Incoterms and Sourcing

CONTRIBUTION BY STUART EMMETT – freelance independent trainer and consultant who trades under the name of Learn and Change


A substantial amount of goods are imported every year. Many organisations have outsourced manufacturing and importing is already the norm for many companies, especially those involved in handling FMCG.

Importing involves a more distant supplier with extended transport lead times. As lead times are one the critical components when deciding how much to order from suppliers, then knowledge and control of this lead time is necessary. Indeed, fixed reliable lead times are a “mandatory” component for effective inventory management; however, variable and uncontrolled lead times are the main, yet often hidden, cause, for over or under stock holding.

However, what often happens is that many buyers decide to import on CIF or C&F Incoterms and therefore, they leave the organisation of the transit with the supplier. Effectively therefore, the associated supplier lead time is also externalised. Importing companies will then often spend and waste time expediting and checking where the goods are, when they will arrive etc.

Delays in transit times can also cause potential product shortages, impact on customer service levels and to not satisfying customer requirements. With regular repeat orders, then any delayed transit times will also inevitably lead to increased stock levels, as the buying company will then be holding additional stock as a protection against the uncertainty of the suppliers lead time.

Use of Incoterms

The word “Incoterm” is an abbreviation of International Commercial Terms that were first created in 1936 by the International Chamber of Commerce (ICC) to provide a set of international rules for the interpretation of the most commonly used trade terms in foreign trade. They are revised approx every 10 years by all members of ICC. The chosen Incoterm becomes a term in the contract of sale (and is not the contract of carriage) and whilst they are not a 100% legal requirement for every contract, it does make sound sense to include then in every contract. Incoterms will only apply if they are named/agreed between the trading parties. Incoterms to be used correctly must state the place and the Incoterms version used, for example: FCA named Suppliers premises, New York, Incoterms 2012 and DDP named Customers premises, Dusseldorf, Incoterms 2012.

[tabs][tab title =”Incoterms will:”]Tell the parties what they have to do in respect to the following:

• The division of transport costs between the parties;

• Where the transport risk for loss/damage passes;

• Who is to arrange export and import clearance;

• Who is to organise the transport of the goods;

• The commercial documents the seller must provide.[/tab][tab title =”Incoterms will not:”]

Define the complete contract terms/the full contractual liabilities and/or obligations between the parties;

• Dictate how the title of the goods will pass (even though Incoterms can dictate when the physical transfer takes place);

• Dictate obligations with regards to the merchandise prior to and after delivery;

• Protect a party from their own risk of loss ( so for example, appropriate transport insurance cover is needed).[/tab][/tabs]