Effects of Shipment Terms and Conditions

global-productionLike it or not we must import from offshore so shipment terms and conditions are increasingly important. Regardless of the economic and the political climate, within the bounds of our 50 states we cannot locally source all our finished goods or even our raw materials. The US has been overtaken by China as the world’s leading manufacturing powerhouse, Japan and Germany are coming back,  and India is starting to gain traction.  That means that before placing an order we need to understand and calculate the final cost.

Avocados will be shipped to the Midwest from California, Mexico, Chile and elsewhere.  Aluminum ingots will come from China, Russia, and Canada.  Some televisions are made in the US by foreign companies but the majority are imported from Malaysia, Korea, Japan, India and China.  Clothing could come from New England or from New Delhi.  Even for electronics manufactured within the US the basic components have not been made domestically for decades, things like resistors, capacitors, and even ICs.  All these are imported by air, sea, rail, and truck.  But at what cost and under what conditions?

When an engineer specifies a component or a chef an ingredient there is always a cost/benefit tradeoff.  Need a transformer quickly to meet a production deadline?  What will the expedited shipment cost?  Want the freshest fish for a restaurant?  What will be its landed cost and will your patrons pay for the quality?

Your RFQ (request for quotation) sent to suppliers will be completed by the vendor’s sales staff and include their boilerplate terms and conditions – sometimes extending for several pages.  You then respond with a purchase order that includes your boilerplate terms and conditions.  If the two sets of conditions do not match then you will be set up for a war of the terms, something neither party desires.  Yet differing terms could be the difference between a good price and an unacceptable price.

Sometimes the terms must change after the PO is issued; if a job becomes HOT! then the buyer might ask for expedited delivery and the seller might agree but often the final cost cannot be calculated until the last minute.  Again – who will accept responsibility for the additional costs?  It all depends.

In this case if the original terms are ex-works then all the shipping and handling are borne by the buyer, so any changes or expediting charges flow right back to the buyer.  After that it gets complicated.  The term FOB in the US is often taken to mean “delivered” whether it be delivered to the shipping dock or the receiving air/sea port or the buyer’s factory loading dock.  What charges are included in “FOB” and who pays for them?

Fortunately there is international agreement on what all the shipping terms mean.  Unfortunately some American companies have lost track of the differences.  Perhaps it is time for a remedial course in Incoterms Rules. There are only 11 common terms: Ex Works, Free Carrier, Carriage Paid To, Carriage and Insurance Paid To, Delivered At Terminal, Delivered At Place, Delivered Duty Paid, Free Alongside Ship, Free On Board, Cost and Freight, and Cost Insurance and Freight.

These differing terms greatly change the cost to ship and the responsibility for coverage in the event of loss during transit.  Following the link below you will see short descriptions of the 11 rules from the Incoterms® 2010 edition.  ICC Terms Defined  These should be read in the context of the full official text of the rules which can be obtained from the ICC BusinessBookstore. And another listing is by the United Nations Economic Commission for Europe: INCO terms defined.

The New Year is here – let’s get with the program and control our shipping costs!  USTEK Inc. is not a freight expeditor but we are here ready to assist you in selecting the best shipment option.  Call us at 614.538.8000 or e-mail us info@ustek.com with subject “Terms & Conditions”.