In negotiating delivery terms the important thing to understand is the cost impact of the specific delivery term. Many Suppliers’ sales terms are FOB or Ex Works their factory. That means you need to pay all the costs to get it to the point where you need it and the sum of the price and those costs is called the landed cost. The landed cost includes as a minimum:
· The Price of the item.
· The actual cost of shipping the item from the origin point to the destination.
· The cost of insurance (as risk of loss passes at their factory on these terms).
· The cost of any duties, customs brokerage charges and other costs applicable.
· The cost of money (if payment is made at time of shipment as in letter of credits).
· It may also include other incidental costs incurred such as additional costs of packing and packaging required to protect the shipment.
In addition there is the risk of loss or damage in transit
Every time goods are moved there are risks in making the shipment, and there are costs associated with the shipments. The risks are:
· The shipment may be lost (such as a package being lost in the distribution system, or the entire cargo is lost because of a disaster such as a plane crashing or ship sinking),
· The shipment may be stolen, or
· The shipment may be damaged (by either physical damage, or by failure to properly package, pack, or be damaged by the environment).
· The shipment may be prevented from being exported or imported because of failure to get the proper import or export licenses, or improper documentation preventing clearance.
The party that bears the risk of loss, damage, or theft, and the party that is responsible for export and import and all the costs and risks associate with those is determined by two things.
- The specific delivery term that is agreed
- The stated delivery point.
For example, Ex-Works Suppliers Dock in Hong Kong. Means the delivery point is Supplier’s dock in Hong Kong and the delivery term is Ex-works. If you failed to state the delivery point, the Supplier could ship the product from any location and that could impact your landed cost.
A definition of delivery terms can be found in INCOTERMS that is published by the International Chamber of Commerce. Delivery terms range from Delivered, Duty Paid (DDP) where the Supplier is responsible for all risks and costs to the Buyer’s location, to Ex-Works (EXW) where the Buyer is responsible for all risks and costs from Seller’s location.
The most common terms and where the risk of loss transfers are:
| Delivery term | Risk of loss point |
DDP | When goods are at the disposal of Buyer or designee, at the delivery point, on the method of transport used by Supplier. (e.g. On board Supplier’s carrier at Buyer’s loading dock) |
| DDU | When goods are at the disposal of Buyer or designee, at the delivery point on the method of transport used by Supplier. (e.g. On Board the Supplier’s carrier at Buyer’s loading dock) |
| DEQ | When goods are at the disposal of Buyer or designee, at the delivery point on the quay or wharf designated. |
| DES | When goods are at the disposal of Buyer or designee, at the delivery point on the vessel at the designated delivery point. (e.g. Delivered to Federal Express, Narita Airport, Tokyo) |
| DAF | When goods are at the disposal of the Buyer at the delivery point at the frontier. (E.g. Delivered to Port of San Francisco, prior to customs clearance) |
| CIP | When goods are at the disposal of the Buyer at the delivery point, however Supplier is responsible to procure transit insurance (Delivery is as a location usually different from Supplier’s facility) |
| CPT | When goods are delivered to the Supplier’s selected carrier at the agreed delivery point (which is usually different than Supplier’s facility). |
| CIF | When goods are delivered on the carrier at port of shipment, however Supplier is responsible to procure insurance and pay for freight. (on-board the vessel or aircraft) |
| CFR | When goods are delivered to the carrier and have passed the ships rails (on-board the vessel or aircraft) |
| FOB | When Ggods are delivered on board the carrier designated by Buyer (e.g. Delivered on the carrier at Suppliers loading dock) |
| FAS | When goods are placed along side the carrier designated by Buyer (e.g. delivered to Federal Express, at Kennedy Airport, New York) |
| FCA | When goods are delivered to the Buyer or person designated by the Buyer at the place designated by the Buyer (e.g. Delivered to Buyer’s freight forwarder at their location) |
| EXW | When goods are at the disposal of the Buyer at the delivery point (e.g. At the Suppliers loading dock). |
In every purchase you need to establish both the delivery term and deliver point such as:
“DDP, Buyer’s facility located at: 5 Pine Street, Anytown, NY 12555”. Both the delivery term and the delivery point are negotiable and some of the factors the Buyer should consider in making this decision are:
· Is there substantial risk of loss or damage in transit?
o If there is, who could manage it more efficiently and cost effectively?
· Which party has the most cost effective distribution network?
o Are there individual activities that the Seller may be able to manage more cost effectively, such as inland transport prior to shipment?
· Does the Buyer have the presence in the exporting country to effectively manage certain responsibilities?
· Will there be any financial advantages or impact to the depending on the location of transfer of title?
o Savings in duties paid because of the difference in paying duties based on seller’s internal transfer price versus Buyer’s purchase price.
o Tax advantages to the Supplier because where they earn their profits.
The delivery term also defines which party has the responsibility for preparing export documents, exporting, preparing import documents, and importing the goods. A list of responsibilities by delivery term is listed below.
| ACTIVITY | DDP | DDU | DEQ | DE S | DAF | CIP | C P T | C I F | C F R | F O B | F A S | F C A | E XW |
| Load At Seller Premises | S | S | S | S | S | S | S | S | S | S | S | S | B |
| Domestic Cartage | S | S | S | S | S | S | S | S | S | S | S | B | B |
| Contract For Carriage & Dispatch | S | S | S | S | S | S | S | S | S | S | S | S | B |
| Export Documentation | S | S | S | S | S | S | S | S | S | S | B | S | B |
| Customs Clearance for Export Country | S | S | S | S | S | S | D | S | S | S | B | S | B |
| Export Charges | S | S | S | S | S | S | D | S | S | S | B | S | B |
| Loading At Carrier’s Terminal | S | S | S | S | S | S | D | S | S | S | B | B | B |
| Transport. Equip. & Accessories | S | S | S | S | S | S | D | S | S | B | B | B | B |
| Insurance (Transit) | S | S | S | S | B | S | B | S | B | B | B | B | B |
| International Freight | S | S | S | S | B | B | D | S | S | B | B | B | B |
| Unloading At Terminal Of Import | S | S | S | B | B | B | B | B | S | B | B | B | B |
| Import Documentation | S | B | S | B | B | B | B | B | B | B | B | B | B |
| Customs Clearance | S | B | S | B | B | B | B | B | B | B | B | B | B |
| Duties And Other Import Charges | S | B | S | B | B | B | B | B | B | B | B | B | B |
| Receiving Country Cartage | S | S | B | B | B | B | B | B | B | B | B | B | B |
| Unloading At Buyer Premises | B | B | B | B | B | B | B | B | B | B | B | B | B |
S = SELLER PAYS
B= BUYER PAYS
D= DEPENDENT UPON NAMED PLACE OF DESTINATION
Assume you want to buy a product from a Supplier in Japan for delivery to your location in New York. If you agreed that the purchase would be ex-works their dock in Japan, you have agreed to assume the following costs:
o The cost to Load the product on a local carrier at Seller Premises
o The cost of the domestic carrier
o The cost of preparing export documentation
o The cost of customs clearance for export
o The cost of any export charges
o The cost of loading the product at the carrier’s terminal
o The cost of any unique transportation equipment and accessories required for the move
o The cost transit insurance
o The cost of the international freight carrier’s charges
o The cost of unloading at terminal of import
o The cost of preparing necessary import documentation
o The cost of managing customs clearance
o The cost of any duties and other import charges
o The cost of the carrier at the receiving country
o The cost of unloading the shipment at Buyer’s premises
o The cost of any warehousing or demurrage charges incurred in route because of delays in things like clearing customs, or having the carrier pick up the goods as scheduled.
The delivery term also define where the risk of loss also passes. Once the risk of loss passes to the Buyer, the Buyer assumes the cost of any loss or damage, subject to any possible insurance reimbursement provided for in the delivery term. Any term that includes an “I” (such as CIP or CIF) has the Supplier paying for the cost of insurance to the defined delivery point.
If the delivery term has the Buyer assuming any risk of loss or damage in transit, the Buyer may want to manage this risk by:
· Including specific packaging and packing requirements as part of the purchase specification. Most companies packaging and packing specifications are designed to reduce the possibility of damage in a cost effective manner.
· If there are specific environmental risks (such as temperature or humidity), Buyer may include in their specifications that all shipping, and storage be in accordance with specified environment standards.
· The Buyer will usually want to specify the Carrier to avoid shipping with high-risk carriers.
· The Buyer may want to specify shipping lanes to be used, to avoid shipment through high-risk ports or other areas where there is a history of substantial damage or pilferage.
If one of the standard delivery terms doesn’t exactly meet your needs, you can always include the closest term to what you need, and then amend that to meet your requirements.
With all of the standard terms the responsibility to unload the product from the import country’s carrier at the Buyer’s delivery point is Buyer’s responsibility. If you were buying something that you didn’t have the ability to unload or if you wanted the item to be installed in a specific spot such as a large piece of capital equipment, you would need to add those requirements to the delivery term. For example, if you were buying a piece of capital equipment that you wanted to be installed by the Supplier, the delivery term could be “DDP, Buyer’s facility located at: 5 Pine Street, Anytown, NY 12555 and Supplier shall be responsible and bear all costs of unloading the Product from the Carrier at destination and shall manage and pay for all rigging and installation costs to have the product installed in the location defined in the attached drawing”. You could also buy the Product Ex-works and still add responsibilities at destination with a delivery term like: “Ex-Works, Supplier’s facility in Tokyo, Japan, however Supplier shall be responsible to coordinate delivery to Buyer’s facility and shall be responsible and bear all costs associated with unloading, rigging and installation of the Product at the place defined in the attached drawing.”
There are several factors that will impact what delivery terms a Supplier may be willing to agree upon, the biggest of which is taxes. Delivery terms define where the sale is occurring based upon where title to the product transfers. Where it is sold is also where profit from that sale is made and where it would be subject to being taxed. For example, a Supplier that is based in a High Tax location may want to have the sales occur through their local Subsidiary because the tax rate in the Subsidiary’s location is less as party of a tax management strategy. A company may not want to sell a product delivered in a Customer’s country as then that would be a local sale, and to do the local sale the company would need to be registered to do business in that country and would also be subject to local laws and taxes. For example a Supplier may be unwilling to have a vendor managed inventory held at a specific location as that constitutes delivery in the local location and all the same issues arise.
Free trade zones are also something you should understand when dealing with delivery.
Many countries allow free trade zones that are nothing more than a controlled area of warehouses that are located either after customs at the port of export or before customs at the port of import prior to customs clearance. Transactions that occur in free trade zones are considered to be international sales where the Seller does not need to be registered to do business in that country, and is not subject to the laws and taxes of that country. So a Supplier could sell you a product delivered to that free trade zone without a tax impact.
Another thing to consider when negotiating the delivery term is what impact that has on other clauses that are dependent upon delivery such as payment or warranty. For example, your payment terms may be 30 days after delivery; your acceptance rights may be 30 days from delivery; and your warranty may be 24 months from the date of delivery. If you were purchasing a bulky from a Supplier in Taiwan the most economical mode of shipment is ocean freight. Then assume that it takes 20 days for the shipment to arrive in the West Coast port, 2-3 days in customs, and another 5 days by motor carriers to get it to your site. If you purchase FOB Origin or Ex-works, all those time frames commence when you take deliver at the Supplier’s site. The impact of this will be that you will receive the material approximately 27 days after you took delivery under the ex-works term. This means that from an acceptance or rejection of the goods standpoint you have all of 3 days to inspect or reject the material and if there is any further delay in transit or your inspection, your right of acceptance may have lapsed. If that happens it means your only rights for defective product are under whatever warranties you have. You have 3 days after receiving the material to make payment, and if there is any delay in transit, you could be making payment prior to even receiving the goods at your site. As to warranty, since the warranty period commenced when you took delivery, all the in-transit time has effectively reduced the warranty period and if it took you another 30 days before delivery to the Customer, your effective warranty coverage for only 22 months, not 24.
If you will be buying products where you take delivery at any place other than your dock, you need to take the expected in-transit time into account when you negotiate other terms that are based off when the Buyer takes delivery. For example if what you really want is a 24 month warranty with the Customer, and you knew the transit and supply chain time before delivery to a customer would never be more than two months, you could try to negotiate a warranty that’s 26 months from the date of delivery.
The last thing to consider in determining the right delivery term is the import duty. If the Buyer is importing the Product, the Buyer will be paying duty based upon the purchase price. If a Supplier Subsidiary is importing the Product, the Supplier will be paying duty based upon the “transfer price” which is the price at which the Subsidiary purchases the product from the Parent company for resale. If you were purchasing something for delivery in a location that had a high duty rate it may be better to have the Supplier import it, and pay the duty on the transfer price rather that you import it and pay the duty on the higher Purchase Price. The key is if you will purchase a large volume of product that is moved internationally you need to work with your suppliers to determine the delivery term and delivery point that works best for both parties.
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