Terms & conditions in procurement logistics The delivery terms make the difference The procurement costs of raw materials can vary considerably from supplier to supplier. Reasons for this difference can be that the goods have to be picked up once and are delivered free of charge the next time. Another possible factor is that either the buyer or the seller assumes the costs and risks of the shipment. As a result, a critical element in writing international sales and logistics contracts is close attention to clauses that define the logistical span of control: the so-called incoterms. The pick-up or delivery principles The purchase price of the product includes the cost of procurement logistics. This means that negotiations about the product s price and the extent of logistics services must address the question of whether it is more cost effective to use the pick-up principle or delivery principle. It must also be determined whether it is better for a company to take delivery ex works and do the shipping itself or to agree to free delivery to its own facilities. If material supply is carried out using the pick-up principle, the customer or buyer is responsible to a large extent for the provision and must also take the measures required for its implementation. Pick-up of products ex works makes particular sense when compound effects can be achieved through the coordination of procurement and distribution logistics. For instance, a Milk run with a predetermined route, time and quantities can be organized. In addition, procurement and distribution shipments can be bundled to eliminate empty runs and to achieve high vehicle utilization. If the delivery principle is used, the task of external material supply is essentially assigned to the supplier. Companies generally decide on an individual basis who will assume the responsibility for shipping each product. In international product shipping, the delivery and transport conditions are set through the application of the corresponding incomterms. International rules form a basis International rules for interpreting the terms of commercial contracts are called incoterms. They are used by companies in cross-border trade, and they stipulate the terms of delivery and the rights and obligations - particularly the assignment of tasks, costs and risks - of the supplier and the customer. Incoterms consist of 13 clauses and are subdivided into four main groups that differ according to the places where costs and risks are transferred. Group E: The customer or buyer bears all transportation costs and risks Group F: The customer or buyer bears the main transportation costs and risks Group C: The supplier or seller bears the main transportation costs; the customer or buyer bears the risks Group D: The supplier or seller bears all transportation costs and risks 1 / 14
The groups sequence highlights the supplier s increasing responsibility for the supplied items. Subgroup EXW Ex works EXW: Transfer of risks / dangers: Ex works (...named place) The customer assumes all risks of loss or damage to the goods from the point at which he takes delivery of the goods from the supplier. The customer bears all the costs after the goods have been delivered to him at the supplier s factory premises. These include transportation costs, customs and excise duties, taxes as well as other public charges, costs of customs and excise formalities for import and export, insurance, costs incurred for loss, damage, delays, etc. All export and import formalities such as authorizations and customs handling are carried out by the customer. The supplier will make the goods available to the customer at the supplier s factory premises on the contractually arranged date. The supplier is under no obligation to load the goods onto the mode of transport supplied by the customer. The customer is under obligation to take delivery of the goods at the agreedupon time. Applies to all modes of transport. Subgroup EXW Ex works Subgroup FCA Free carrier FCA: Transfer of risks / dangers: Free carrier (...named place) The transfer of risks/dangers from the supplier to the customer takes place as soon as the goods are deemed to be delivered as per the section Delivery. 2 / 14
The supplier bears all costs up to the point at which the goods are deemed to be delivered, e.g., customs and excise duties, taxes, costs of customs and excise formalities as well as other public charges required for exporting the goods. The customer bears all costs incurred after the transfer of the goods to the customer, e.g., customs and excise duties, taxes, costs of customs and excise formalities as well as other public charges required for importing the goods as well as for transit through one or more other countries. The supplier must obtain the export permit or other official authorizations required for exporting the goods at his own cost and risk. He must carry out the customs and excise formalities required for exporting the goods. The customer must obtain the import permit or other official authorizations required for importing the goods at his own cost and risk. He must carry out the customs and excise formalities required for importing the goods - if necessary for transit through other countries. The supplier must deliver the goods authorized for export to the freight forwarder stipulated by the customer at the stipulated place of delivery. At this moment, he has fulfilled his delivery obligation. In the case of a delivery at the supplier s factory premises, the goods must be loaded onto the mode of transport supplied by the customer at the supplier s expense. In the case of a delivery outside the supplier s factory premises, the goods must be delivered by the supplier loaded. Unloading is carried out at the customer s expense. Applies to all modes of transport and was introduced particularly for container transport. 3 / 14
Subgroup FCA Free carrier Subgroup FAS Free alongside ship FAS: Free alongside ship (...named port of shipment) Transfer of risks/ dangers:: The transfer of risks and dangers from the supplier to the customer takes place as soon as the goods are deemed to be delivered alongside the ship in a harbor. The supplier bears all costs for the transport to the harbor and provision alongside the ship. These include custom duties, taxes, the costs of customs formalities and other export of goods. The customer assumes all costs after the delivery alongside ship by the supplier. These include customs duties, taxes, the costs of customs formalities and other government fees associated with the export of goods - as well as shipment by third parties. The customer also bears costs associated with the support of the supplier in exports. Upon the customer s request, the supplier, at his own expense and risk, must help the customer obtain all papers required for export. The customer, at his own expense and risk, must organize the import and export of the goods - and by third parties when necessary. L The supplier must deliver the goods at the agreed-upon time to the loading berth stipulated by the customer at the port of shipment named by the customer. Applies to seagoing and inland waterway transportation. Subgroup FAS Free alongside ship Subgroup FOB Free on board 4 / 14
FOB: Transfer of risks / dangers: K Free on board (...named port of shipment) The supplier bears all the dangers or risks of loss of or damage to the goods until the goods pass the named ship s rail at the port of shipment named by the customer. Thereafter, the customer bears these risks. The supplier assumes all costs incurred until the goods pass the ship s rail, e.g., costs of customs and excise formalities, customs and excise duties, taxes and other public charges required for exporting the goods. The customer assumes all costs incurred from the time the goods pass the ship s rail, e.g., costs of customs and excise formalities, customs and excise duties, taxes and other public charges required for importing the goods - including for transit through other countries. The supplier must obtain the export permit or other official export authorizations at his own expense and risk. He must carry out the customs and excise formalities required for exporting the goods. The customer must obtain the import permit or other official import authorizations at his own expense and risk. He must carry out all the customs and excise formalities required for importing the goods, if necessary also for transit through other countries. The supplier must deliver the goods on board the ship stipulated by the customer at the port of shipment named by the customer and at the agreed-upon time. Applies to seagoing and inland waterway transport. Subgroup FOB Free on board Subgroup CFR Costs and freight CFR: Cost and freight (...named port of destination) 5 / 14
Transfer of risks / dangers:: The supplier bears the risk of loss and damage to the goods until they pass across the ship s rail in the port of shipment. Afterward, the customer bears all risks of the remaining transport until the destination location is reached. The supplier bears the costs of the preshipment and main shipment, including loading at the shipping port and unloading at the destination port. These include customs duties, taxes, the costs of customs formalities and export of goods. The customer bears all costs incurred after the transfer of the goods to the customer in the shipping port. These include customs duties, taxes, the costs of customs formalities and other import of goods and shipment through other countries. Exceptions apply to the freight costs of the sea transport borne by the supplier. The supplier must obtain, at his own cost and risk, the export permit and other government authorizations associated with exports. He must complete customs formalities necessary for exports. The customer must obtain, at his own cost and risk, the import permit and other government authorizations associated with imports. He must also complete the customs formalities required in conjunction with the import of goods - also for shipment through other countries when necessary. The supplier contracts for carriage of the goods to the port of destination named by the customer. Applies to seagoing and inland waterway transport. Subgroup CFR Costs and freight Subgroup CIF Cost, insurance and freight 6 / 14
CIF: : Cost, insurance and freight (...named port of destination) The CIF clause is identical to the CFR clause with the exception that the supplier must also take out a sea transport insurance policy at his own expense. However, the supplier is only required to take out minimum insurance. Applies to seagoing and inland waterway transport. Subgroup CIF Cost, insurance and freight Subgroup CPT Carriage paid to CPT: Transfer of risks/ dangers:: Carriage paid to (...named place of destination) The supplier bears the risk of loss of or damage to the goods until the goods have been delivered to the freight forwarder. Thereafter, the customer bears all the risks of the remaining transportation to the destination. The supplier bears the costs of preshipment and main shipment including loading, unloading at the port of destination, customs duties, taxes, costs of customs formalities and export of goods. The customer bears all costs incurred from the time the goods have been delivered by the supplier to the freight forwarder and are not covered by the freight costs borne by the supplier. These costs include customs duties, taxes, the costs of customs formalities and other government fees associated with the import of goods and shipment through other countries. 7 / 14
Formalities/ The supplier must obtain, at his own expense and risk, the export permit or other official export authorizations. He must carry out the customs and excise formalities required for exporting the goods. The customer must obtain, at his own expense and risk, the import permit or other official import authorizations. He must carry out all customs and excise formalities required for importing the goods - also for shipments through other countries if necessary The supplier contracts for carriage of the goods to the destination named by the customer. The goods are deemed to be delivered when the supplier has delivered the goods to the freight forwarder who is to convey the goods to the destination. If there are several freight forwarders in the transport chain to the destination, this applies to the first freight forwarder who takes delivery of the goods. Applies to all modes of transport. Subgroup CPT Carriage paid to Subgroup CIP Carriage and insurance paid to CIP: Carriage and insurance paid to (...named place of destination) The CIP clause is identical to the CPT clause with the exception that the supplier must also take out an insurance policy for the shipment to the destination at his own expense. However, the supplier is only required to take out minimum insurance. Applies to all modes of transport. Subgroup CIP Carriage and insurance paid to Subgroup DAF Delivered at frontier DAF: delivered at frontier (...named place) geliefert Grenze (...benannter Ort) 8 / 14
Transfer of risks/ dangers: The supplier bears the risk of loss of or damage to the goods until the goods have been delivered to the named border. Thereafter, the risk is transferred to the customer. The supplier bears the costs of transport to the place of delivery at the border, if necessary including unloading costs at the place of delivery. These include customs duties, taxes, costs of customs formalities as well as other government fees associated with the export of the goods. The customer bears all costs incurred from the time the goods are delivered to the customer. These include customs duties, taxes, costs of customs formalities and other import of goods and further shipment. The supplier must obtain, at his own expense and risk, all official permits required for export as well as all documents necessary for delivering the goods to the customer - if necessary also for shipment through other countries. The customer must obtain, at his own expense and risk, the import permit or other official import authorizations. He must carry out all the customs formalities required for importing the goods and organize further shipment. The supplier must deliver the goods to the customer at the named place of delivery at the border at the agreedupon time in an unloaded condition. If no location is stipulated at the place of delivery, the supplier can deliver them anywhere at the place of delivery. Applies to all modes of transport, primarily rail and road shipments. Subgroup DAF Delivered at frontier Subgroup DES Delivered ex ship 9 / 14
DES: Transfer of risks / dangers: Delivered ex ship (...named port of destination) The supplier bears the risk of loss of or damage to the goods until the goods have been delivered on board the ship for unloading at the named port of destination. Thereafter, the risk is transferred to the customer. The supplier bears the costs of transport to the port of destination. These include customs duties, taxes, costs of customs formalities and other export of the goods - if necessary also for shipment through other countries. The customer bears all costs incurred from the time the goods have been transferred to the customer - including unloading costs. These include customs duties, taxes, costs of customs formalities and government fees associated with the import of the goods and further shipment. The supplier must obtain, at his own expense and risk, all official permits required for export as well as all documents necessary for delivering the goods to the customer at his own expense and risk - if necessary also for transit through other countries. The customer must obtain, at his own expense and risk, the import permit or other official import authorizations. He must carry out all the customs formalities required for importing the goods and organize further shipment. The supplier must deliver the goods that have not been cleared for import to the customer on board the ship at the named port of destination at the agreed -upon time so that they can be unloaded. Applies to seagoing and inland waterway transport. Subgroup DES Delivered ex ship 10 / 14
Subgroup DEQ Delivered ex quay DEQ: Transfer of risks/ dangers: Delivered ex quay (duty paid) (...named port of destination) The supplier bears the risk of loss until the goods have been delivered at the quayside at the named port of destination. Thereafter, the risk is transferred to the customer. The supplier bears the costs of transport to the port of destination. These include customs duties, taxes, costs of customs formalities and other export of the goods - if necessary also for shipment through other countries. The customer bears all costs that arise from the time that the goods are transferred to the customer. These include customs duties, taxes, costs of customs formalities and other import of goods into the country of destination. The supplier must obtain, at his own expense and risk, all official permits required for export and import as well as all documents necessary for delivering the goods to the customer - if necessary also for shipment through other countries. The customer, at his own expense and risk, must give the supplier all possible assistance to enable the supplier to import the goods. The supplier must deliver the goods that have been cleared for import to the customer at the quayside at the named port of destination at the agreed-upon time. Applies to seagoing and inland waterway transport. The DEQ clause should not be selected if the supplier cannot carry out the import clearance directly or indirectly. Subgroup DEQ Delivered ex quay 11 / 14
Subgroup DDU Delivered duty unpaid DDU: Delivered duty unpaid (...named place of destination) Transfer of risks/ dangers:: The supplier bears the risk of loss of or damage to the goods until the goods have been delivered to the named destination. Thereafter, the risk is transferred to the customer. The supplier bears the costs of transport to the named destination. These include customs duties, taxes, costs of customs formalities and other export of goods - if necessary also for shipment through other countries. The customer bears all costs incurred from the time the goods are delivered to the customer. These include customs duties, taxes, costs of customs formalities and other import of the goods and further shipment. The supplier must obtain, at his own expense and risk, all official permits required for export as well as all documents necessary for delivering the goods to the customer - if necessary also for shipment through other countries. The customer must obtain, at his own expense and risk, the import permit or other official import authorizations. He must carry out all the customs formalities required for importing the goods and organize further transport. The supplier must deliver the goods - which have not been cleared for import - to the customer at the stipulated place in the named destination in the import country at the agreed-upon time in an unloaded condition. Applies to all modes of transport. Subgroup DDU Delivered duty unpaid Subgroup DDP Delivered duty paid 12 / 14
DDP: Delivered duty paid (...named place of destination) Transfer of risks/ dangers: The supplier bears the risk of loss of or damage to the goods until the goods have been delivered to the named destination. Thereafter, the risk is transferred to the customer. The supplier bears the costs of transport to the named destination. These include customs duties, taxes, costs of customs formalities and other export and import of the goods - if necessary also for shipment through other countries. The customer bears all costs incurred from the time the goods are delivered to the customer. The supplier must obtain, at his own expense and risk, all official permits required for export and import as well as all documents necessary for delivering the goods to the customer - if necessary also for shipment through other countries. If so requested by the supplier, the customer must provide, at the supplier s expense and risk, all possible assistance to the supplier in obtaining clearance, particularly with the customs formalities. The supplier must deliver the goods - which have not been cleared for import - to the customer at the stipulated place in the named destination in the import country at the agreed-upon time in an unloaded condition. Applies to all modes of transport. Subgroup DDP Delivered duty paid Recommended reading Purchasing and Supply Chain Management Quayle 2006 Gower Handbook of Purchasing Management Day 2002 13 / 14
References Related articles Download the Incoterms as PDF URL http://www.dhldiscoverlogistics.com/cms/en/course/processes/procurement_logistics/terms.js p 14 / 14