When applied correctly, Incoterms® can reduce your costs, expedite your cross-border shipments, and enhance supply chain agility. Yet despite the Incoterms® changes that have already taken effect in cross-border sales contracts (we don’t have to wait until January 1, 2020 to apply them), many people aren’t familiar with what these powerful terms are and how they work.
Mielken Says... |
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| Incoterms...are helping global supply chains to operate smoothly by avoiding bottlenecks or confusion over who is responsible for the risks and transportation of purchased goods. |
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With great opportunity comes great responsibility
Global trade has seen unpreceded growth over the last decade, providing extraordinary opportunities for companies to expand their reach to more distant markets and sell more products to a broader customer base. However, moving goods internationally is no easy task, and requires a carefully coordinated strategy from planning to execution and the efficient coordination of many actors across the global supply chain. These partners are required to operate in-sync to avoid costly supply chain delays. Clear instructions of who must do what, where, and when are, therefore, paramount. Such clarity can only be obtained if the parties in the initial sales contract—the buyer and the seller—can stick to agreed principles based on leading business-to-business practices and fix these agreements in their contracts.
Enter the ICC Incoterms® 2020
The International Chamber of Commerce (ICC) Incoterms® 2020 refers to international commercial terms—the obligations, risks, and costs that sellers and buyers owe to each other under the contract they agreed. More specifically, they indicate at what port, place, or point the goods are to be delivered, where the risks are to be transferred, and also detail who must arrange or provide carriage, insurance, trade documents, and import or export clearance. Remarkably, all this is specified through the use of eleven simple, commonly used, three-letter abbreviations starting with one of the four letters E, F, C, or D.
What’s different from the 2010 version? The devil is in the details
The primary changes to Incoterms® 2020 compared to the 2010 version is the re-ordering of the internal order and the change from DAT to DPU. Some observers who may have hoped for a radical shake-up—such as the elimination of EXW or the addition or a new mode of transport covering space travel—were disappointed. They may argue that the simple re-ordering of the internal order within each rule is only cosmetic, but they would be missing the point. By prioritizing at what moment the delivery of the goods from seller to buyer has taken place, the 2020 terms help ensure that both parties are in no doubt about who is responsible for the loss of or damage to the goods. And, those eagerly seeking more substantial changes can rest assured when the DAT (Delivered at Terminal) was changed to DPU (Delivered at Place Unloaded), the change established that the place of destination could be any place and not only a “terminal.” Of course, there are quite a few other changes, and details can be found in the Incoterms® book, available for purchase on the ICC website.
Does using the right Incoterms® 2020 matter that much?
Agreeing to the use of a certain Incoterm in a sales contract requires a solid understanding of the obligations that a business takes on as a result of agreeing to them. Companies need to ensure they can meet the requirements that come with it before signing any contract. For example, can you arrange carriage to the agreed destination? Have you added the costs of insurance and carriage to the sales price? Are you able to customs-clear the goods for import as a non-established, foreign seller? How will you get the necessary trade documentation to meet your compliance obligations? These and many more questions must be answered when engaging in international sales or purchases. Failure to understand each term and merely to agree to it can have disastrous consequences for profit margins and order fulfillment, creating supply chain nightmares that must be avoided at all costs.
Why do Incoterms® 2020 matter in the global supply chain?
Incoterms® 2020 should be appreciated as a tool to improve business transactions worldwide. They can prevent disruptions and enhance global supply chain management. They are helping global supply chains to operate smoothly by avoiding bottlenecks or confusion over who is responsible for the risks and transportation of purchased goods.
So, how ready are you?
Any organization selling or purchasing goods at a global level should have a clear and deep understanding of Incoterms® 2020. Used in combination with powerful global trade automation solutions that can globally standardize processes, import and export best practices, cost‐cutting programs and reduced compliance risks, they are the essential tool to guarantee efficiency and speed in worldwide sourcing and shipping operations.
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