Global sourcing concepts

Understanding Incoterms

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Incoterms
International Commercial Terms, are three-letter trade terms
established by the International Chamber of Commerce to facilitate
cross-border trade.

Possibly the most important clause within an international contract of

sale is that which describes the terms of trade chosen between the
seller and the buyer. These identify the following issues for both
parties in the movement of the goods:

• Responsibilities of both parties and their service providers

• The division of risks between seller and buyer
• The division of costs between seller and buyer.
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 Incoterms
CIF
EXW CFR DAP DDP

FOB

First
The Seller Carrier The Buyer

Loading Destination
Main
Port Port
Carrier
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 Shipment
movement Steps

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Incoterm groups
Incoterms Group C
Condition: The seller bears all costs to the destination port (including international
transport) however, risk transfer will be made once the goods are loaded on the means of
transport.
Incoterms Group D
Condition: The seller bears all risks and costs necessary to bring the goods to the
destination country.
Incoterms Group E
Condition: The buyer is responsible for collecting the goods at the seller’s warehouse and
bears all associated risk and cost.
Incoterms Group F
Condition: The seller is responsible for bringing the goods to the buyer’s predefined
transport medium; the buyer then accepts cost and risk responsibility from that point
onwards.
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“Global purchasers must also deal with more complex shipping terms
than domestic buyers. The International Chamber of Commerce
created a uniform set of rules, called incoterms (International
Commercial Terms), to simplify international transactions of goods
with respect to shipping costs, risks and responsibilities of buyer, seller
and shipper. However, incoterms do not deal with transfer of title of the
goods. Incoterms are often used in conjunction with a geographical
location” (Wisner et al. 2012 p.65 3e)

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“ As early as 1936, Incoterms were developed by the Paris-based
International Chamber of Commerce to provide internationally
accepted regulations for trade terms such as export packing costs,
customs clearance, inland and ocean transportation costs, and damage
insurance.” (Arnold et al. 2008 P.367 6e)