In most cases, you or your company is likely to get the very best price for imported goods when they are purchased using the following Incoterms:
· Free Carrier – (FCA)
· Free On Board – (FOB)
· Ex-Works – (EXW)
Conversely, you are most likely leaving money on the table or negatively impacting margin if you or your company are purchasing foreign goods using the following Incoterms:
· Cost, Insurance and Freight – (CIF)
· Cost and Insurance – (C&I)
· Cost and Freight – (CFR) (formerly known as C&F)
· Carriage Paid To – (CPT)
· Delivered Duty Paid – (DDP)
· Carriage and Insurance Paid To – (CIP)
Why? Well, typically when vendors or suppliers “bundle” transportation (and sometimes duty and brokerage fees) into a transaction; they generally “pad” those expenses. So, if the freight is $1,500; they’ll mark that number up for cost overruns or for arranging the freight. It is very likely that this same freight could have been moved in your own carrier/forwarder network for less. Moving it with preferred service providers not only leverages your buying power in terms of freight volume, but it greatly increases your control and visibility of that cargo as it moves through the supply chain.
In some cases, you may be forced to purchase DDP because it is a “related” transaction being shipped by a subsidiary, parent, or sister-company. If this is the case, we suggest that you only monitor costs to ensure that they are reasonable and in accordance with the company’s contracts.
If you are purchasing using one of the Incoterms that require the Vendor to pay freight costs, you should ensure that your customs broker is catching it at the time of entry and, if applicable, is making the appropriate deduction(s) to entered value for freight or insurance. Many brokers miss this because the Incoterms are not visible or clearly spelled out on the commercial invoice, or because the charges for freight and insurance are not itemized or shown on the invoice. CBP has published a useful Informed Compliance Publication on the Proper Deductions of Freight and Other Costs from Customs Value.
If you are using one of the terms above that include Insurance, wouldn’t you rather have a policy placed in the U.S.? Once again, the rates may be lower and in the event of a claim you are working with U.S. representatives, surveyors and adjusters.
Many companies are also purchasing DDP. This is the least advantageous Incoterm in my opinion; it gives your company the least amount of visibility and control. While use of the term is completely legal, off-the-record U.S. Customs and Border Protection (CBP) will tell you they “detest it.” It is their belief that the DDP Purchaser is basically abdicating their responsibility as a U.S. importer. It is also very likely that the prices paid include expenses that have been “rounded-up” to offset potential cost overruns. If your company already has the import infrastructure to make EXW, FCA or FOB purchases, why not consider rolling all DDP or CFR purchases into that program? This will require working with the Buyer and Vendor or Supplier to adjust the first cost price by requiring the Supplier to back out the freight, insurance, brokerage fees and/or duty. Once the new first cost is negotiated, the analysis of potential savings can be made by applying your carrier contracts. If you’re unsure changing Incoterms will be effective, try it as a pilot on a small universe of consignments and closely track expenses.
The bottom line is, we are all trying to be as competitive as possible but at times, we seem to cut of our nose despite our face. One incorrect use of an Incoterm can sour the entire transaction. If you would like to discuss this article or any other aspect of trade compliance please do not hesitate to contact us firstname.lastname@example.org.
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