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exhausted) or in time (an amount is available in fixed installments over a period such as
week, month, or year).

What is the bullwhip effect?

The bullwhip effect can be explained as an occurrence detected by the supply chain where orders sent to
the manufacturer and supplier create larger variance then the sales to the end customer. These irregular
orders in the lower part of the supply chain develop to be more distinct higher up in the supply
chain. This variance can interrupt the smoothness of the supply chain process as each link in the supply
chain will over or underestimate the product demand resulting in exaggerated fluctuations.

What contributes to the bullwhip effect?

There are many factors said to cause or contribute to the bullwhip effect in supply chains; the following
list names a few:

Disorganization between each supply chain link; with ordering larger or smaller amounts of a product than
is needed due to an over or under reaction to the supply chain beforehand.

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Lack of communication between each link in the supply chain makes it difficult for processes to run
smoothly. Managers can perceive a product demand quite differently within different links of the supply
chain and therefore order different quantities.

Free return policies; customers may intentionally overstate demands due to shortages and then cancel
when the supply becomes adequate again, without return forfeit retailers will continue to exaggerate
their needs and cancel orders; resulting in excess material.

Order batching; companies may not immediately place an order with their supplier; often accumulating the
demand first. Companies may order weekly or even monthly. This creates variability in the demand as
there may for instance be a surge in demand at some stage followed by no demand after.

Price variations special discounts and other cost changes can upset regular buying patterns; buyers want
to take advantage on discounts offered during a short time period, this can cause uneven production and
distorted demand information.

Demand information relying on past demand information to estimate current demand information of a
product does not take into account any fluctuations that may occur in demand over a period of time.

Example of the bullwhip effect

Lets look at an example; the actual demand for a product and its materials start at the customer,
however often the actual demand for a product gets distorted going down the supply chain. Lets say that
an actual demand from a customer is 8 units, the retailer may then order 10 units from the distributor; an
extra 2 units are to ensure they dont run out of floor stock.

The supplier then orders 20 units from the manufacturer; allowing them to buy in bulk so they have
enough stock to guarantee timely shipment of goods to the retailer. The manufacturer then receives the
order and then orders from their supplier in bulk; ordering 40 units to ensure economy of scale in
production to meet demand. Now 40 units have been produced for a demand of only 8 units; meaning
the retailer will have to increase demand by dropping prices or finding more customers by marketing and
advertising.

Although the bullwhip effect is a common problem for supply chain management understanding the
causes of the bullwhip effect can help managers find strategies to alleviate the effect. Hopefully this blog
post has given you a simple understanding of the term

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