Beginner’s Guide to Shipping Part 2: Shipping Terms

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The Beginner’s Guide to Shipping Part 1 covered different shipment methods – now it’s time to look not at how you ship the goods, but at who pays for what.

Costs Associated with International Shipping

An international shipment can be broken down into three main stages, and there is a cost for transport in each stage:

  • from the point of origin (ie the factory door) to the agreed port of origin (usually a shipping port or an airport)
  • from the port of origin to the destination port
  • from the destination port to the final destination – your warehouse, store or other delivery address.

Every shipment incurs costs additional to the cost of transport – you may also need to cover insurance, container handling, customs clearance, import duties, terminal fees, storage at either or both ports, etc.  The total logistics cost may be as much as or even more than the cost of your goods, so it’s important to make sure you know right from the start who is responsible for what costs.  You also want to consider who has control and makes decisions about the shipment.

INCOTerms

Fortunately, standard INCOTerms (International Commercial Terms) have been in place since 1936 to provide a shared understanding and make international commerce run more smoothly while still allowing flexibility for individual buyers and sellers.  There are 11 standard INCOTerms currently (full details available here), but some of these are more commonly used than others.

The table below summarises buyer / seller responsibility for the most commonly used INCOTerms:

incoterms-most-used

Which are the best terms to use?

First and most important is to know what the shipping terms are in any quote!  To give an example, you can’t directly compare the price for goods you need to pick up in Wuhan to the price of goods loaded onto a container ship and ready to leave Shanghai.

Secondly, you need to weigh up the risks and benefits of each potential option.  At Hornet, we consider the following points when we are negotiating with factories on behalf of our clients:

  • if we are paying for the freight we have greater visibility of where stock is and it is also easier to make changes – for example if we have a sudden wet November and you need stock of umbrellas urgently!
  • if quotations are EXW or FOB, it’s relatively easy to compare the actual cost of goods of various factories.  We have people on the ground in China, so we’re also able to oversee internal and inland transport within China, so EXW terms do not cause many headaches.
  • as we have a good volume of business overall, we can negotiate more attractive rates with the shipping companies and forwarders, so there’s no real cost attached to keeping the extra control.
  • freight costs tend to fluctuate – if we ask factories to build them into the quote, they will build in a buffer, which is not cost-effective.

For all these reasons, most shipments Hornet are involved with are EXW or FOB.  We quote freight separately, when we know the shipment is ready to go, so that we can get the best price at the time.  It’s all part of trying to deliver maximum value to our clients at the most affordable cost.

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November 21st 2013