What is INCOTERMS?

When we sell the product from one company to other, the goods will go on many steps, at every step there will be a lot of procedures, every procedure will have their own relevant and costs. Let’s imagine you sold a product to your customer, and you have told him; “I will organize the transport till the import port, and you will handle the rest.” Then the customer confirmed.” The goods were loaded to the ship, they arrived at the import port. Everything was well, but suddenly your phone rang and your customer is upset, he is yelling “There are some costs at the port which I’m not supposed to pay!” For your bad luck the container is damaged at the port and customer is requesting also your insurance company details, but you supposed the insurance would be made by your customer.

To avoid this mess, you should have said, “I’m organizing Loading on truck (carrier), Export-Customs declaration, Carriage to port of export, Unloading of truck in port of export, Loading charges in port of export, Carriage to port of import and  you are organizing Unloading charges in port of import, Loading on truck in port of import, Carriage to place of destination, Insurance, Import customs clearance, Import taxes.” And you should mention about this process on every export document, and you should reach an agreement with people which speak different languages, have different cultures.

Or...

You should use a common language which leaves no opportunity for misunderstandings and means the same thing to both sides.

For example saying “I am going to send the goods via CIF incoterms.” would be enough.

Incoterms are first found at 1919 by International Chamber of Commerce.  It’s revised at 1936,53,67,76,80, 2000 finally on 2010 according to needs. The purpose of Incoterms is to avoid cultural, linguistic and perceptional differences and contradictions between the seller and customer. Incoterms do not leave any commentary situation to both sides.

How to read INCOTERMS

If you don’t know who does which work, even the most simplified incoterm table will be confusing. I am going to explain one example process as detailed as I can.

On our case, one seller from Turkey, Istanbul is selling two containers of goods to a customer in Egypt, Cairo. The customer told the seller that the goods must arrive at Alexandria Port in Egypt.  The goods will be sent under CIF incoterm. Let’s follow the steps.

1) Loading on truck (carrier)

Container depot and container loading

container booking form

First of all, we will load the goods at our factory into an empty container, but how the empty container came to our factory?

After the purchase order comes and payment, letter of credit and etc. are confirmed, the seller choses the best transporter for the shipment. Then, the seller books two containers from the Transporter company. The transporter send the form of the booking as below.

At this form writes a container depot. This a depot which the transporter agreed to store, stack empty containers that returned from the port. Now we give this booking form to a “container transporter company” and the take the booked empty containers and bring them to our factory.

2)Export-Customs declaration;

The goods are loaded at the factory and necessary procedures (product count, voucher print etc.) are done. Now the seller will handle custom clearance via a custom brokerage company. The details of this procedure are another article’s subject. 

3) Carriage to port of export

After the goods are loaded to the truck/the container final documentation and sealing will be made and the truck is heading his way to the port.  

4)Unloading of truck in port of export, Loading charges in port of export,

The truck arrives at the port, the container firstly carried to stacking area via cranes or reachstackers. When the ship’s departure time comes, the containers are carried to dock and stacked in the ship via cranes. (and these handling charges will be invoiced to the supplier in the name of “local charges”)

port operations

5)Carriage to port of import

Finally  the containers are on the ship, now its time to pose in front of the ship, and say farewell to our beloved containers.

6)Insurance

According to the goods’ value plus transport price a dedicated percent of insurance price is stated. And the insurance is made by an insurance agency.

Now, let’s follow the steps from the container depot to port on the map

1-Empty container is taken from the container depot

2-Container is carried to the factory and the goods are loaded. The truck turns its way to the port.

3-The ship starts its route to Alexandria port.

If the goods arrived to Alexandria Port, we can take a breath now because according to CIF incoterm, our responsibility was until the carriage to port of import.

Now the customer is responsible of Unloading charges in port of import, Loading on truck in port of import, Carriage to place of destination, Import customs clearance, Import taxes. If the goods were sent under another incoterm which requires transport to door (such as DAP or EXW) our transport company’s agency in that country would handle the remaining procedures. Bu we would be in touch with the Turkish company.

How the incoterms are chosen.

Incoterms are generally chosen by the customer but with the agreement of the both sides. It depends on which responsibilities the customer and seller wants to take. For example one customer in Tajikistan takes 30 trucks of goods from Turkey but from 5 different companies. He takes only 3 trucks from your company. If you bargain for freight, you will bargain only for 3 trucks. But if he does, he will have 30 trucks in his hand.. So the customer may want to take the goods under EXW incoterm. Or if it’s a container shipment, the customer may want you to take the goods until the export port and handle the rest, then you choose FOB incoterm.

Another customer doesn’t want to deal with any steps of the logistics, he only wants to take the goods and wants them in his depot, then he chooses DDP.

Finally, my last word is to knowthe incoterms and the responsible relevant of the steps helps you to have comprehensive knowledge of your business, and solve the problems without losing time.