Supply Chain Management (SCM) 101: Global Supply Chain - International Trade, Terms Incoterms EXW FOB CIF DDP etc

What This Is

International Trade Terms, also known as Incoterms, are standardized rules for the delivery of goods between buyers and sellers in international trade. These terms determine the point at which the buyer takes ownership of the goods and the responsibilities of each party involved in the transaction. For example, Amazon uses Incoterms to clarify the delivery terms for its international shipments, ensuring that both Amazon and its suppliers understand their respective responsibilities.

Key Frameworks & Formulas

• Incoterms 2020: A set of 11 standardized trade terms that define the responsibilities of buyers and sellers in international trade.
• EXW (Ex Works): The buyer is responsible for collecting the goods from the seller's premises.
• FOB (Free on Board): The seller is responsible for loading the goods onto the ship, and the buyer is responsible for the risk and cost of transportation.
• CIF (Cost, Insurance, and Freight): The seller is responsible for the cost of the goods, insurance, and freight to the destination port.
• DDP (Delivered Duty Paid): The seller is responsible for delivering the goods to the buyer's premises, including paying all duties and taxes.
• FOB Cost: The cost of the goods at the point of shipment, including the cost of goods sold and any applicable taxes.
• Incoterms Risk: The point at which the risk of loss or damage to the goods passes from the seller to the buyer.
• Incoterms Responsibility: The point at which the seller's responsibility for the goods ends and the buyer's responsibility begins.
• CIF Value: The value of the goods, insurance, and freight, which is used to calculate the total cost of the shipment.
• DDP Cost: The total cost of the shipment, including the cost of the goods, insurance, freight, and any applicable duties and taxes.

Step-by-Step Application

1. Identify the Incoterm used in the transaction: Determine which Incoterm is used in the transaction, such as EXW, FOB, CIF, or DDP.
2. Determine the point of risk transfer: Identify the point at which the risk of loss or damage to the goods passes from the seller to the buyer.
3. Determine the point of responsibility transfer: Identify the point at which the seller's responsibility for the goods ends and the buyer's responsibility begins.
4. Calculate the FOB cost: Calculate the cost of the goods at the point of shipment, including the cost of goods sold and any applicable taxes.
5. Calculate the CIF value: Calculate the value of the goods, insurance, and freight, which is used to calculate the total cost of the shipment.
6. Calculate the DDP cost: Calculate the total cost of the shipment, including the cost of the goods, insurance, freight, and any applicable duties and taxes.

Common Mistakes

• Mistake: Assuming that EXW means the seller is responsible for delivering the goods to the buyer's premises.
  • Correction: EXW means the buyer is responsible for collecting the goods from the seller's premises.
• Mistake: Assuming that FOB means the seller is responsible for the risk and cost of transportation.
  • Correction: FOB means the buyer is responsible for the risk and cost of transportation.
• Mistake: Assuming that CIF means the seller is responsible for delivering the goods to the buyer's premises.
  • Correction: CIF means the seller is responsible for loading the goods onto the ship, and the buyer is responsible for the risk and cost of transportation.
• Mistake: Assuming that DDP means the seller is responsible for the cost of the goods, insurance, and freight.
  • Correction: DDP means the seller is responsible for delivering the goods to the buyer's premises, including paying all duties and taxes.

Exam / Certification Tips

• Tip: Be able to identify the different Incoterms and their meanings.
• Tip: Understand the point of risk transfer and the point of responsibility transfer for each Incoterm.
• Tip: Be able to calculate the FOB cost, CIF value, and DDP cost for a given transaction.
• Tip: Be able to identify the responsibilities of the buyer and seller for each Incoterm.

Quick Practice Problem

A buyer and seller are using the FOB Incoterm for a shipment of goods. The cost of the goods is $100, and the applicable taxes are $10. What is the FOB cost of the goods?

Answer: $110 Explanation: The FOB cost is the cost of the goods at the point of shipment, including the cost of goods sold and any applicable taxes.

Last-Minute Cram Sheet

• Incoterms 2020: A set of 11 standardized trade terms that define the responsibilities of buyers and sellers in international trade.
• EXW (Ex Works): The buyer is responsible for collecting the goods from the seller's premises.
• FOB (Free on Board): The seller is responsible for loading the goods onto the ship, and the buyer is responsible for the risk and cost of transportation.
• CIF (Cost, Insurance, and Freight): The seller is responsible for the cost of the goods, insurance, and freight to the destination port.
• DDP (Delivered Duty Paid): The seller is responsible for delivering the goods to the buyer's premises, including paying all duties and taxes.
• FOB Cost: The cost of the goods at the point of shipment, including the cost of goods sold and any applicable taxes.
• Incoterms Risk: The point at which the risk of loss or damage to the goods passes from the seller to the buyer.
• Incoterms Responsibility: The point at which the seller's responsibility for the goods ends and the buyer's responsibility begins.
• CIF Value: The value of the goods, insurance, and freight, which is used to calculate the total cost of the shipment.
• DDP Cost: The total cost of the shipment, including the cost of the goods, insurance, freight, and any applicable duties and taxes.
• EXW does not mean the seller is responsible for delivering the goods to the buyer's premises.
• FOB does not mean the seller is responsible for the risk and cost of transportation.
• CIF does not mean the seller is responsible for delivering the goods to the buyer's premises.
• DDP does not mean the seller is responsible for the cost of the goods, insurance, and freight.