Mastering Incoterms in SAP MM: Streamlining Procurement and Logistics
Incoterms are a set of standardized rules developed by the International Chamber of Commerce (ICC), regarding duties, costs, and risk transfer between sellers and buyers in cross-border or domestic trade. The following is a brief description of each of the Incoterms specified in the 2020 version (still valid), continuing with brief descriptions:
1. EXW (Ex Works)
- Overview: Seller supplies goods either from its premises (e.g., factory) or specified location; buyer bears all costs/taker of risks thereafter, including loading, transportation, and customs.
- Seller’s Obligations: Processing of goods, invoicing, documents, readying the item for pickup.
- Buyer’s Obligations: Arrange/pay transportation, loading; deal with customs, export/import fees; assume risks after availability.
- Risk Shift: To buyer when goods are ready (unloaded).
- Use: For buyers who have good logistics or local buyers who require transportation control.
- Example: German Purchaser buys Chinese machinery EXW from Shanghai; organizes pick-up, export, and import shipping.
- Notes: The buyer requires expertise in handling exports; less suitable for export business.
2. FCA (Free Carrier)
- Overview: Seller delivers merchandise to the buyer’s designated carrier at a named location (e.g., premise/terminal) for export, and the buyer is responsible for the main transportation.
- Seller’s Obligations: Export (licences, charges); deliver to carrier; docs (invoice, export).
- Buyer’s Obligations: Organize/payment of transport from the spot; handling of import clearance and taxes; risks thereafter.
- Risk Shift: To Buyer at Carrier handover.
- Use: Suits buyers controlling transport, requiring assistance from the seller to export; containers.
- Example: U.S. Buyer purchasing Japanese electronics, U.S. buyer receives Japanese electronics at a warehouse in Japan. Seller delivers or exports Japanese
- Notes: Delivery location affects loading. More flexible than EXW.
3. CPT (Carriage Paid To)
- Overview: Seller organizes/contributes to cost of primary transportation to specific destination, such as buyer’s port, but buyer assumes risks at first carrier handoff point.
- Seller’s Obligations: Organizing/-paying transportation to deliver goods to the destination, export clearance, transport documents such as a bill of
- Buyer’s Obligations: Assume risk of first carrier, import clearance, taxes, and onward carriage if required.
- Risk Shift: Risk of Loss to the buyer initially, not the carrier.
- Use: Fits shoppers seeking transport paid by seller and accepts imports.
- Example: Brazilian buyer acquires CPT Indian textiles; delivery to CPT on the port of Santos. The exporter/seller ships and exports, and the risks on the delivery Comments:
- Notes: Early risk shifting is deceptive; the buyer requires import capacity.
4. DPU (Delivered at Place Unloaded)
- Overview: Seller delivers and unloads goods at a specified location (e.g., warehouse). Covers costs/risks until unloaded.
- Seller’s Obligations: Pay for transportation; obtain export permit; unpack at destination.
- Buyer’s Obligations: Import clearance, taxes, as well as transportation arrangements after unloading.
- Risk Shift: to buyer after unloading.
- Use: Fits buyers requiring seller-managed transport/unloading at certain sites.
- Example: For instance, Australian Purchaser acquires German machinery DPU to Sydney Warehouse; seller delivers/export/unloads; additional buyer import.
- Notes: Replaces DAT (2020); seller unloads, unlike DAP.
5. DAP (Delivered at Place)
- Overview: Seller delivers goods ready for unloading at named spot, covers costs/risks to delivery, not unloading.
- Seller’s Obligations: Arrange/pay transport; export clearance; supply documents.
- Buyer’s Obligations: Discharge cargo; manage customs clearance, duties, and taxes. Bear risks and extra costs after delivery.
- Risk Shift: To buyer at delivery (ready for unload).
- Use: Suits buyers handling unloading/imports but wanting seller transport.
- Example: Canadian buyer takes Italian furniture DAP to Toronto warehouse; seller moves/exports, buyer unloads/imports.
- Notes: Buyer unloads (vs. DPU); flexible delivery spot.
6. DDP (Delivered Duty Paid)
- Overview: Seller delivers import-cleared goods to buyer’s country spot, pays dues/taxes; pays costs/risk until ready for unloading.
- Seller’s Obligations: Organize and/or pay for transport; export/import and pay fees;
- Buyer’s Obligations: Unload the merchandise, assume risks/costs post-delivery.
- Risk Shift: To Buyer on Delivery (Ready to Unload).
- Use: Suitable for purchasers who require less logistics; dealer does all work.
- Example: Mexican buyer acquires Korean chemicals delivered DDP to Mexico City. Seller arranges for the transportation, processing, and payment of duties.
- Notes: Need expertise on importing; most expensive for seller.
7. FAS (Free Alongside Ship)
- Overview: Seller deliveries product alongside the ship at the named port; responsible for import is the buyer. Sea/waterway transportation only.
- Seller’s Obligations: Ship goods alongside vessel; export documentation; deliver documents like invoice.
- Buyer’s Obligations: Loding of goods, arranging/payments for transport, insurance, and imports; assuming risks
- Risk Shift: To buyer aside ship.
- Use: For Bulk Cargo where Buyer controls ship/Loading.
- Example: The Egyptian buyer takes the Ukrainian grain FAS Odessa, seller ports/exports; buyer loads/ships/imports.
- Notes: Sea-limited; synchronization of ship schedules necessary.
8. FOB (Free On Board)
- Overview: Seller delivers products to ocean transport at named port of destination; delivers goods to carrier and assumes risk of loss until transfer to carrier.
Sea/Waterway Only - Seller’s Obligations: Load the cargo on board the ship; obtain export clearance; provide documents, including the ‘bill of lading’
- Buyer’s Obligations:To arrange for the transport, insurance, and import; to assume risks when the goods are on board.
- Risk Shift: To Buyer on board.
- Use: For bulk cargo: The buyer can arrange the transportation and the seller loads the cargo
- Example: Japanese buyer takes delivery of Australian steel FOB Sydney; seller loads/exporter; buyer ships/importer
- Notes: Risk for rail vessel still present; requires better communication.
9. CFR (Cost and Freight)
- Overview: The seller is responsible for the transportation of the goods to the destination port. The risk of loss shifts to the buyer once the goods
- Seller’s Obligations: Organize/pay transportation; export formalities; provide documents such as bill of lading.
- Buyer’s Obligations: Share risks on the vessel; arrange for the importation of the goods; organize the transportation of the
- Risk Shift: To the buyer on-board.
- Use: For those buying with free freight but importing purchases.
- Example: South African buyer gets Indonesian coal CFR Cape Town; seller ships/exports; buyer risks on board, imports.
- Notes: Much like CPT in the context of the sea, buyer risks during transit.
10. CIF (Cost, Insurance & Freight)
- Overview: Buyer assumes risk for transport/insurance from port to destination. Sea/waterway mode.
- Seller’s Obligations: Organize/repay transport costs; obtain export license; procure insurance (minimum 110% of value), obtain documents (e.g., bill of lading, policy)
- Buyers’ Obligations: Assume risks on board, import, taxes, onward carriage, and insurance, if required.
- Risk Shift: To Buyer On board.
- Use: For buyers who wish for seller freight/insurance, imports.
- Example: Indian buyer receives UK machinery CIF Mumbai. Seller delivers/exports/insures. Buyer bears risk on board/import.
- Notes: Very little insurance; similar to CFR, covered.
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