Using Incoterms to reduce transport costs

There is an opportunity to drive value and bottom line results by placing focus on the transport segment of the supply chain. However to realise the benefit of optimising transportation, companies need to work with experienced freight forwarders whom they can give cost and lead time targets.
The latest edition of Inco-terms or International Comm-ercial terms, a series of pre-def-ined commercial terms published by the International Ch-amber of Commerce (ICC) ev-ery ten years and widely used in international commercial transactions, reflects the chan-ges in international trade since the last version of the rules was published in 2000. The latest edition became effective on January 1 2011. Incoterms are relevant for anyone involved in the buying or selling of goods internationally and services relating to the cross border movement of goods.
Incoterms 2011
The latest Incoterms inclu-de 11 terms arranged in two categories:
Terms for any mode of transport
EXW – Ex Works – Sellers make the goods available at their premises and buyer pays all the transport costs.
FCA – Free Carrier – The seller hands over the goods, cleared for export, into the custody of the first carrier (named by the buyer) at the named place.
CPT – Carriage Paid To – Seller pays for main carriage but risk transfers to buyer upon delivery to first carrier rail.
CIP – Carriage and Insurance Paid – Seller pays for carriage and insurance to the named destination point, but risk passes when the goods are handed over to the first carrier.
DAT – Delivered At Terminal – Seller pays for carriage to the terminal, except for costs related to import clearance, and assumes all risks up to the point that the goods are unloaded at the terminal.
DAP – Delivered At Place – Seller pays for carriage to the named place, except for costs related to import clearance, and assu-mes all risks prior to the point that the goods are ready for unloading by the buyer.
DDP – Delivered Duty Paid – Seller is responsible for delivering the goods to the named place in the country of importation, including all costs and risks in bringing the goods to import destination. This includes duties, taxes and customs formalities.
Terms for sea, inland waterway transport only
FAS – Free Alongside Ship – The seller must place the goods alongside the ship at the named port.
FOB – Free On Boa-rd – The seller must themselves load the goods on board the ship nominated by the buyer, cost and risk being divided at ship’s rail.
CFR – Cost and Freig-ht – Seller must pay the costs and freight to bring the goods to the port of destination.
CIF – Cost, Insurance and Freight – Exactly the same as CFR except that the seller must in addition procure and pay for insurance for the buyer. A correct application of these terms within the co-ntext of a company’s supply chain strategy has a significant imp-act on costs and lead times, while incorrect application may result in an importer paying twice for terminal handling.
FCA terms have gained prominence over the recent yea-rs and are being ad-opted by many companies as they give the buyer better co-ntrol of their goods within the supply chain. This control is what drives financial benefits to the buying company.
Importance of Incoterms
Incoterms are m-ainly used in international contracts for the sale of goods to help buyers and sellers avoid misunderstandings by cle-arly identifying the obligations of each in respect of comm-unicating the tasks, costs and risks associated with the transportation and delivery of goods.
In recent years gl-obal trade has created longer and more complex supply cha-ins and this has cha-nged the requireme-nts in which the supply chain is managed. It is therefore important that companies identify optimal methods of tran-sporting goods that will allow them to reduce lead-time va-riability on their shipments while having the potential to real-ise significant cost savings. The use of incoterms is one of the most universally applicable and sustainable logistics initiatives that can be undertaken within the supply chain to drive competitive advantage in retail or manufacturing organisations.
Using incoterms to land products in Zimbabwe on time and right cost
Sourcing strategies and lead time components within the supply chain can drive significant variability in landing products in Zimbabwe on time and at the right cost. Any variability can affect the overall consistency to land products on their prescribed delivery dates and projected costs. Although variability is caused by controllable and uncontrollable factors, there are established ways to move goods across borders cost effectively.
For many companies in Zimbabwe, it is widely recognised that transportation costs are one of the most expensive cost drivers in the supply cha-in. Thus, it is a generally acce-pted assertion that effective management of the end to en-d transportation of goods sho-uld have a significant impact on competitiveness.
Therefore, leveraging free carrier incoterms that allow Zimbabwean importers gain better control of their goods within global supply chains has the potential to drive benefits.  
For example, vendor locations in China can be optimised against the many loading ports available. The recent infusion of investments over the past decades has driven the growth of viable port options in China.
It is now possible to select ports that are closer in proximity to the sourcing factory and therefore less expensive for the inland movement to the port of loading. Many operators for these ports have reduced their handling charges in order to attract container traffic. The FCA terms allow the introduction of more flexible routing options as the importer assu-mes control of the origin inland transport responsibility through a third party logistics provider. If there are uncontrollable factors such as strikes, wars or natural disasters, the FCA terms affords the buyer the flexibility to change the route with ease.

– Wellington Majora has several years of progressive experience in optimising supply chains for international companies and contactable on wellington.majora@vadomarklogistics.co.za