LESSON 5

INBOUND LOGISTICS

INTERNATIONAL PROCUREMENT/PURCHASING
• Relates to a commercial purchase transaction between a buyer and a supplier located in a different
country.
• This type of purchase is typically more complex than a domestic purchase. PDEs must contend with
longer material pipelines, increased rules and regulations, currency fluctuations, customs requirements,
and a host for other variables such as language and time differences

REASONS FOR INTERNATIONAL PROCUREMENT

• Opportunity to improve quality, cost and delivery performance
• Materials are not available domestically
o Domestic manufacturers are unavailable to supply specific materials; Incapable of meeting
required delivery time or limited technical capabilities
• Unsatisfactory quality of domestic products
o Quality of the products in the domestic market does not meet the requirements of the PDE.
Supplier cannot provide satisfactory warranties or after-sales services to the manufacturers and
PDEs.
• Price
o Products supplied by domestic suppliers may be too expensive, and PDE can obtain the same
goods with a cheaper price elsewhere around the world.
• Technology
o PDEs may have no choice but to source internationally; otherwise they cannot get the supplies.
• No suitable domestic suppliers
• Required supplies got from overseas suppliers
• Entity has information about international sources
• Supplier selection issues dictate

Barriers and Overcoming them (International Procurement)

Barriers
• Lack of knowledge and skills concerning international sourcing
o How to identify potential sources of supply
o Documentation issues

• Resistance to change
o Established, routine sourcing patterns
o Shifting from longstanding suppliers
o Domestic market nationalism

• Longer lead times

o Extended material pipelines
o Forecasting over longer time horizons
o Need to more closely manage delivery dates
o Possibility of transit and/or customs delays
o Greater logistical, political and financial risks
 • Different business customs, language, and culture
o Business practices
o Language
o Culture
o Need to more closely manage delivery and engineering changes
o Different meeting and negotiation styles
o More difficult interpersonal relationships

• Currency fluctuations
o Often daily or hourly fluctuations
o Need to understand highly complicated financial options
o How to price purchases

Overcoming Barriers
• Education and training
• Publicizing success stories
• Globally linked information systems
• Measurement and reward systems
• Use of third party intermediaries
• Obligate in stable currency

Documentations used in International Procurement

• Letters of credit
• Multiple bills of lading (Air way bill; Bill of lading)
• Dock receipts
• Import licenses
• Certificates of origin
• Certificate of insurance
• Packing lists/Proforma invoice
• Commercial invoices
• Warranties
• Manufactures authorizations
• Clearance certificates (NDA; UNBS etc)

Factors to consider in International Procurement

• Costs
o Local labor rates
o International freight tariffs
o Currency exchange rates
• Customs duty
o Duty rates differ by commodity and level of assembly
o Impact of GATT/WTO: Changes over time
• Export regulations
o Denied parties list
o Export licenses
• Time
o Lead time
o Cycle time
 o Transit time
o Export license approval cycle
o Customs clearance
• Taxes on Corporate Income
o Different markups by country
• Offset Trade and Local Content
o Local content requirement for government purchases
o Content for preferential duty rates

Sources of Risks

GLOBAL SOURCING
• the process of identifying, developing, and utilizing the best source of supply for the enterprise,
regardless of location
• Global sourcing comprises both shared services and outsourcing solutions that can be implemented
domestically and offshore.
• Shared Services concentration of an organization’s resources; performing similar activities, normally
distributed across the organization, to service multiple internal partners with the common goal of
achieving customer satisfaction
• OUTSOURCING - Global Sourcing the provision by a third party of defined services, which can involve
a transfer of assets, intellectual property and/or staff
COMMON REASONS FOR GLOBAL SOURCING
• Reducing overall cost structure
• Availability of a new technology and capacity
• Establishing alternative sources of supply
• Access to new designs or specialized intellectual capital • Government incentives
• Superior quality

DRIVERS OF GLOBAL SOURING

GLOBAL SOURCING FACTORS

• Global sourcing factors that must be understood and balanced can be segmented into six categories:
○ Material Costs
○ Transportation Costs
○ Inventory carrying costs
○ Cross-border taxes, tariffs, and duty costs
○ Supply and operational performance
○ Supply and operational risks

HIDDEN COSTS OF GLOBAL SOURCING

• Internal Expenses
• Supplier Health
• Post-contract lull
• Duty and tariff changes
• Contract non-compliance
• True inventory costs
• Logistics Volatility
• Technology
• Quality breakdown

Two Key Decisions Regarding Global Sourcing

Decision 1: Outsource or not

• Decide whether each value adding activity should be conducted in house or by an independent
supplier.
• Known as the make or buy decision.
• Firms usually internalize those value chain activities they consider a part of their core competence, or
which involve the use of proprietary knowledge and trade secrets that they want to control.

Decision 2: Where in the world should value adding activities be located?

 • Firms configure their value chain activities in specific countries to cut costs, reduce transit time, access
favorable factors of production, and access competitive advantages.

Port Terminal and Handling Fees

• Unloading of cargo
• Administrative services of port authority personnel
• General use of the port
• Temporary storage for goods awaiting customs and/or documentation clearance

INCOTERM
• The word INCOTERM is an abbreviation for International Commercial Terms which provide a common
set of rules used for defining the responsibilities of sellers and buyers in the delivery of goods under
sales contracts. They are widely used in international commercial transactions.
• The Incoterms rules are standard sets of trading terms and conditions designed to assist traders when
goods are sold and transported.
• Each Incoterms rule specifies:
○ the obligations of each party (e.g. who is responsible for services such as transport; import and
export clearance etc)
○ the point in the journey where risk transfers from the seller to the buyer
• The Incoterms rules are created and published by the International Chamber of Commerce (ICC) and
are revised from time to time. The most recent revision is Incoterms 2020 which came into force on 1st
January 2020

TERMS COVERED BY INCOTERMS

• Warehousing
• Packing and loading
• Inland freight
• Terminal charges
• Freight forwarder’s fees
• Ocean/air freight
• Duty, taxes, & customs clearance
• Delivery
• Security Clearances

IMPORTANCE OF INCOTERMS
• Because they :
o Set international rules for commonly used terms in foreign trade ○Define obligations of both
parties involved in the transaction
o Determine the distribution & transfer of risks regarding the goods delivered from seller to buyer
o State the clear sharing of expenses between the parties during transport

TRANSPORTATION DEFINITIONS
• Pre-carriage: inland transportation on the seller’s side
o Domestic: from the place where the shipment starts to any subsequent transportation carriage
o International: from the place where the shipment starts to the departure point on the seller’s side
• Main Carriage:
o Domestic: subsequent transportation beyond pre-carriage
o International: transportation from the point of departure on the seller’s side to the arrival pint on
the buyer’s side
 • On-carriage:
o Domestic: subsequent transportation beyond main carriage
o International: transportation from the arrival pint on the buyer’s side

TRANSPORTATION DEFINITIONS
• Door – to – Door
o Contract of carriage that includes pre-carriage, main-carriage and on-carriage by the same
carrier
• Door – to – (Air) Port:
o Contract of carriage including pre-carriage and main-carriage to airport or ocean port or truck
terminal port or rail port
• (Air) Port – to – (Air) Port:
o Contract of carriage for main carriage only
• (Air) Port – to – Door:
o Contract of carriage including main carriage and on-carriage

CONTRACTS
• SHIPMENT CONTRACT: sales/purchase contract where the seller’s responsibility ends when goods
are handed over to the first carrier
• ARRIVAL CONTRACT: sales/purchase contract where seller’s responsibility ends when goods have
arrived at agreed place

BRIEF HISTORY

Before 1921
1812: Creation of the first FOB term.
1895: CIF term was created.
1919: The EUA (European Union Emission Trading Scheme) created its own terms
1921: Incoterms first conceived by International Chamber of Commerce (ICC).
1923: The first six rules were developed-FOB, FAS, FOT, FOR, Free Delivered CIF and C&F.
1936: Incoterms first implemented.
1956: The ICC created the next version of incoterms.
1976: The ICC created new incoterms, which included air transportation.
1980: The ICC adopted three new incoterms applicable to all modes of transportation. At this time incoterms
numbered at fourteen.
1990: New incoterms were created to suit intermodal transport.
2000: The ICC made a simplification in the allocation of loading and unloading costs.
At this point there were thirteen incoterms
2010: The number of incoterms decreased to eleven.
2011: These incoterms were put into effect January 1, 2011.

BRIEF HISTORY
• First conceived by International Chamber of Commerce (ICC) in 1921 and implemented starting from
1936, since they have been updated 6 times in order to keep pace with the evolution of international
trade.
• In 1923, a Trade Terms Committee developed the first 6 rules : FOB (Free on Board: Free on board
indicates whether the seller or the buyer is liable for goods that are damaged or destroyed during
shipping. For FOB shipment, the risk is transferred when the cargo is placed ONBOARD of the ship of
the buyer’s choice.), FAS (Free Alongside. For FAS shipment term, the risk is transferred when the
 cargo is placed ALONGSIDE the ship of the buyer’s choice.), FOT (FOT means Free on Truck and
refers to goods being carried by truck. This term should only be used when the goods are carried by
truck. The risk of loss or damage is transferred to the buyer when the goods are loaded onto the truck.),
FOR (Free on rail. This occurs when the goods have passed over the railcar's loading gate.), Free
Delivered CIF (Cost, insurance, and freight (CIF) is an international shipping agreement used when
freight is shipped via sea or waterway. Under CIF, the seller is responsible for covering the costs,
insurance, and freight of the buyer's shipment while in transit.) and C&F (cost and freight), as the
precursor for what would later be known as INCOTERM rules.

INCOTERMS 2010
• LATEST REVISION: Entered into force 1st January 2011, containing the following amendments:

• Reduction from 13 to 11 terms by replacing 4 delivery terms : DEQ (In international trade, DEQ or
"delivered ex quay" was a contract specification where the seller had to deliver the goods to the quay or
wharf at the destination port.), DAF ("Delivered at frontier" is a term used in international shipping
contracts that requires a seller to deliver goods to a border location.), DES (Delivered ex-ship was a
trade term that required a seller to deliver goods to a buyer at an agreed port of arrival.), DDU
(Delivered Duty Unpaid,” is an international commerce term which means that the seller will deliver the
goods as soon as they are made available at an agreed-upon location in the country to which they are
imported.) with 2 new ones : DAT(Delivered At Terminal refers to the seller delivering the goods, once
unloaded from the arriving means of transport. Goods are placed at the disposal of the buyer at the
named terminal, at the named port or place of destination.) and DAP(Delivered at-place simply means
that the seller takes on all the risks and costs of delivering goods to an agreed-upon location. This
means the seller is responsible for everything, including packaging, documentation, export approval,
loading charges, and ultimate delivery.) Terms grouped in 2 categories, according to the means of
transport used : General all types of transport, Special sea & inland waterway

• EXW DAT FAS • FCA DAP FOB • CPT DDP CFR • CIP CIF

INCOTERMS 2020
• Incoterms 2020 was published on 10 September 2019 and came into force on 1st January 202

• Although the layout of the text is very different from Incoterms 2010, there are very few substantive
changes to the meaning of the rules.

• The two most important changes are these:

o The rule DAT Delivered at Terminal (DAT) has been renamed Delivered at Place Unloaded (DPU)
o For Carriage and Insurance Paid (CIP), the level of freight insurance provided is now Institute
Clauses (A), and not the lower level Institute Clauses (C). For Cost Insurance and Freight (CIF), the
level of freight insurance provided has remained unchanged at Institute Clauses (C)

CLASSIFICATION OF INCOTERMS
• In general the “transport by sea or inland waterway only” rules should only be used for bulk cargos (e.g.
oil, coal etc.) and non-containerized goods, where the exporter can load the goods directly onto the
vessel. Where the goods are containerized, the “any transport mode” rules are more appropriate.
• A critical difference between the rules in these two groups is the point at which risk transfers from seller
to buyer. For example, the “Free on Board” (FOB) rule specifies that risk transfers when the goods
have been loaded on board the vessel. However the “Free Carrier” (FCA) rule specifies that risk
transfers when the goods have been taken in charge by the carrier.
CLASSIFICATION OF INCOTERMS
• In general the “transport by sea or inland waterway only” rules should only be used for bulk cargos (e.g.
oil, coal etc.) and non-containerized goods, where the exporter can load the goods directly onto the
vessel. Where the goods are containerized, the “any transport mode” rules are more appropriate.
• A critical difference between the rules in these two groups is the point at which risk transfers from seller
to buyer. For example, the “Free on Board” (FOB) rule specifies that risk transfers when the goods
have been loaded on board the vessel. However the “Free Carrier” (FCA) rule specifies that risk
transfers when the goods have been taken in charge by the carrier.

11 RULES IN TWO GROUPS

Rules for any transport mode

• Ex Works EXW
• Free Carrier FCA
• Carriage Paid to CPT
• Carriage & Insurance Paid to CIP
• Delivered at Place Unloaded DPU (***)
• Delivered at Place DAP
• Delivered Duty Paid DDP

Rules for sea & inland waterway only

• Free Alongside Ship FAS
• Free On Board FOB
• Cost and Freight CFR
• Cost Insurance and Freight CIF

CLASSIFICATION OF INCOTERMS
• Another useful way of classifying the rules is by considering:
o Who is responsible for the main carriage – the buyer or the seller?
o If the seller is responsible for the main carriage, where does the risk pass from the seller to the
buyer – before the main carriage, or after it?
• This gives us these four groups:
o Buyer responsible for all carriage – EXW
o Buyer arranges main carriage – FAS; FOB; FCA
o Seller arranges main carriage, risk passes after main carriage – DPU; DAP; DDP
o Seller arranges main carriage, but risk passes before main carriage – CFR; CIF; CPT; CIP
• This last group of rules often surprises newcomers, because although the seller pays for transport to
the named place, the risk transfers at an earlier point in the journey.

EX WORKS (EXW)
• Can be used for any transport mode, or where there is more than one transport mode
• This rule places minimum responsibility on the seller, who merely has to make the goods available,
suitably packaged, at the specified place, usually the seller’s factory or depot.
• The buyer is responsible for loading the goods onto a vehicle (even though the seller may be better
placed to do this); for all export procedures; for onward transport and for all costs arising after collection
of the goods.
• In many cross-border transactions, this rule can present practical difficulties.
• Specifically, the exporter may still need to be involved in export reporting and clearance processes, and
cannot realistically leave these to the buyer. Consider Free Carrier (seller’s premises) instead.
 • Other things to watch for. Although the seller is not obliged to load the goods, if the seller does so, this
is at the buyer’s risk!

FREE CARRIER (FCA) – seller not obliged to insure goods for pre-carriage
• Can be used for any transport mode, or where there is more than one transport mode.
• A very flexible rule that is suitable for all situations where the buyer arranges the main carriage
• For example:
o Seller arranges pre-carriage from seller’s depot to the named place, which can be a terminal or
transport hub, forwarder’s warehouse etc. Delivery and transfer of risk takes place when the truck
or other vehicle arrives at this place, ready for unloading – in other words, the carrier is responsible
for unloading the goods. (If there is more than one carrier, then risk transfers on delivery to the first
carrier.)
o Where the named place is the seller’s premises, then the seller is responsible for loading the goods
onto the truck etc. NB this is an important difference from Ex Works EXW
• In all cases, the seller is responsible for export clearance; the buyer assumes all risks and costs after
the goods have been delivered at the named place.
• FCA is the rule of choice for containerized goods where the buyer arranges for the main carriage.

FREE ALONGSIDE SHIP (FAS) – seller not obliged to insure goods for pre-carriage
• Use of this rule is restricted to goods transported by sea or inland waterway.
• In practice it should be used for situations where the seller has direct access to the vessel for loading,
e.g. bulk cargos or non-containerized goods.
• For containerized goods, consider “Free Carrier FCA” instead.
• Seller delivers goods, cleared for export, alongside the vessel at a named port, at which point risk
transfers to the buyer.
• The buyer is responsible for loading the goods and all costs thereafter.

FREE ON BOARD (FOB) – seller not obliged to insure goods for pre-carriage
• Use of this rule is restricted to goods transported by sea or inland waterway.
• In practice it should be used for situations where the seller has direct access to the vessel for loading,
e.g. bulk cargos or non-containerized goods.
• For containerized goods, consider “Free Carrier FCA” instead.
• Seller delivers goods, cleared for export, loaded on board the vessel at the named port.
• Once the goods have been loaded on board, risk transfers to the buyer, who bears all costs thereafter.

INCOTERMS 2000
• Ex Works (EXW): Buyer takes title when taking delivery of the gods at supplier’s facility. Buyer is
responsible for the shipment and duties.
• Free Carrier (FCA): Buyer takes possession and title at the airport or truck terminal at the port of export
in the seller’ country after the goods clear customs.
• Free Alongside Ship (FAS): Buyer takes possession at the dock at the port of export after the gods
clear customs.
• Free of Board (FOB): Buyer takes responsibility and title for the goods as they pass over the ship’s rail
during loading.

CARRIAGE PAID TO (CPT) – seller not obliged to insure goods for pre-carriage or main carriage
• Can be used for any transport mode, or where there is more than one transport mode.
 • The seller is responsible for arranging carriage to the named place, but not for insuring the goods to the
named place. However delivery of the goods takes place, and risk transfers from seller to buyer, at the
point where the goods are taken in charge by a carrier.
• Things to watch for.
o Terminal Handling Charges (THC) are charges made by the terminal operator. These charges
may or may not be included by the carrier in their freight rates – the buyer should enquire
whether the CPT price includes THC, so as to avoid surprises.
o The buyer may wish to arrange insurance cover for the main carriage, starting from the point
where the goods are taken in charge by the carrier – NB this will not be the place referred to in
the Incoterms rule, but will be specified elsewhere within the commercial agreement

CARRIAGE AND INSURANCE PAID TO (CIP) – seller insures goods for main carriage to named place
• Can be used for any transport mode, or where there is more than one transport mode. The seller is
responsible for arranging carriage to the named place, and also for insuring the goods.
• As with CPT, delivery of the goods takes place, and risk transfers from seller to buyer, at the point
where the goods are taken in charge by a carrier.
• Things to watch for.
o Terminal Handling Charges (THC) are charges made by the terminal operator. These charges
may or may not be included by the carrier in their freight rates – the buyer should enquire
whether the CPT price includes THC, so as to avoid surprises.
o The level of insurance cover that the seller is obliged to obtain – there are differences here
between Incoterms 2010 and Incoterms 2020. If necessary, different levels of cover may be
included in the commercial agreement.

COST AND FREIGHT (CFR) – seller not obliged to insure goods for pre-carriage or main carriage
• Use of this rule is restricted to goods transported by sea or inland waterway.
• In practice it should be used for situations where the seller has direct access to the vessel for loading,
e.g. bulk cargos or non-containerized goods.
• For containerized goods, consider ‘Carriage Paid To CPT’ instead.
• Seller arranges and pays for transport to named port. Seller delivers goods, cleared for export, loaded
on board the vessel.
• However risk transfers from seller to buyer once the goods have been loaded on board, i.e. before the
main carriage takes place.
• NB seller is not responsible for insuring the goods for the main carriage.

COST INSURANCE AND FREIGHT (CIF)

• Seller arranges and pays for transport to named port. Seller delivers goods, cleared for export, loaded
on board the vessel.
• However risk transfers from seller to buyer once the goods have been loaded on board, i.e. before the
main carriage takes place.
• Seller also arranges and pays for insurance for the goods for carriage to the named port.
• However as with “Carriage and Insurance Paid To”, the rule only require a minimum level of cover,
which may be commercially unrealistic. Therefore the level of cover may need to be addressed
elsewhere in the commercial agreement.
Incoterms 2000
• Cost and Freight (CFR): Supplier arranges freight and pays as far as the buyer’s port of entry. Title and
risk of loss remain with the buyer.
 • Cost, Insurance and Freight (CIF): Supplier arranges freight and buys insurance for the goods as part
of the sales price. Title and risk transfer to the buyer once the goods clear a ship’s rail while being
loaded.
• Carriage Paid (CPT): Title transfers to buyer when goods are loaded into a container. Seller selects and
pays the carrier. Similar to CFR.
• Carriage and Freight Paid to (CIP): Similar to CIF but applies to air or truck transport only.

DELIVERED AT TERMINAL (DAT) – INCOTERMS 2010 – seller responsible for goods during transport to
named place, but not obliged to insure
• In Incoterms 2020, this rule has been renamed Delivered at Place Unloaded
• Can be used for any transport mode, or where there is more than one transport mode. The seller is
responsible for arranging carriage and for delivering the goods, unloaded from the arriving means of
transport, at the named place.
• Risk transfers from seller to buyer when the goods have been unloaded.
• ‘Terminal’ can be any place – a quay, container yard, warehouse or transport hub.
• The buyer is responsible for import clearance and any applicable local taxes or import duties.
• Things to watch for:
o The place for delivery should be specified as precisely as possible, as many ports and transport
hubs are very large.
o A useful rule, well suited to container operations where the seller bears responsibility for the
main carriage.

DELIVERED AT PLACE (DAP) – seller responsible for goods during transport to named place, but not obliged
to insure
• Can be used for any transport mode, or where there is more than one transport mode.
• The seller is responsible for arranging carriage and for delivering the goods, ready for unloading from
the arriving means of transport, at the named place. (An important difference from Delivered at Place
Unloaded DPU.)
• Risk transfers from seller to buyer when the goods are available for unloading; so unloading is at the
buyer’s risk.
• The buyer is responsible for import clearance and any applicable local taxes or import duties.

Incoterms 2000
• Delivered at Frontier (DAF0: Goods are delivered to a border by truck or rail. Title transfer transfers at
the border after goods are cleared for export but not yet cleared through import customs.
• Delivered Ex Ship (DES): Seller pays freight costs to a port of import, and title transfers on the ship at
arrival. Buyer is responsible for unloading the freight and clearing customs.
• Delivered Ex Quay (DEQ): Seller is responsible for having the ship unloaded at the port of entry. Title
transfers when goods are unloaded from the ship, either before or after customs. Term must include
“Duty Paid” or “Duty Unpaid”.

DELIVERED DUTY PAID (DDP) – seller not obliged to insure goods for pre-carriage or main carriage
• Can be used for any transport mode, or where there is more than one transport mode.
• The seller is responsible for arranging carriage and delivering the goods at the named place, cleared
for import and all applicable taxes and duties paid (e.g. VAT, GST)
• Risk transfers from seller to buyer when the goods are made available to the buyer, ready for unloading
from the arriving means of transport
• This rule places the maximum obligation on the seller, and is the only rule that requires the seller to
take responsibility for import clearance and payment of taxes and/or import duty.
 • These last requirements can be highly problematical for the seller. In some countries, import clearance
procedures are complex and bureaucratic, and so best left to the buyer who has local knowledge.

Incoterms 2000
• Delivered Duty Unpaid (DDU): Seller delivers goods with duty unpaid to a buyer’s specified location.
This location, where the title transfer, is different from the port of import. These goods have not cleared
customs and require proper customs supervision and bonding.
• Delivered Duty Paid (DDP): Seller delivers goods to the buyer with all duties paid. Title transfers at the
buyer’s designated receiving location.

INCOTERMS GROUP

Contract for carriage without assuming risk of loss during shipment

CFR – Cost and Freight
CIF – Cost, Insurance and Freight
CPT – Carriage Paid To
CIP – Carriage and Insurance Paid To

Bear all costs and risks needed to bring goods to place of destination
DAT – Delivered at Terminal
DAP – Delivered at Place
DDP – Delivered Duty Paid

Make goods available at own premises

EXW – Ex Works

Deliver goods to a carrier appointed by buyer

FCA – Free Carrier
FAS – Free Alongside Ship
FOB – Free on Board

F-GROUP TERMS
• Are considered to be “Shipment contracts”
• Are considered buyer friendly
Seller
 Handles Export Clearance
 Handles Pre-carriage
 Named Place on Seller’s Side
Buyer
 Contracts for Main Carriage
 In charge of Carrier (and usually forwarder) selection
 Control over Freight Costs
 Control of Documentation

C-GROUP TERMS
• Are considered to be “Shipment contracts”
• Are considered seller friendly
Seller
 Contracts for Main Carriage
  In charge of carrier (and usually forwarder) selection
 Handles pre-carriage
 Has control over freight costs
 In control of documentation
 Passes risk of loss (delivers) to Buyer prior main carriage
 Handles export clearance
Buyer
 Named Place is on Buyer's side
 Has risk of loss while goods are in transit with carrier selected and paid for by seller
 Must rely heavily on Seller for data elements required for ocean shipments such as Importer Security
Filing (known as ISF or 10+2)
If informed, should not consider “C” terms due to downside described

D-GROUP TERMS
• Are considered to be “Arrival contracts”
Seller
 Contracts for Main Carriage
 In charge of carrier (and usually forwarder) selection
 Handles pre-carriage
 Has control over freight costs
 In control of documentation
 Passes risk of loss (delivers) to Buyer at freight arrival point
 Handles export clearance
 Seller may have revenue recognition issues since “delivery” occurs on arrival side, meaning revenue is
recognized
Buyer
 Named Place on Buyer's side
 Must rely heavily on Seller for data elements required for ocean shipments such as Importer Security
Filing (known as ISF or 10+2)
 Undertakes less risk than in “CC” terms
 If inexperienced, or does not have good relationship with carriers, is served will by °D* terms
International Transaction Costs
 Base price
 Tooling
 Packaging
 Escalation
 Transportation from supplier to buyer
 Customs duties
 Insurance premiums
 Payment terms
 Additional fees and commissions
 Port terminal and handling fees
 Customs broker fees
 Taxes
 Communication costs
 Payment and currency fees
 Inventory carrying costs

10 COMMON MISTAKES IN USING INCOTERM RULES

Here are some of the most common mistakes made by importers and exporters:

1. Use of a traditional “sea and inland waterway only” rule such as FOB or CIF for containerized goods,
instead of the “all transport modes” rule e.g. FCA or CIP. This exposes the exporter to unnecessary risks. A
dramatic recent example was the Japanese tsunami in March 2011, which wrecked the Sendai container
terminal. Many hundreds of consignments awaiting dispatch were damaged. Exporters who were using the
wrong rule found themselves responsible for losses that could have been avoided!

2. Making assumptions about passing of title to the goods, based on the Incoterms rule in use. The Incoterms
rules are silent on when title passes from seller to buyer; this needs to be defined separately in the sales
contract

3. Failure to specify the port/place with sufficient precision, e.g. “FCA Chicago”, which could refer to many
places within a wide area

4. Attempting to use DDP without thinking through whether the seller can undertake all the necessary
formalities in the buyer’s country, e.g. paying GST or VAT

5. Attempting to use EXW without thinking through the implications of the buyer being required to complete
export procedures – in many countries it will be necessary for the exporter to communicate with the
authorities in a number of different ways

6. Use of CIP or CIF without checking whether the level of insurance in force matches the requirements of the
commercial contract – in some instances these Incoterms rules only require a minimal level of cover, which
may be inadequate.

7. Where there is more than one carrier, failure to think through the implications of the risk transferring on
taking in charge by the first carrier – from the buyer’s perspective, this may turn out to be a small haulage
company in another country, so redress may be difficult in the event of loss or damage
8. Failure to establish how terminal handling charges (THC) are going to be treated at the point of arrival.
Carriers’ practices vary a good deal here. Some carriers absorb THC’s and include them in their freight
charges; however others do not.

9. Where payment is with a letter of credit or a documentary collection, failure to align the Incoterms rule with
the security requirements or the requirements of the banks.

10. When DAT/DPU or DAP is used with a “post-clearance” delivery point, failure to think through the liaison
required between the carrier and the customs authorities – can lead to delays and extra costs

DOCUMENTARY CREDITS
• Documentary credit is as assurance of payment by the bank.
• It is an arrangement under which the bank , at the request of the buyer or on its own , undertakes to
make payment to the seller provided specific Documents are submitted .
• Documentary Credits are akin to bank guarantee.
• Documentary Credits in Popular Language are Known as LETTER OF CREDIT (LC)

Letters of Credit
• Assure the seller that it will be paid for shipment
• Paid when accurate and appropriate documents are presented to buyer’s bank
• Revocable vs. irrevocable

PARTIES TO DOCUMENTARY CREDITS

• COMMERCIAL PARTIES. There are two commercial parties viz. Applicant & Beneficiary
o Applicant The applicant is normally the buyer of the goods. i.e. the importer who request his
bank to issue a letter of credit in favor of a named beneficiary against tendering of certain
specified documents.
 The Role of Applicant
 Supply the bank with complete instruction. (To fill out standard application form)
 Issue instruction for amendments if any
 Decide on discrepancies reported by the issuing bank to him
 Arrange for funds at the payment time .

BENEFICIARY
• The beneficiary is normally the seller of goods who receives payment under documentary credit if he
has complied with terms and conditions thereof .
• A credit issued in favor of the beneficiary to enable him or his agent to obtain payment once he
performed his part of contract and submitted stipulated documents showing compliance with the terms
and conditions of letter of credit.
• In case of a transferable letter of credit , the credit is transferred to another party , the original
beneficiary is known as first beneficiary the person to whom the credit is transferred is known as the
second beneficiary.
o The Role of Beneficiary
 Establish the terms of payment when sales contracts is being Negotiated
 Assess the risk of non payment even when compliant documents are presented in the
case of unconfirmed LCS.
 Provide the draft wordings to buyer regarding LC Terms • Scrutinize LC on receipt from
the advising bank to check whether it is in consonance with the sales contract and
whether it is otherwise workable and acceptable to him .
  Request for LC amendments from buyer
 Provide copy of the credit to dispatch department and cargo agent to ensure correct
documentation

BANKERS.
• Issuing Bank: The issuing bank or the opening bank is one which issue the credit , i.e. undertake ,
independent of the Undertaking of the applicant , to make payment provided the terms and conditions
of the credit have been complied with .
• Advising Bank: The advising bank advises the credit to the beneficiary thereby authenticating the
genuineness of the credit.
• Confirming Bank: A confirming bank is the one which adds its guarantee to the credit . It undertakes the
responsibility of payments / negotiation / acceptance under the credit in addition to that of the issuing
bank .
• Nominated Bank: A Nominated bank is the bank nominated or authorized by issuing bank to pay , to
incur a deferred payment liability , to accept drafts or to negotiate the credit.
• Reimbursing Bank: A reimbursing bank is the bank authorized to honor the reimbursement claims in
settlement of negotiation with the paying or accepting bank .

RELATED PARTIES
• Insurer: The insurer has the prime responsibility for insuring the goods as provided for in the credit .
• Carrier: The carrier , i.e. the shipping company or airline or road transport agency is responsible for
safe arrival of the goods at the destination .

TYPES OF DOCUMENTARY CREDITS

• Revocable Documentary Credit
o This type of credit is one which can be cancelled , revoked or amended without the consent of
the beneficiary or the applicant ( without prior notice to beneficiary ) up to moment of payment
o Under UCP article 6 it is compulsory to indicate whether LC is revocable or irrevocable . If not
then it is considered deemed to be irrevocable
• Irrevocable Documentary Credit
o It is other hand of Revocable LC
• Confirmed Documentary Credit
o Confirmed Credit is the one to which another bank , that is a bank other than the issuing bank ,
has added its confirmation and guarantee
o Confirmation at the request of the Seller
• Unconfirmed Letter of credit
o It is in other hand of confirmed LC
• Fixed Credit
o Fixed credit is available for fixed amount and period
• Installment Credit
o Installment Credit is available for full value of goods to be shipped in stipulated time at stated
intervals
• The Stand by Letter of Credit
o Is not at all documentary credit .
o It is a guarantee issued in format of LC by issuing bank
o a legal document where a bank guarantees the payment of a specific amount of money to a
seller if the buyer defaults on the agreement.
• The Inland Letter of Credit
 o an obligation of the bank that opens the letter of credit (the issuing bank) to pay the agreed
amount to the seller on behalf of the buyer, upon receipt of the documents specified in the letter
of credit under domestic business transaction.

STAGES IN PERFORMANCE OF LETTER OF CREDIT

• Stage 1 - Opening of Letter of Credit ( Application for LC )
• Stage 2 - Mailing of LC to Beneficiaries bank
• Stage 3 - Examination of LC by Exporter
• Stage 4 - Amendments to LCs
• Stage 5 - Confirmation
• Stage 6 - Shipment
• Stage 7 - Collection of Documents
• Stage 8 - Presentation of Documents
• Stage 9 - Examination of Documents by Issuing Bank
• Stage 10 - Handling of Discrepant Documents
• Stage 11 - Settlement of Payment .

PAYMENT STRUCTURE
• Sight Credit
o In this the payment is release to Beneficiary on presentation of documents
o a document that verifies the payment of goods or services, payable once it is presented along
with the necessary documents.
• Acceptance Credit
o In this beneficiary draws the bill of exchange on issuing bank and allows some time for
acceptance
o an authorization given by a bank to a specified beneficiary to draw drafts upon the bank up to a
specified amount.
• Deferred Credit
o Is same as Acceptance Credit except there is no bill of exchange
o money that is received by a company but not immediately reported as income because it has
not yet been earned.
General Documents Under Documentary Credits
• Commercial Invoice
• Packing List
• Bill of lading and other transport documents
• Certificate of Origin
• Inspection Certificate
• Bill of Exchange
• Insurance Documents