When shipping goods internationally, it is important to have a clear understanding of who claims ownership and responsibility for the goods while in transit and through arrival at the customs port.
To help make things more clearly for the consignor and consignee, the International Chamber of Commerce in 1936 created 13 International commercial terms (Incoterms for short) to “define the roles, responsibilities and transportation costs between the seller and buyer of goods for the purpose of shipping goods.” These Incoterms are recognized by governments, freight forwarders, and attorneys around the world making it easy for buyers and sellers to understand each other.
While it may not be necessary to master all of the Incoterms, it is important to become familiar and have an understanding of them. Below are the most common of the 13 terms to get started with.
1. FOB Shipping
The most widely used shipping method is FOB shipping. FOB stands for ‘Free On Board’ or ‘Freight On Board’. For this shipping, the buyer takes charge of the consignment as soon as it leaves the seller’s shipping dock and therefore the buyer is in charge of the delivery. As soon as the goods leave the seller’s dock, the seller should record a sale at that point. At the same time, the buyer should record an increase in inventory as the buyer takes on both risks and rewards for owning the goods. The supplier is not liable for any damages during delivery and does not bear any delivery cost.
2. CIF and CNF Shipping
CIF stands for ‘Cost, Insurance, and Freight’. In CIF shipping, the price quoted to the buyer is inclusive of delivery costs and insurance to guarantee compensation against loss or damage of goods. The seller is responsible for delivery of the consignment up to your port. However, delivery beyond the port is up to the buyer. The seller records a sale after the goods leave the destination port and the buyer as well records an increase in inventory.
CNF stands for ‘Cost nd Freight’ or ‘Cost, no Insurance, Freight’. CFR (Cost and Freight) can also be used to refer to CNF shipping. This shipping mode is similar to CIF except for the insurance cover against loss or damage to the consignment. Therefore, the seller is still responsible for sea freight delivery up to your port. Similarly, the buyer takes charge of delivery after the consignment leaves the port. CNF prices are cheaper but there are other additional costs when the goods reach your port such as import duty, VAT, customs clearance, docking charges, warehouse fees for storage, port security fees, fuel surcharge and others. So before deciding on CNF shipping, one should be aware of the additional charges required at the port. Only after will it be possible to determine if it is truly cheaper than CIF shipping.
3. LCL and FCL Shipping
LCL stands for ‘Less than Container Load’. LCL is used when the good being shipped are not enough to fill a shipment container. The shipper engages a consolidator who arranges for the shipment to be shipped along with other shippers in the same container. Consolidators arrange for goods from different shippers to be transported in the same container. At the destination dock, the shipments are separated and delivered to the final destinations. LCL shipping provides an economical way to ship goods that can’t fill a container and is a very popular
FCL stands for ‘Full Container Load’. In FCL shipping, the goods in one container all belong to a single shipper. If a shipper has enough of a load to fill a container, he books FCL shipping. However, the container does not have to be fully loaded for it to qualify as FCL shipping. FCL just means a shipper has exclusive rights to a container for the trip. FCL offers the advantage of faster and more secure shipment than in LCL shipping. Due to the consolidation of different shipping, LCL tends to take longer time in transit.
There is a lot to understand when importing and exporting products internationally. In order to minimize problems and unnecessary costs, take the time to understand the Incoterms mentioned above by going to http://www.iccwbo.org for more information.