Incoterms shipping terminology isn’t just fancy jargon. Knowing the rules on global freight can translate to minimized shipping risk and maximized profits.

Expanding your small business globally is a great way to increase profits, but navigating international trade in 2023 can be difficult. Incoterms are a set of internationally recognized rules that define the responsibilities of buyers and sellers in international trade transactions. In this article, we’ll explore how Incoterms can help small business owners control shipping and freight costs and risk factors to better succeed in the global market.

What are Incoterms?

First published in 1936, Incoterms (International Commercial Terms) are a set of standard trade terms widely used in international trade transactions. Formally and currently published by the International Chamber of Commerce (ICC), they are widely recognized and accepted by governments, legal authorities, and practitioners around the world.

As a guide intended to level the international playing field, Incoterms specify the responsibilities of the seller and buyer in the transaction. This includes obligations for the delivery of goods, transfer of risks, and costs related to transportation and insurance.

Key Incoterms Defined

Some of the more commonly used Incoterms include:

EXW (Ex Works): The seller’s only obligation is to make the goods available at their premises.

FOB (Free on Board): The seller is responsible for the delivery of goods to the port of shipment and the buyer is responsible for the cost and risk of loss or damage to the goods from that point onwards.

CIF (Cost, Insurance and Freight): The seller is responsible for the delivery of goods to the port of destination and the cost and risk of loss or damage to the goods during transportation.

CPT (Carriage Paid To): The seller is responsible for the delivery of goods to the named place of destination and the cost of transportation.

DAP (Delivered at Place): The seller is responsible for the delivery of goods to the named place of destination.

Incoterms play a crucial role in international trade by providing a common understanding of the obligations and responsibilities of the parties involved, reducing the risk of misunderstandings and disputes.

Incoterms 2022 vs 2023

Compared to 2020, 2021 or 2022, what’s new in Incoterms for 2023? Essentially, nothing.

The ICC updates and revises the Incoterms guide only once every 10 years, with the last update being in 2020.

Not that the ICC is static in its development for more timely resources, far from it. For instance in 2022 the ICC launched Genesis, a online tool intended to enable exporters to obtain certification of their origin statement on invoice declarations.

As for the update in 2020, several changes were made to the Incoterms, including changes to the rules and responsibilities of the buyer and seller. Also included were updates to reflect developments in transportation and logistics practices, and the introduction of a new Incoterm, DPU (Delivered at Place Unloaded), which provides additional clarity for delivery obligations in multimodal transportation scenarios.

How Do Incoterms Impact the Cost of Shipping?

Incoterms can have a significant impact on the cost of shipping in international trade transactions. The specific Incoterm agreed upon between the buyer and the seller determines the responsibilities and costs associated with the delivery of goods, including transportation, insurance, and customs duties.

Having an intimate knowledge of the terms that relate to your business, and the resources available to negotiate the best possible outcome can have a significant impact on your shipping costs.

For example, if the Incoterm agreed upon is FOB (Free on Board), the seller is responsible for the delivery of goods to the port of shipment, while the buyer is responsible for the cost of transportation, insurance, and customs duties from that point onwards. This means that the buyer will bear the cost of these expenses, which can significantly increase the cost of shipping.

On the other hand, if the Incoterm agreed upon is CIF (Cost, Insurance and Freight), the seller is responsible for the delivery of goods to the port of destination, and the cost and risk of loss or damage to the goods during transportation. In this case, the seller will bear the cost of transportation, insurance, and customs duties, which can reduce the cost of shipping for the buyer.

What are the Most Important Incoterms for Small Business

For North American-based small business,

Depending on your type of industry, the most important Incoterms for smaller North American-based businesses would likely be EXW (Ex Works), FOB (Free on Board), CIF (Cost, Insurance and Freight), and DAP (Delivered at Place). Simply because these Incoterms are the most widely used in international trade.

In terms of controlling shipping and freight costs, it is important to carefully consider the Incoterm agreed upon in each transaction. In general sum-sum negotiations, Incoterms that place more responsibility on the seller will tend to result in lower costs for the buyer, as the seller will bear the costs of transportation, insurance, and customs duties.

For example, if you’re importing goods from a supplier in another country, using an Incoterm like CIF or DAP, which place the responsibility for delivery and transportation costs on the seller, can help to reduce your costs. On the other hand, if you are exporting goods to a customer in another country, using an Incoterm like FOB, which places the responsibility for delivery and transportation costs on the buyer, can help to reduce your costs.

Overall, consulting with a trade expert or an experienced logistics partner to help you determine the best Incoterms for your specific needs to help you control shipping and freight costs

Incoterms Shortfalls and Limitations

As mentioned, Incoterms are a widely used and well-established set of rules for international trade, but like any commercial tool, they are not without limitations. Some of the potential shortfalls or limitations of Incoterms include:

1. Ambiguity: Incoterms are designed to be flexible, but this can also result in ambiguity in the interpretation of their terms. This can lead to disputes between buyers and sellers over the responsibilities and obligations outlined in the agreement.
2. Limited coverage: Incoterms are only intended to cover the delivery of goods and do not address other important aspects of the transaction, such as the payment of goods, warranties, and intellectual property rights.
3. Outdated provisions: Incoterms are updated every 10 years, but changes in transportation and logistics practices, as well as other commercial developments, can render some provisions outdated. This can result in a lack of clarity around obligations and responsibilities, particularly in new or complex commercial arrangements.
4. Non-binding nature: While Incoterms are widely used and accepted in international trade, they are not legally binding and are only enforceable if specifically incorporated into a contract between the buyer and seller.
5. Lack of uniformity: Incoterms are used globally, but the interpretation and application of their terms can vary between countries and regions, leading to potential misunderstandings and disputes.

Move Forward with Expertise

Considering the complexity of the global supply chain and the endless combinations of market participants, it’s important to keep potential gains and shortfalls of using Incoterms in mind. It’s critical to ensure that they’re used in the context of a well-drafted contract that clearly outlines the rights and obligations of both the buyer and the seller.

Partnering with an experienced trade expert or a logistics specialist such as Brimich can help you navigate the limitations of Incoterms and ensure that they’re used effectively in your international trade transactions.

If you’re running a business that produces physical goods, chances are you’re not only dealing with aspects of shipping, but receiving as well.

Given enough time, having a delivery come through your receiving department with obvious damage is going to happen. It could be from long distance wear and tear, improper packaging, mishandling, or any number of other factors.

As mentioned, receiving damaged freight is an inevitability – it’s a frustrating situation for both parties. The best course is to deal with the problem calmly and professionally, without finger pointing and freaking out.

What remains is knowing the best way to through the freight damage claim process. This will not only go a long way in maintaining relationships, but will get you back on track quickly and efficiently.

Here’s what to do when you’ve received damaged goods. Remember to remain even-keeled, document everything and follow the steps below.

Managing the Freight Damage Claim Process

1. Do Not Turn the Driver Away!

When it comes to carriers and freight contracts, these are your partners. Refusing to accept a shipment, even in a compromised condition, will likely only cost you more in the long run.

You might also be subjected to further shipping costs. Do not turn the driver away, instead, accept the freight, damages and all even though it may seem counter-intuitive.

2. Accept the Damaged Goods

By accepting the damaged delivery, you have the opportunity to thoroughly document the specifics. You can then file a claim, and you’ll likely be duly recompensed. Proper records will help determine whether the claimed damage was the fault of the original shipper, such as poor or inadequate packaging.

If the problem occurred during the carrier’s haul, they’ll be found at fault and will have insurance to cover such losses.

If you do not accept the damaged freight, the carrier will have to send it back to their warehouse and store it as the claim is processed – which costs time, increases the chances of further damage, and potentially leads to further charges. It doesn’t do much for the relationship either.

If you utilize a third-party insurance policy outside of the carrier, be sure that your policy does not have clauses that nullify their responsibility to compensate you if you refuse the freight.

Most insurance policies require that you accept the freight, document everything, take pictures, or even have a claims inspector come by to personally verify the damaged product received.

3. Document Everything

Act immediately and takes notes of any damages or shortages. Check the Bill of Lading (BOL) or proof of delivery (POD) provided by the carrier that they’re accurate.

It’s important to not only makes full records of obvious exterior damage, but consider the condition of the contents. Unseen damages that are not apparent at first glance can be hard to prove if the container is more or less in tact. Therefore it’s prudent to fully inspect and record the condition of the packaging and its contents for any undue harm.

In terms of associated paperwork, the Bill of Lading acts as the carriage contract between the carrier and the shipper. Most claims in the US will rely on U.S.C 14706 as the standard for resolving claims disputes, but freight claim laws differ on a state by state basis, and from country to country.

Because the laws are dramatically different when crossing the northern or southern borders, the point of origin will be the deciding factor on the legal jurisdiction that presides over the claim. For example, if a freight shipment intended for Mexico departs from Canada and is damaged or lost along the way, Canadian claims laws will be used in the resolution process.

Take pictures of the damaged goods. Make sure they’re clear, focus on the damage in context, and support your claims. Once you have taken pictures, contact your carrier or freight logistics company and let them know you received damaged goods.

Keep in mind carriers have a legal right to mitigate the value of their claim. This can be done by allowing them to try to make good on the shipment by re-delivering, salvaging, or returning the goods. Consequently, if you don’t give them their opportunity to mitigate or recoup loss, they may have legal grounds to deny your claim.

The time frame is to file a damaged freight claim is generally two weeks. Some carriers may allow longer claim times, or utilize different methods to prevent missing freight. regardless, the moment you realize you have a claim for damage on shipped goods goods, alert your carrier.

Be diligent in following up, it’s your responsibility, not theirs. Moreover, a properly annotated BOL is regularly used as proof of delivery and condition. Fill it out and then contact the claims department for additional freight claims procedures and paperwork.

It’s also important to be clear in your description of how the external damage instigated further harm to the internal products. There’s a big difference between goods that leave the factory in an already compromised condition, and those that become damaged through handling during the shipping process.

4. Keep the Freight and Packaging

It may be inconvenient to store the damaged freight, but it’s important that you do. Remember, the carrier has the right to inspect the damage in person and the right to salvage the damaged freight. Not allowing them access for inspection could result in only partial compensation or outright denial.

However, in cases such as food spoilage or hazardous materials, disposal laws may supersede the carrier’s right to salvage. Regardless, they still do have to be notified first to give them the opportunity to act.

5. Protect the Freight from Additional Damage

Receiving damaged freight unfortunately means it’s also your responsibility to not aggravate the problem. Store the received damaged goods in a safe place and do everything you can to keep the shipment from suffering further damage.

Put the received damaged goods out of the way of normal operations to avoid having to move it again. By reducing handling, you decrease the odds of further damage.

6. Pay the Freight Charges

There are requirements that claims be filed along with a copy of the paid freight bill. Regardless of who is at fault, refusing to pay the freight bill can hurt your claims resolution.

Moreover, you’ll show a sign of good faith and cooperation by paying the freight bill immediately. Consider this tactic a necessary step towards a full recovery of everything owed back to you.

7. File a Freight Claim Immediately

As with coordinating documentation, filing the freight claim should be done as quickly as possible. According to the Carmack Amendment, a carrier within the United States has to acknowledge a claim within a month of the initial filing.

Subsequently, a written final disposition has to be handed over within a three-month period. Following that, the claimant will have two years to dispute the disposition.

Remember, time in freight claims procedures is not your friend. If you file a claim after the initial claim period, that claim will be automatically voided.

8. Understand Maximum Liability Amounts on Freight Claims

Within Canada and Mexico, carriers are responsible for a permanent dollar per pound rate – unless the two parties had a prior agreement on a higher rate. Currently the rate in Mexico is fixed at 2.8 ¢/lbs, within Canada, the rate is $2 CAN/lbs. If the carrier is found liable within the United States, the carrier is responsible for the actual value of the lost or damaged freight.

9. Keep Copies of All Records

For convenience, refer to this checklist if you received damaged freight:

• Copies of photos depicting the damage
• A copy of the packing slip
• Bill of Lading copy
• Paid freight bill copy
• A copy of the invoice showing the price paid for the damaged goods received
• A standardized claim form which identifies the shipment and the states the claim amount.

Once all the records and documents are compiled, put them in an appropriate folder and keep it where you’ll have quick yet secure access to it. With an overabundance of precise evidence available, you serve yourself in strengthening your claim.

Remember, Receiving Damaged Freight Is Just Another Process

You will inevitably receive damaged freight, you’ll likely be annoyed, frustrated and frustrated. But logically, think of it as a part of doing business, have a process in place to accommodate the disruption – a plan B.

Managing your freight claims efficiently can save you both time and money. Document everything and understand the process. File your claim as soon as possible and be sure that you know how the freight claims procedures work according to your contract with your carrier.

Follow the steps and you can make the normally difficult situation of receiving damaged freight as stress-free as possible.

With continuing evolution of the supply chain, customer expectations of fast deliveries right to their door are changing as well.

Thanks to successful models developed by Amazon and eBay, customers are not only comfortable, but prefer to shop online – especially in a compromised environment due to a pandemic.

Because of this shift in how customer’s view shipping, getting your products from A to B, or from the factory to their door is more critical than ever.

Of course your company is committed to excellence and customer satisfaction – that’s a given. Therefor, awareness of the most common shipping mistakes just might help you avoid those awkward moments when a problem does need to be explained.

Mistake #1: Listing the Wrong Address

It seems obvious enough to avoid, but it happens all the time, and at many different levels. It’s a stupid mistake that can cost you dearly and delay your shipment arriving on time.

If you list the wrong address, or if it’s entered incorrectly for you – thanks autofill, your delivery will end up at the wrong place. As a result, it’ll have to be tracked down and re-routed to the right address.

This costs time and resources in re-routing fees, missed deadlines and most unfortunately, unhappy customers.

Mistake #2: Improper Packaging

Sketchy packaging means damaged freight, which means unhappy customers and again, higher costs.

According to experts, the structural integrity of most any shipping container suffers significant break-down over the course of a single journey; and that’s for boxes that are correctly packed and sized.

When the package is NOT sized or sized correctly, the potential for damage rises exponentially. With the amount of time and care you put into creating your fantastic product, why would you risk all that work with inappropriate shipping boxes or using boxes with a sloppy fit?

Of course different products require varying amounts of care and protection, much of which depending on an item’s size, weight, and fragility.

Even with the right packaging, make sure that your goods are secured properly to their pallet: not filled with overhanging packages. Instead, column-stack or interlock-stack goods. Make sure they’re secured with stretch wrap and bands along with cushioning to increase shock absorption, strength, and stability.

A conversation with a preferred carrier will go a long way, and a little extra time is worth the cost of making sure your goods arrive intact and in good condition.

Mistake #3: Bill Of Lading (BOL) Inaccuracies

The key document required for every freight shipment – The Bill of Lading, one of the essential shipping terms to be familiar with, is a legally binding document giving both the carrier and the driver all the details to necessary to process and invoice the freight accurately.

The BOL includes:

• The date of the shipment
• The number of units in the shipment
• The exact weight of shipment
• The Shipper’s and Consignee’s full names and addresses
• The Freight classification for the items being shipped
• Type of packaging
• The declared value of goods
• A description of items being shipped: name and material of manufacture
• A Purchase Order or special account numbers used between businesses for tracking
• Special instructions for the carrier to ensure prompt delivery – such as closing times
• If necessary, a note regarding potentially hazardous materials

Considering the amount of specific information that must be documented, it’s not uncommon for shippers to use the wrong commodity description; enter the wrong piece count; notify party; or fail to read the terms and conditions of the bill of lading just to name a few.

Mistakes like these can be extremely costly and easily avoided by carefully filling out the information. Engaging the help of someone to double-check also goes a long way to ensuring its accuracy.

Going the extra mile may seem unnecessary, but you should remind yourself what’s at stake when things aren’t 100% accurate – your products, and you business’ reputation.

Mistake #4: Incorrect Weight or Freight Class Listing

Yes, it is part of the BOL, but it’s important enough to have its own listing because improperly listed freight class or weight can be a serious and costly mistake.

If you try to guess your shipment’s weight without the aid of a weigh station, you will inevitably receive additional fees – the same goes for improper freight class.

Because a lower class is associated with a lower price, shippers sometimes try to list their shipment in the lowest possible class. But if they’re incorrect, the reclassification fee will be much higher than the margin from one class to another.

This may not seem like a big deal to some, but if you’re shipping hundreds or thousands of freight loads a year, those additional fees can add up fast. Not to mention the damage it does to a reputation.

Mistake #5: No Freight Insurance

In order to cut costs, shippers may opt to avoid insurance. It may be cheaper in the short run, but the law of averages will come back to bite you.

The simple frequency of continuous shipping over time will inevitably lead to damage of one kind or another. It may be it an overturned truck, theft, natural disasters, an accident, or a host of other problems capable of ruining a shipment.

Human error has to be taken into consideration. Plus the likelihood of a mistake occurring increases with travel distance and package handling.

The relatively small price of insuring the goods saves you from worrying about the inevitable mishaps that are bound to happen over time, and save you from what could be financially crippling replacement costs of an entire shipment.

Mistake #6: Not Palletizing

Palletizing takes time and effort, but it’s far better than having a loose stack of packages free to shift around while on route and get damaged.

Furthermore, most LTL companies won’t allow you to ship without using a pallet. If you don’t, they’ll palletize your goods and pass the cost of doing so on to you. While this can be negotiable point, it’s far less expensive to do it yourself.

Mistake #7: Overpaying for Freight

This last “mistake” may seem obvious, but it’s one mistake made far too frequently.

Working with a trusted 3PL partner is one of the best ways to avoid the mistakes listed, and more, and keep your freight costs low at the same time.

An experienced 3PL partner audits your freight invoices to ensure your company is paying the correct amount for your shipments. If in case you are overpaying, they’ll work directly with your preferred carriers to provide accurate pricing, or correct other issues.

What role does freight logistics play in making sure your products are delivered on time, and on budget?

What Is Freight Logistics?

Freight logistics comprise the core systems and infrastructure of an estimated $270 billion global business.

At any given point, the knowledge of shippers and carriers, the technology, experience, and human resources make possible the smooth and efficient movement of goods around the world.

One major example, international maritime shipping, accounts for about 90 percent of world trade, and without these logistical mechanisms, simply would not be possible.

The following is a useful look into the key components of freight logistics including: communication, tracking and tracing, warehousing and distribution, customs, and insurance.

The Seven Rs of Logistics

To understand the complexities of strategically coordinating the elements and functions necessary to the efficient operation of the international maritime shipping industry, it’s helpful to understand the basic principles represented by:

1. The Right Product

2. The Right Place

3. The Right Price

4. The Right Customer

5. The Right Condition

6. The Right Time

7. The Right Quantity

In practice, making sure the correct cargo reaches its intended destination safely and on time is priority one.

The logistical systems of freight management are equal parts mechanical and organic. In order for their respective supply chains to properly function, each  must pull its weight in perfect synchronicity.

To get a better idea of how massively intricate the global flow of freight is, the interactive map below illustrates just how much the world relies on coordinated logistics systems:

How Freight Forwarders Play Their Part

Managing the specific needs of such a highly coordinated system requires a freight logistics team dedicated to:

• Negotiating freight rate contracts
  
• Ensuring continued customs compliance and insurance protection
• Maintaining relationships with steamship lines
• Minimizing empty miles by coordinating efficient shipping routes

Freight forwarders oversee the following logistical responsibilities:

1. Communication

2. Tracing and Tracking

3. Warehousing and Distribution

4. Customs

5. Insurance

Logistics Communications

Logistics companies partner with businesses to make the right decisions impacting finance, production, engineering, marketing, transport, warehousing, purchasing, and inventory management.

What does this do for your business’s bottom line?

By minimizing the amount of connections needed to link a variety of economic players, third party logistics providers help reduce costs.

Tracking and Tracing

Freight Forwarders typically utilize specialized software called a Transportation Management System, or TMS, to trace and track shipments, making any freight’s journey transparent. This helps logistics management to:

• Develop more efficient procedures
• Improve customer service
• Save money

An integrated TMS reports crucial data about carrier performance, transportation costs, and market trends.

Though the goal is always in smooth logistical operations, the TMS detects hiccups that may defer delivery, facilitating prompt notification for any customers who may be affected by the delay.

This enables freight forwarders to continually refine their strategies in creating a cost-effective supply chain.

Warehousing and Distribution

Diligence in warehousing and distribution pays dividends for your supply chain. There are many opportunities that can cause costly mistakes, there are just as many to excel.

Freight is the life’s blood of both buyers and sellers, therefor faithfully adhering to regulated warehousing and distribution procedures help logistics partners earn trust and strengthen relationships.

A breakdown of value-added warehousing and distribution services include:

• Cargo Packing and Crating
• Pick and Pack
• Labeling+ Barcode schema:
  + Label materials
  + Label placement
  + Complementary technologies
• Vendor Assembly and Consolidation
• Kitting
• Visual Inspection Services:
  1. Inspect the carrier for cleanliness, dryness, ventilation, and cargo separation to be sure the vessel is appropriate for its designated cargo.
  2. Report on markings, type of packing (bulk, cartons/drums, etc.) and a count of goods.
  3. Confirm that a valid mate receipt (document signed by an officer of a vessel evidencing receipt of a shipment on board the vessel) was received.
  4. Verify that units match those listed on the order description.
  5. Check packages and labels for correct dates and batch numbers as well as supplier certificates.
  6. Document when and where product was loaded, and the processes used to do it.
  7. Maintain a time log that includes dates and times of arrival, departure, loading, and delays (citing the reasons for the delays). Descriptions of loading gear and weather conditions should also be listed.

Managing Customs

In simple terms, customs brokers produce documentation for shippers to prove that the required customs procedures have been performed and the goods have cleared for shipment when entering or leaving a country.

If warehousing procedures aren’t complied with properly, the warehoused freight waiting for clearance might instigate extra fees. This can add up to hundreds or thousands in avoidable shipping costs.

Whether importing or exporting, the documentation is extensive, plus laws vary from country to country and port to port.

Time, money, and relationships can be compromised without the proper attention from a licensed customs broker as logistical errors can easily be made.

Required documents for importing or exporting cargo are:

• Purchase order from buyer – The terms include:
  • Price
  • Quantity
  • Quality
  • Description
  • Latest ship date
  • Mode of transportation

• Sales Invoice – An example sales invoice may include:
  • Clear description of the item
  • Quantity
  • Value, in foreign currency and U.S. dollars
  • Country of Origin
  • Where it was purchased
  • Names and locations of buyer and seller
  • Address of the person or business the goods are being shipped to

• Packing list – A packing list may also:
  • Accompany an insurance certificate
  • Be used to issue a Bill of Lading
  • Contribute to electronic export information (EEI)
  • Help customs officials verify goods

• Shipping bill
• Bill of lading
• Bill of entry
• Certificate of Origin

Other requirements may include other documentation specific to the buyer, or financial institution, or Letter of Credit terms per importing country regulations.

When negotiating for an appropriate freight forwarder, it’s imperative to exercise due diligence and research whether a given forwarder has experience and is knowledgeable enough to handle your particular customs brokerage needs.

If not, consider splitting the tasks between a separate customs broker and forwarder. Though the costs may rise, the price of inadequate or negligent customs brokerage is not worth the risk.

Insurance

Due to the inherent nature of unforeseen problems arising despite best hopes, whether accidental or instigated, the need for insurance is a must in freight logistics.

Industry experts cite that, cargo theft is a $30 billion a year business. While this is indeed a serious potential threat to your freight, it’s far from the only bad thing that could happen to your cargo.

Also adding to the potential for loss or damage are:

• General Handling
• Bad weather
• Long extended voyages
• Continuous moving and shifting of cargo

Therefor protecting your cargo from its point of departure to final delivery warrants insurance coverage.

Because of the broad scope of goods that require transportation, it’s imperative you work with a partner that can set you up with a plan that best suits your cargo’s, and your business’s needs.

What Is The Most Important Part of Freight Logistics?

As you can see, freight logistics is a multi-faceted and intricate balance of elements all designed to help move your business forward. But the most important thing to remember is that it always involves engaging the right people with the right expertise at each step along the way.