Incoterms and Sourcing

Removing confusion

In Ex Works (EXW) Incoterms 2012, it is made clear that export clearance and loading onto transport vehicles is not arranged by the supplier. As these must be undertaken, then either the shipper or the buyers appointed freight forwarder can do these; however, if so doing, this must be agreed as an extra to the standard EXW 2012 Incoterm.

Understandably this may cause confusions, therefore, the term FCA Suppliers named premises can also be used, as here, the export clearance is clearly here as being the responsibility of the supplier.

These can also be confusion with EXW/FCA on the responsibly for appropriate export packing. As the seller may not always be fully aware of the buyer’s intentions, it is advisable for the buyer to specify the required packaging in the contract of sale to the seller.

Benefits of changing to EXW/FCA terms

It is suggested that it is better to control imports by switching to Ex Works (EXW) or Free Carrier (FCA) Incoterms 2012, as the following benefits will then be realised:

[list][item icon=”fa-check” ]Control and knowledge of exactly what is happening; (management needs to recall here that the management cycle not only involves planning, organising, directing but also controlling);[/item][/list]

[list][item icon=”fa-check” ]Visibility and knowledge of exactly where the products are during the transit; as simply, the transit it is now in your direct control;[/item][/list]

[list][item icon=”fa-check” ]Cheaper freight costs, as you are now directly paying them. Importers and buyers need to appreciate that suppliers have a margin on the freight costs they have paid; after all, they are not over time, going to be loosing money.[/item][/list]

How to change

Starting out

A useful place to start is to understand some of the aspects of total supply chain management, for example:

[list][item icon=”fa-th-list” ]What are your costs of holding inventory?[/item][/list]

[list][item icon=”fa-th-list” ]What supply lead time is required?[/item][/list]

[list][item icon=”fa-th-list” ]What part of the supply lead time, is the transit lead time?[/item][/list]

[list][item icon=”fa-th-list” ]What would be the effects of reliable and consistent on time in full receipts for your business?[/item][/list]

[list][item icon=”fa-th-list” ]How does the above compare to your current situation?[/item][/list]

Answers to these questions are always revealing and also often show, how the internal structure is fragmented and unorganised to undertake effective importing.

Answers will also provide the basis for accessing the benefits of changing.

The next steps

[list][item icon=”fa-th-list” ]Ask for the suppliers FCA or EXW (including loading and export clearance and any required packing) price;[/item][/list]

[list][item icon=”fa-th-list” ]Negotiate freight terms, possibly by going out to tender for a global or regional freight forwarder;[/item][/list]

[list][item icon=”fa-th-list” ]Check on the track/trace system to be used. This can be a simple key point reporting with spreadsheet recording, or, an instant on demand access to a carriers system;[/item][/list]

[list][item icon=”fa-th-list” ]Assess the risk of changing, for example, any extra management costs, the insurance costs and the risks of direct exposure to regular variations in freight rates;[/item][/list]

[list][item icon=”fa-th-list” ]Compare and contrast the current CIF price against the new EXW/FCA price plus the freight, insurance and risk costs. It is important to ensure a like for like comparison with the current methods as many of the current costs may well be hidden.[/item][/list]

[list][item icon=”fa-th-list” ]If deciding to change, and effectively changing the procurement and buying strategy, then ensure that the internal structure will support the changes.[/item][/list]