In my previous blog post, I reviewed the benefits of drop shipping. As previously noted, with the expansion of global trade it has never been easier to find sources for goods worldwide and then sell directly to your clients. That being said, before you embark on this journey, you will need to know the rules of international commerce. That is where Incoterms® come in.
Incoterms® - International Commercial Terms
International commerce is governed by a set of terms known as International Commerce Terms, or Incoterms®.
Established by the International Chamber of Commerce, the Incoterms® assign responsibilities to both the buyer and the seller throughout the international transaction thereby eliminating uncertainties and avoiding costly misunderstandings by clarifying the tasks, costs and risks involved in delivery of the goods from sellers to buyers.
Originally published in 1936, the latest set came out in September of 2010 and took effect on January 1, 2011.
Benefits of Incoterms®
- Incoterms® help determine how prices and risks are designated between the importing buyer and the exporting seller with respect to shipping of products.
- It lets shippers take shipment transport cost and risk responsibility in hand when it benefits them most.
- They help improve supply chain performance by avoiding the confusion created by varied interpretations of the rules in different countries.
- The understanding and the proper use of applicable Terms of Sale may make the difference between future success and failure.
- Understanding Incoterms® and their implications to your business transactions is crucial, especially with regard to import or exports of goods.
- You determine your financial and commercial fate when you manage your Terms of Sale.
Responsibilities And Obligations Of A Buyer
To begin with, you will need to determine how involved you want to be in the process of getting the goods from source to destination and how much information you want the seller to see.
Below is a list of terms that provide the least obligation to terms that provide maximum obligation:
1. Delivered Duty Paid (DDP)
Delivered Duty Paid places the entire obligation on the seller to deliver the goods to the final destination. This can be useful if you want to avoid all obligation and are delivering goods to a third party warehouse from where you will fulfill your sales. This term implies that you have no logistics team in place and is not a good model if you intend on having the goods shipped directly to your client as you are essentially handing your supplier a sales lead on a golden platter.
2. Cost, Insurance And Freight (CIF)
This is one of the most commonly used terms. Basically, the seller is responsible to deliver the goods to a named destination port where you will then clear customs and arrange for delivery to your client. Under this term you will need to have a good logistics network in place consisting of a Customs Broker to clear the goods and a local freight forwarder to deliver the goods once they arrive. Since you arrange the details once the goods arrive, you keep the seller at an arm's length from your client.
3. Free On Board (FOB)
Assuming more control and obligation, Free on Board or FOB is a classic maritime trade term where the seller is obligated to deliver the goods cleared for export to the named conveyance of your choosing. In this model you assume the obligation of arranging transport from the foreign port of lading all the way through to the final destination. Under this term you will need a logistics network consisting of an international freight forwarder to arrange the transport and a customs broker to clear the goods once they arrive.
4. Ex Works (EXW)
Maximum obligation comes with the terms of Ex Works, which places full responsibility on the buyer to arrange transport from the seller's premises, clear the goods for export and then clear customs and deliver the goods to the final destination. This is usually used by multi-national companies with many locations and a sophisticated logistics network and not a very good choice for drop shipping.
As you can see there are many choices to consider when negotiating the terms of sale. More obligations also mean more control, so you need to decide how much effort you are willing to spend before you buy. The last equation to figure out is duties, taxes and clearing customs.
In our next blog post we will take a look at Leveraging Free Trade Agreements and Non-Resident Importing in Drop Shipping.