Understanding and accurately using the correct Incoterm is critical, as a simple misunderstanding can end up costing you financially.
Understanding and accurately using the correct Incoterm is critical, as a simple misunderstanding can end up costing you financially.
Novice importers may find the C & D terms (CFR, CIF, CPT, CIP, DAT, DAP & DDP) convenient, as depending on the Incoterm used, the seller pays for all the freight charges, insurance and delivery to Australia. You may be thinking “Great, this importing thing is easy, my seller arranges everything!”
But just hang on a minute! Sellers account for these additional charges in the rates they give you. Sellers ensure they have covered the cost of the freight, insurance, currency fluctuations, delivery etc. in their price. As a result, importers frequently pay higher prices when the seller selects the freight and insurance company, as well as you being left unaware of the breakdown of charges.
Additionally the insurance cover your supplier may pay for, may not cover you for all eventualities, and how difficult will it be to submit a claim when you have not taken out the policy yourself?
One of the most common groups of Incoterms is the F Group (FCA, FAS & FOB). With these Incoterms, the importer is responsible for shipping and insurance, giving importers more control to manage and track their shipment, providing them with better supply chain management and influence over the choice in shipping lines, insurance options and transit times, which all can vary in costs.
This is not to say always choose an F Incoterm, but merely always look at the different options and do not opt for what seems to be the easy choice, as it may cost you. Investigating the most efficient and economical way for your business may just give you the competitive advantage in your industry.
Three fundamental details you should remember in regards to Incoterms:
- Ensure you are clear on the agreed Incoterm.
- Ensure you are aware of what costs you are responsible for with the chosen Incoterm.
- Always compare Incoterm options as each scenario can see you with significant savings or revenue loss by not investigating which option is best for your situation.
