The Art of Choosing the Right Trade Terms

John Vogt, former Halliburton vice president of global logistics and a visiting professor at the University of Houston-Downtown, presents the latest in his series on Incoterms, the internationally recognized set of trade rules that sellers and buyers must follow when devising a contract for the shipment of goods. This week, John examines the mechanics behind choosing trade terms that strategically improve the service between the supplier and buyer.

New installments are published each month on the Breakbulk news page and in our online BreakbulkONE newsletter.


Trade is effected between two parties. In any trade the aim is to earn a profit and retain a customer for the long term if the seller wants to stay in business.

But the question is really whether the trade terms can be utilized to promote the trade, or should they just be what is acceptable to the dominant player in the logistics chain, ignoring the skills and competencies in the buyer-seller relationship? This conundrum is really a practical question of whether companies even know what the effect is of a poor choice of trade terms, and how to choose trade terms that strategically improve the service between the supplier and buyer.

The question of who chooses the terms – and how they are chosen – underpins this. The direct consequence is that the logistics capabilities of the seller and the buyer must work together to move goods, provide the information flows to enable the movement and clearances into and out of countries, as well as the payments for duties and licenses. This is the work of a competent logistics organization and so these terms affect roles, responsibilities, costs and risks for each of the seller and buyer.

One would expect that the choice of trade terms would be made or heavily influenced by the capabilities of the logistics organizations of the seller and buyer to deliver the goods to the end customer at the right time, the right place, the right price and under the right conditions. Unfortunately, the “expectation” is not visible in practice.

The “right place” is one of the four principles of marketing, and logistics is the entire process for this marketing capability. Logistics is the capability directly affected by the trade terms and effects the “place” in marketing. Logistics also affects the promotional aspects if the logistics are of a relatively superior quality (see Amazon’s offer of a two-day delivery) and the efficient movement improves profitability.

These marketing aspects would also suggest the logistics capability would have most of the decision-making working in conjunction with the marketing side of the seller and procurement side of the buyer to choose the most valuable terms for this trade.

Research shows that all this is not what happens in business. Alarmingly, the result is that the order of decision making, or choice of the trade terms is procurement (37%), sales (19%), logistics (19%) and legal (10%).

This shows that the logistics capability has a way to go to exert its skills and capabilities in trade agreements in most businesses. Even more problematic is the research showing more than 41% of companies utilize only one term, and another 20% utilize only two terms. The use of two terms is, in many cases, the consequence of the purchase contract having one term and the sales contract having another.

This means no choice is made to match the buyer and seller capabilities, nor is the lane considered. The result is the trade terms are not chosen to match circumstances; rather, they are preordained by precedent, which is hardly the best way forward.

This research covers larger companies who ship goods in multiple lanes, and hence should be choosing the terms to match the lane and the buyer or seller within that lane. This lack of choice implies that many companies have chosen an Incoterms rule and embedded it into standard contract terms, caring nothing for the effectiveness or efficiency of the trade, focusing instead on the simple agreement for sale and purchase.

We will review the principles above in the next article, but the case has been presented that business does not choose the Incoterms rules to maximize efficiency and effectiveness, nor to reduce costs and risks.


Do you have an Incoterms experience to share that you'd like John to comment on and 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.

PHOTO CREDIT: Hareket