I hope the New Year is getting off to a great start for everyone. This week I would like to discuss INCO terms. If you are new to international shipping or a veteran, it is always a good idea to review these terms.
INCO Terms are internationally recognized terms of sale used to determine responsibility for shipping arrangements and transfer of goods shipped in international trade. These standard terms help eliminate or reduce legal disputes and misinterpretation of responsibilities to the export or import transaction. Per the International Chamber of Commerce, they “help traders avoid costly misunderstandings by clarifying the tasks, costs and risks involved in the delivery of goods from sellers to buyers.”
The terms are universal as they apply to all trading nations under all circumstances. They were first published in 1936 and have been updated 8 times, the most recent in 2010. The terms apply to both imports and exports. The terms are abbreviated to 3 letter codes broken down into 4 categories. The first letter of the code determines the category:
E Terms. The seller makes the goods available at the seller’s facility.
F Terms. The seller is required to deliver the goods to a carrier specified by the buyer.
C Terms. The seller contracts for carriage, but does not assume the risk of loss or damage to the goods after delivery to the carrier.
D Terms. The seller is responsible for all costs and risks required to bring the shipment to the destination country.
Additionally, some of the terms are rules for any mode of transport where others only apply to Sea and Inland Waterway transport.
Determining which term to use is a vital component of the sales process. A lot of the customers I work with often fail to grasp the importance of them. Most shippers in the U.S. are very familiar with the North America terms: FOB Shipping Point and FOB Destination. But they often forget to take into account that International shipments are handled by many more entities. Thus, who pays for what part of the shipment can become confusing.
Ultimately, it comes down to the level of trust that exists between the parties involved. Typically, for export shipments, the term DDP(Delivered Duties Paid) entails the most liability for the shipper. But companies may have their reasons for handling shipments in this manner.
For example, if an exporter here in the U.S. is very familiar with the company that it is shipping to in Germany, then shipping under DDPmay make complete sense. The company receiving the shipment may be a subsidiary or sister company. These two entities may have a complex accounting system by which they debit and credit each other internally for some or all of the shipping costs. But they prefer the Bills of Lading to be under DDP.
More often, however, in the case of a company here in the U.S. working with a customer outside the U.S., the customer may make demands of the seller as terms of the sale. They may state that they will not purchase the goods unless the seller handles all freight charges. Many times I have dealt with an exporter that has made this mistake, only to learn that their customer in the foreign country will allow the freight to sit in Customs limbo while they attempt to finalize a sale of the goods to their customer. Meanwhile, the freight starts to rack up storage charges and other fees that the U.S. Exporter is responsible for paying.
One way I advise customers to avoid this situation is to have their customer use brokers and trucking companies in their own domicile country. Have them get quotes for expected costs and offer to make this part of the sale negotiation. Perhaps they can offer the customer a credit of $2000 to handle the trucking and Customs clearance themselves. Then set up the Bills of Lading as DAP (Delivered At Place). This way, the seller’s liability ends once the goods are delivered to the named port or terminal.
One last thought regarding INCO terms is that the term is technically not complete without a “place” tied in with it. In other words, the term has to list the city, port or city to be complete. As Thomas Cook mentions in his book, Mastering Import & Export Management, “offering the INCO term without the ‘named place’ is only addressing part of the equation and leaving out a very integral component, leading to confusion and much frustration.”
If the seller has not taken into account the place of where responsibility lies, they may find themselves paying more of the freight charges than originally intended.
Last week I talked about the importance of looking at freight shipments with the end (or destination) in mind and how important it is to consider all potential issues working backwards to the shipping point. When it comes to international shipments, there are even more issues to be considered. With an international shipment, the freight is typically handled by many more parties. Also, unless it is a short distance trans-border shipment from Canada or Mexico, the freight usually travels a much greater distance than standard domestic freight.
Let’s use our consignee in Warren, AR from the last week’s entry as an example. But this time, the shipper is located in Huizhou, China. There will be a total of 6 pallets of metal furniture components packed in cartons. So, the same questions regarding the consignee’s location are still needed to be confirmed as in last week’s scenario. Six pallets would be considered LCL, less than container load.
The next items to be considered involve how the freight will be routed and the type of service used. If it is a time critical shipment, air freight might be considered because it’s so much faster. Let’s say that transit time is not a huge factor, so ocean would be preferred because it’s the least expensive method. The freight would likely be delivered to Warren, AR via truck from a CFS (Container Freight Station) in Memphis, TN. The most economical method of getting it there would be via intermodal transit from the ocean port. Los Angeles is the most commonly used port, but east or gulf coast ports could be considered.
Although the shipment is only 6 pallets, it will arrive at the Memphis CFS in a 40’ container, packed with other freight. At the CFS, it will be unloaded, sorted and once cleared by US Customs, made available for pick up by the trucker. If coming from Los Angeles, the container would arrive via rail where a drayman must pick it up and deliver to the CFS.
Before the freight arrives in Memphis, it needs to be placed on the rail system from a CFS at the port of Los Angeles after arriving via the ocean vessel. Oftentimes there is not enough LCL freight moving to Memphis from the origin point to fully complete a 40’ container. When this is the case, the container arriving in Los Angeles CFS will be unloaded, sorted and placed in a different 40’ container to go to Memphis.
Looking back to the origin point of Huizhou, the closest ocean port would be Shenzhen. So getting the freight to that port would require similar thinking. The six pallets would arrive at a CFS station in Shenzhen via truck. At the origin (Shenzhen) CFS, the freight will be placed in the 40’ container where it will be combined with other consignee’s freight to completely fill it and ship to Los Angeles.
So as you consider what seems like a simple LCL import shipment, you begin to notice just how many times the freight will be handled. To summarize: It will be packaged at the shipper’s location, and then handled by a trucker on its way to the origin CFS at Shenzhen. There it will be combined to complete a 40’ container bound for port of Los Angeles. In LA, the freight will be drayed to another CFS, unloaded, sorted and placed in another 40’ container bound for Memphis via rail. Upon arrival at Memphis rail yard, it will be drayed to the destination CFS, unloaded and sorted for pickup by the trucking company, likely an LTL (Less Than Truckload) carrier. The LTL Carrier will bring the freight back to their Memphis terminal where it will be combined with freight bound for their Little Rock, AR facility. There, it will be unloaded and re-loaded onto a delivering trailer to the consignee’s door in Warren, AR.
It is good to be able to step back and see the things that have to take place in order for an international shipment to arrive safely. By considering the number of stop points that the shipment in our example has to make, it becomes clear the importance of planning. The slightest hiccup at any of the points in transit can delay a shipment by a day or two or even weeks. For instance, freight departing the origin port has got to be there by a cutoff day or else it might miss the vessel. If it misses the vessel it might wait a week before it departs.
Therefore, understanding how shipments get from one location to the other can greatly help in planning the where and when it will arrive. Adding buffer times to allow for any possible bottlenecks in the transit line can greatly help keep your work and processes flow more smoothly. Knowing these things can greatly help in planning production schedules at the shipping location.
Businesses must have both long term and short term plans, but in shipping, the plan must revolve around how to get the freight to where it needs to be and when. Sounds simple enough, doesn’t it? But so often, the task of planning shipments falls on someone that was never really trained for it. This person in the organization may already be overworked, now has the responsibility of getting an important shipment delivered, and has no understanding of what it takes to make it happen. Everyone understands that the freight has got to be where it needs to be, when it needs to be there, but what most either don’t take the time to understand or simply don’t have the time to try understanding is the how to get the freight there. Even experienced logistics professionals make grave mistakes in their shipment planning.
When things go wrong, it is easy to levy complete blame on your transportation provider and thinking, “That’s what I contacted you people for; you were supposed to know what to do!” This blame may be completely justified: Truckers, 3PLs and Freight Forwarders drop the ball all the time. Salespeople for these types of companies, too focused on closing a deal, constantly forget to ask important questions. Or if the customer is unable to answer a logistics provider’s questions, the salesperson for the provider may not push hard enough for the answers and just hope things will work out. Many times they do not. Regardless, it serves the customer to understand what’s required from their end. After all, a person may have an accountant to prepare one’s income taxes, but that doesn’t mean that one shouldn’t know something about the process. The same goes for shipping.
Let’s take a closer look at what I mean by planning when it comes to moving a piece of freight from one place to another. As was mentioned earlier, with freight, the only goal is to get the shipment where it needs to be and when it needs to be there. One simple tactic that can greatly help with any shipping scenario is to first consider the destination of the freight and work your way backwards. So for instance, if you are shipping a full 53’ truckload of palletized freight from your warehouse in South Carolina to your new customer in Warren, AR, you need to ask your consignee questions like these:
- Do you have a dock?
- Do you have a forklift?
- Can you accommodate a 53’ trailer at the facility? Many older manufacturing facilities now being used as warehouses were built when the 40’ trailer was the standard. There may not be enough room for a tractor with 53’ trailer to turn around.
- There will be 26 pallets on the truck – how long does it typically take you to unload?
- Do you have the warehouse space to receive the freight if it arrives in the next (define the time frame-a week, a few days…)?
- What are your receiving hours?
Next, you will want to touch base with your motor carrier of choice to confirm:
- What is the time in transit?
- Will the driver that picks up from my dock be the same one that delivers or will these duties be transferred to another driver? (Why is this question important? Because if there are any special instructions you need to make sure that everyone has them)
These are just a few of the issues that you will want to consider and questions that you will need answers to before proceeding. But it is easy to see that by looking at the shipment from the delivery point and working back to the shipping point you can begin to spot potential problems long before they happen and will help you to avoid them.
There is seldom a day in which we are not bombarded by announcements that we need more insurance, or that we need to save money on insurance. We’ve got to have home and car insurance, for example. When we go to an office supply store, sometimes we’re asked if we would like to buy an extended warranty for a $10 calculator. We’ve become numb to so many voices yammering about insurance in our day to day lives.
But when it comes to shipping freight internationally by sea, it is essential. Importers often make the mistake of not purchasing coverage for their freight. There are several possible reasons for this. The importer may be inexperienced or purchasing from a new vendor. The importer may have thoughtfully considered the price of the product and the transit time, and requested estimated freight costs from several freight forwarders and have chosen the most economical option. Most forwarders, in an effort to appear less expensive, do not list insurance on their quotes. After all, the customer did not request it up front, so why include it and appear to be overpriced?
Once the importer chooses a freight forwarder, the forwarder may ask if the importer would like to purchase insurance. But many times the forwarder may be so happy to close the business they simply forget to ask.
Other times the importer may assume that the freight is insured automatically. After all, motor carriers (truckers) are required to carry certificates of insurance stating covered liability for freight usually up to $100,000.00. But ocean carriers play by a completely different set of rules.
There are three reasons that Marine insurance is an absolute must when shipping internationally. All have to do with the rules of COGSA (Carriage of Goods by Sea Act). According to Wikipedia, “COGSA is a United States statute governing the rights and responsibilities between shippers of cargo and ship-owners regarding ocean shipments to and from the United States. It is the U.S. enactment of the International Convention Regarding Bills of Lading, commonly known as the “Hague Rules.”
The U.S. Congress felt that the Hague rules did not offer shippers enough protection against damage to freight from ship owners. So they set a standard that carriers would have to pay up to $500/package. At the time COGSA was passed, freight was typically shipped in crates, bags or cartons of some kind. But later, shippers began placing cartons on pallets. Ship owners seized the opportunity to begin defining each pallet as a “package” and effectively limit liability to $500/pallet.
Later, when shipping containers of 20 and 40 feet in length came into prominent use, ship owners again seized the chance to begin defining each container as a package, thus limiting liability to $500/container. Therefore, without insurance, any claims against loss or damage to your freight are limited to $500 per container.
Secondly, under the rules of COGSA, if there is a disaster at sea in which environmental clean-up is required, the importer could be held liable for a percentage of the clean-up costs. For instance, if there is a fire on board the ocean vessel and your freight becomes lost or damaged, not only would you be reimbursed a paltry $500 maximum for the loss of your cargo, you would also be expected to pay for some of the clean-up! This is why additional insurance is important.
Lastly, Marine insurance also protects your freight from loss in times of war and/or piracy. Like the recent film Captain Phillips illustrates, piracy is alive and well in the modern world.
The interesting thing that I see in my work as a freight forwarder is that with so many ways to communicate in today’s business world, it is amazing how many times and how easy it is to mis-communicate. Time, money, and endless headaches can be saved if you make sure everyone in a transaction supplies the other parties with the information they need for things to happen smoothly.
The first thing a logistics professional should do is to take stock of their contacts list. It is important to understand not only who the key players are in the supply chain, but what their roles are. There are many options out there for managing contacts, with Microsoft Outlook being one of the most popular. But more important than just having the contacts stored in an easy place is the knowledge of how those contacts need to interact in order to make work flow. This knowledge has always been critical, but with international commerce it becomes imperative.
For instance, let’s say you work for a wholesale distributor of plumbing parts with strategic warehouses in Los Angeles CA, Norfolk, VA and Houston, TX. Primarily, you import many of your goods from China, and use a company that is both a Customs Broker and Freight Forwarder to assist. Let’s call them Freight Forwarder A.
Recently, your company has begun procuring galvanized pipe from Brazil. Part of the decision to source the product from Brazil is because you developed a relationship with a Freight Forwarder that specializes in importation from South America. They are Freight Forwarder B. The caveat is that this company cannot clear the goods through U.S. Customs for you – they need to use a partner broker to do so. You have the choice to either let them do this or to allow Freight Forwarder A to do it.
Because Freight Forwarder B specializes in South American freight, you elect to let Freight Forwarder B handle the Customs Clearance also via their partner. This creates 2 separate supply chains and 2 separate lines of communication. You need to make certain that not only you, but all your staff understand where and to whom specific documents need to be sent. You don’t want Freight Forwarder A receiving customs documents from Brazil that Freight Forwarder B should be receiving.
Additionally, one thing that I see regularly is an organization’s decision to simply “copy all” parties in e-mail chains. They copy in their vendor overseas, the manufacturer, the overseas agent, and the Freight Forwarder. This creates a problem because those who don’t need all that information start ignoring the e-mail chain and may miss information they do need as a result.