May 3, 2019
By S. M. Waqas Imam – Incoterms is short for “international commercial terms”, and refers to a set of internationally recognized shipping terms such as CIF, EXW, and FOB. These are standard ways of assigning costs and responsibilities between buyers and sellers around the globe.
Knowledge of Incoterms is essential for maintaining supply chains and procurement processes. The free online course Fundamentals of Incoterms is designed to provide any professional working in these areas with a clear, and comprehensive overview of these essential frameworks. This is vital training.
The Importance of Incoterms
Proposed by the International Chamber of Commerce, Incoterms offer a framework for dealing with sales contracts issues, including:
- arranging and paying for transportation;
- customs clearance;
- duty and VAT payments;
- arranging necessary documentation; and
- agreeing on the point where risk and insurance responsibility is passed over from the seller to the buyer.
One of the most significant roles of Incoterms is ensuring that all international trade is performed in a standardized, best practice manner. Buyers and sellers who do not use Incoterms regularly suffer from extra costs, risks, and re-negotiations caused by the continuous need to consider variations in language and shipping practices. Luckily, Incoterms clarify obligations and allow shippers to maintain standard practices without having to constantly negotiate new types of agreements.
- Standardization of language
Many believe that clear language in a contract is enough to ensure that all parties understand their obligations in international trade. Yet, it is important to note that the connotations of terms in one location may not be the same in another location. For instance, one country might define tariffs as fees imposed by the local government whereas in another country, tariffs might include taxes, fees or surcharges imposed by federal, state, and local governments.
Understanding the fundamentals of Incoterms helps employees eliminate inconsistencies in language by giving all parties the same definition of specific terms within a commercial agreement. Consequently, the risk of problems during shipment is reduced, since all parties clearly understand their responsibilities under a given contract.
- Understanding each Incoterms variant leads to a better workflow
It is essential that parties in international shipping understand how Incoterms vary. Employees need to understand the correct meaning of each type of Incoterm in order to avoid problems throughout the subsequent supply chain. Misuse of Incoterms can lead to serious complications as it can affect payment of goods and delivery schedules, and may lead to increased costs, poor inventory control, and negative customer interactions. Indeed, from distribution centers to shipping recipients, misunderstandings can dramatically disrupt the flow of goods and damage a company’s reputation.
- Knowledge about Incoterms affects profit and competitive advantage.
Incoterms are essential for ensuring proper, timely payment for goods and services, since they define the monetary and procedural aspects of all international shipping practices. They also ensure that all parties are able to maintain a competitive advantage in the international supply chain. For example, if a governing authority were to make adjustments to local terminology, then this terminology could directly impact the competitive advantage of companies. In other words, one company may benefit from the local terminology while the other company endures limitations on capacity and shipping regulations. In contrast, the incidence of bribery and unfair business practices is reduced when Incoterms are used in international trade. This prevents potential penalties and fines in global trade.
The importance of understanding Incoterms from both a seller and a buyer’s perspective should not be underestimated. Without a clear knowledge of the features, obligations and responsibilities of each of the different options in Incoterms, traders may fail to choose the most suitable Incoterm for their transactions. However, with just a little bit of training, you can avoid this pitfall. The free Fundamentals of Incoterms course is designed to get you up to speed on this important framework in just a few short hours, so have a look at it today, and start getting up to speed.