Why Everyone Needs a Better Understanding of Incoterms®

A Practical Guide to Incoterms® by Breakbulk Veteran John Vogt

In this new series by former Halliburton vice president of global logistics John Vogt, you’ll gain the critical information needed to reduce shipping risks to your company whether you’re the buyer or shipper. Look for John's new installments in the first issue of BreakbulkONE each month.

“Your goods are on the water” is a phrase that one hears indicating your trade is taking place. But just like the “check is in the mail”, there are a myriad of trade terms that both buyer and seller have to get right to make the move efficient and effective and, if something goes wrong with the movement, then the same details will determine if this is a simple fix or a major issue.

Welcome to a series on trade and in particular the use of Incoterms® to support efficient and effective trade agreements and logistics movements. Wait, you are an expert, so this series is not for you? Think again please and read the next few paragraphs because formal research shows that “experts” and “very knowledgeable” personnel in Incoterms® can only choose the right answer for a broad number of scenarios about 60% of the time. It appears that some of these experts are really good in their subset of trade, but once outside of it, their detailed knowledge is lacking. This series is aimed at bringing the latest knowledge and research on Incoterms® to the Breakbulk community, as well as answering questions and helping to use these terms.

Incoterms® define the obligations, risks and the costs to be borne by the buyer and seller in moving the goods from the seller to the buyer. Obligations is the big word to describe the roles and responsibilities that the buyer and seller have to accept and carry out to make the move happen efficiently. There are currently 11 Incoterms® to choose from, and the choice you make will define your risks, costs and the amount of work your organization will be required to do.

Here are the latest Incoterms®, the short description and the mode for which they are applicable, for refence. They are listed in the order from closest to the seller and then progressively further from the seller.

Incoterms® 2020
Incoterms® Rule Description Mode
EXW Ex Works All
FCA Free Carrier At All
FAS Free Alongside Ship Ocean or Waterway Only
FOB Free On Board Ocean or Waterway Only
CFR Cost and Freight Ocean or Waterway Only
CPT Carriage Paid To All
CIF Cost Insurance and Freight Ocean or Waterway Only
CIP Carriage and Insurance Paid To All
DAP Delivered at Place All
DPU Delivered at Place Unloaded All
DDP Delivered Duty Paid All

It all sounds simple, just choose one of the 11 Incoterms® and proceed. But each of the terms has 10 sections of obligations for both the buyer and seller, and these must all be adhered to in order to make the trade happen. The myriad of “obligations” are spelt out in detail and are often not as clear and simple as one might expect.

Understanding the nuances is important, and using terms without detailed understanding increases the chances of added delays, risks, duplicated effort and higher costs. Let’s start simply to understand Incoterms®. The first letter of the term tells us where the transfer of obligations from the buyer to seller will occur. The E term (Ex Works) means the transfer is at the premises of the seller. The F terms means that this transfer is within the country of the seller. But when the buyer is in another country, then the C terms add the cost of moving out of the country to the buyer’s costs, and the D terms add the costs of moving to the buyer’s country and the costs within the buyer’s country. Each of these move the logistics costs from the seller to the buyer as the term chosen moves down the logistics chain from transfer at the buyer to the seller.

By the way, in research some companies and personnel believe the D term can be utilized for delivery in the country of the seller, which is not correct. D terms are used to deal with foreign to the seller deliveries. The use of Incoterms® are practical, and examples of issues and use are important in order to understand the details.

You need to be fully versed if these Incoterms® define your professional capability to deliver goods, and this series will help you to gain the detailed understanding. Over the following months we will address each of the Incoterms® in the order above and intersperse these with examples of use and issues that people have encountered.

So we will cover:
  • 11 Incoterms® (approximately 22 articles)
  • Use and issues as they are provided and raised
  • How to strategically choose Incoterms® between buyer and seller capabilities (covered in multiple articles)

Do you have an Incoterms® experience to share that you'd like John to comment on that could be included in a future article? Submit to Breakbulk's Leslie Meredith at [email protected] and include description, locations (origin and delivery), Incoterm® used and lesson learned if applicable.

About the Author
John has his own Consulting Company and, at the end of his 42 years in industry around the world, was the Vice President of Global Logistics for a fortune 100 company. Thereafter he spent 5 years as a Professor of Record for the University of Houston-Downtown MBA for International and Supply Chain courses He has experience as a Board Director and has traveled the world to improve trade. In his career he has driven the correct use of Incoterms® as part of the Trade improvements he has implemented to drive efficiency and effectiveness. In his role as a professor of record, he taught multiple courses on the use of Incoterms® and trade related agreements. He has published, with a colleague Dr Davis, three formal research papers on Incoterms® with two more in consideration, making him the most published Incoterms® researcher. He has also published numerous articles, presented papers at multiple international conferences around the world on logistics, trade and compliance including Incoterms®. He has served as track chair for multiple conferences as well. He has a Ph.D. (Logistics), an MBA, and a B.Sc. (Engineering), holds the title of European Engineer (Eur. Ing), is a Chartered Engineer (UK) and has been elected as a Fellow of the Institute of Engineering and Technology (UK). You can reach John at [email protected].