At Dragon Innovation, we're approached with manufacturing questions all the time. While our business is leveraging our expertise and knowledge directly for our customers, we also like to share our wealth of knowledge more broadly with the manufacturing community. To this end, we'll be answering some questions we receive about the manufacturing process in this short video series we call: 'Ask a Dragon'.
What are some of the most common issues and challenges of shipping and incoterms (International Commercial Terms)? How can those issues be avoided?
So there are many issues that can occur during the shipping process. There are also many fees that are typically not included in the factory selection or RFQ process. In order to avoid confusion things like Incoterms, which are an indispensable part of international trade, and more so with offshore manufacturing, were created. The International Chamber of Commerce (ICC) publishes the standard with the 2010 edition being the latest edition.Factories in Asia commonly quote orders in Ex Works (EXW) or Free on Board (FOB) terms.
Per Incoterms 2010, Ex Works at factory indicates the transfer of goods occur at the factory, with the buyer bearing all risks and responsibilities from that point on. This may not be technically feasible for two reasons: 1. Trucking usually does not have loading capability (i.e. forklifts) and 2. Many countries, including China, require a local legal entity with export license to clear customs.
So in practice, it is sometimes expected that the factory will help load the goods onto the truck and administratively assist in clearing customs. While factories may offer this as a service to the buyer, this may result in certain risks, such as who is responsible when goods are damaged during loading or when export is delayed due to paperwork? As for Free on Board term, it technically applies to conventional sea freight and not for use with container shipping where Free Carrier (FCA) is more appropriate.
However many factories (or sellers) continue to quote in FOB term for container shipping orders. FOB and FCA are not interchangeable terms and thus may result in cost differences for the buyer and or seller.To really mitigate these risks, both parties should be aware of any changes or details and address those in the contract up front. Additionally with the upcoming changes to the Incoterms in 2020 it’s good to stay updated with the latest developments.
Got a question of your own you'd like us to answer? Feel free to submit your question and we'll answer it in our series.