The general rule to choosing the best incoterm is choosing the one have less risk, obligations to you, and more control of your freight.
If you are a seller you should choose the one to receive money as quickly as possible once freight is out of your facility such as EXW Factory. If you are a buyer you want to delay all payments until you receive freight at your warehouse, such as DAP or DDP your warehouse.
What does incoterm stand for?
Incoterm is a set of trade terms describing international traders’ rights and obligations regarding the sale and transport of goods.
Incoterm is an abbreviation of International Commercial Terms. The International Chamber of Commerce (ICC) in Paris developed a set of uniform rules to define the costs, risks, and obligations of buyers and sellers in international transactions. This first edition of incoterm was published in 1936 and revised periodically.
What are the 11 types of incoterms?
EXW
Ex-works at the named place of delivery.
If the incoterm is EXW seller’s factory then it means the seller is responsible to makes the goods available at its facility. Once the buyer picks up the freight then the transaction is complete.
EXW seller’s factory is the most favored incoterm for sellers. Because sellers have no responsibility to load the goods onto the buyer’s vehicle, and also no responsibility to clear the goods for export.
FCA
Free carrier at the named place of delivery
The seller clears the goods for export and delivers the freight to the named place of the carrier. The carrier is specified by the buyer. The named place of the carrier can be the seller’s business place, a loading dock, etc.
The buyer prefers to use this incoterm if they have their freight forwarder to handle its logistics. The buyer may ask the seller to send the freight to its freight forwarder’s warehouse or terminal. For example, FCA xxx warehouse Door 8, Shenzhen, China.
The buyer pays all costs relating to export and all cost until the goods have been delivered to the carrier at the named place of delivery.
FAS
Free alongside the ship at the named port of shipment
The seller clears the goods for export and places the goods alongside the ship, on a dock, or a barge.
The seller pays all costs relating to export, and all costs until the goods have been delivered alongside the ship at the named port of shipment.
The FAS term is commonly used in the sale of bulk commodities such as oil, grains, minerals, etc.
FOB
Free on board at the named port of shipment
The seller clears the goods for export and delivers the goods on board the vessel. The buyer names the port and the vessel for the seller.
The seller pays all costs relating to export, and all costs until the goods are on board the vessel.
Since the named place in the FOB term is port, the FOB term is only used for ocean or any waterway transport. The key document in FOB terms is on board bill of lading. The seller needs to submit this document together with an invoice, packing list, and others to its bank to get payment.
CFR
Cost and Freight at the named port of destination
The seller clears the goods for export and is responsible for delivering the goods on board the ship and to the named port of destination.
The seller pays all costs relating to export, all costs of loading and transport to the named port of destination.
With CFR term, the named port of destination is domestic to the buyer.
CIF
Cost insurance and Freight at the named port of destination
The seller clears the goods for export and is responsible for delivering the goods at the named port of destination.
The seller pays all costs relating to export, the cost of insurance, on board of the ship, and pay all costs of loading and transport to the named port of destination.
With the CIF term, the named port of destination is domestic to the buyer.
CPT
Carriage paid to at named place of destination
The seller clears the goods for export and is responsible for delivering the goods to the named place of destination.
The seller pays all costs relating to export, and all costs of loading and transport to the named place of destination. The place can be a terminal or the buyer’s freight forwarder’s warehouse.
CIP
Carriage and Insurance paid to at named place of destination
The seller clears the goods for export and is responsible for insurance, and delivering the goods to the named place of destination.
The seller pays all costs relating to export, insurance, and all costs of loading and transport to the named place of destination.
The CIP term is often used for multi modes of transport. In CIP, the named place of destination is domestic to the buyer.
DAT
Delivered at Terminal at a named port terminal or named place of destination
The Seller clears the goods for export and is responsible for the delivery to the buyer’s named terminal or ports.
The seller pays all costs relating to export, and all costs to the named terminal or port. The seller also pays the cost of unloading at the terminal but excludes import formalities, duties, and any other import fees.
DAP
Delivered at the place at the named place of destination
The seller clears the goods for export and is responsible for the delivery to the buyer’s named place of destination.
The seller pays all costs relating to export, and all costs until the goods are at the named place of destination, but excludes import formalities, duties, and other import fees.
In DAP terms, the named place of destination is domestic to the buyer.
DDP
Delivered duty paid at named place of destination
The seller clears the goods for export and also clears the goods for import. The seller is also responsible for the delivery at the buyer’s named place of destination.
The seller pays all costs relating to export and import and pays all costs for the delivery at the named place of destination.
The DDP term places the greatest responsibility on the seller and the least responsibility on the buyer.
What are the 4 most used incoterms?
The 4 most used incoterms in international trade are EXW, FOB, FCA, and CIF.
Buyers would select EXW, FOB or FCA if they purchase the goods from different suppliers and need consolidate it. Buyer’s freight forwarder will pick up freight from different manufacturer and consonlidate the freight at forwarder’s warehouse then ship all goods together.
EXW, FOB and FCA terms are easy for buyer’s freight fowarders to arrange logistics.
Buyers would select CIF if they do not have freight forwarder to handle their freight. CIF term will let the shipper arrange transportation.
here is a good vide to explain 6 basic incoterms
Which is better DDP or FOB?
The buyer would prefer DDP term, but the seller would like FOB term.
DDP term means that the shipper deliver the freight at the buyer’s named place of destination with duty paid. DDP term places the great responsibility on the seller and the least responsibility on the buyer.
FOB term is commonly used incoterm in international trade. Majority shippers prefer FOB term.
Is FOB or CIF better?
It is hard to compare this two incoterms without knowing your position. If you are a shipper you will choose FOB. If you are a buyer then CIF term sounds better to you.
If you are a buyer and have your trusted freight forwarder to arrange your freight, then you might choose FOB terms too. Your freight forwarder will book the vessel for you. You only need your shipper bring the goods on board.
Is CIF the same as DDP?
Most CIF term is CIF at buyer’s named port. The seller is responsible to clear the goods for export, responsible for freight insurance and until the goods arrive at buyer’s named port.
DDP term is favored by buyers, because the seller is responsible to clear the goods for export and import, responsible for delivery of the goods at buyer’s named place of destination.
Buyers hardly have any risk under DDP term, instead the seller bear all risk until the freight delivers at buyer’s named place.
Is DAP or DDP better?
There is no better incoterm than another. It totally depends on your situation and your choice.
The major difference between DAP and DDP is that DDP term is duty paid by the seller.
Most buyers choose DDP term because they do not have freight broker to clear import custom for them.
Final thoughts
These is no best incoterm to fit everyone. The best incoterm is the one to match your needs and situation. Sellers and buyers will favor different incoterms based on their interest.
Buyers do not want to pay the goods or freight cost until they receive the goods in their warehouse. Shippers want receive the payment as soon as the goods left their hands.
Generally speaking, the best incoterm for a seller is EXW seller’s factory. The best incoterm for a buyer is DDP buyer’s warehouse.
You might also like the below similar articles
Is Logistics Easy? ( Explained With Examples)
9 Things You Should Know About Logistics
Good Or Bad About Transportation
Is A Career In Supply Chain Management Hard?
Is A Degree In Supply Chain Management Hard? (My Own Experience)
