13.2 International Transportation and Incoterms
4 min read•july 31, 2024
International transportation is the backbone of global trade, connecting suppliers and consumers across borders. This section explores various modes of transport, their characteristics, and how they shape international logistics operations.
Incoterms play a crucial role in standardizing international trade practices. These terms define responsibilities between buyers and sellers, impacting risk allocation, pricing strategies, and the overall structure of global supply chains.
International Transportation Modes
Sea and Air Transport
Top images from around the web for Sea and Air Transport
Free Image of Cranes for loading cargo on a bulk carrier | Freebie.Photography View original
Is this image relevant?
File:Cargolux B747-400F.jpg - Wikipedia View original
Is this image relevant?
File:Air Transport International Boeing 767-200F LDS.jpg - Wikipedia, the free encyclopedia View original
Is this image relevant?
Free Image of Cranes for loading cargo on a bulk carrier | Freebie.Photography View original
Is this image relevant?
File:Cargolux B747-400F.jpg - Wikipedia View original
Is this image relevant?
1 of 3
Top images from around the web for Sea and Air Transport
Free Image of Cranes for loading cargo on a bulk carrier | Freebie.Photography View original
Is this image relevant?
File:Cargolux B747-400F.jpg - Wikipedia View original
Is this image relevant?
File:Air Transport International Boeing 767-200F LDS.jpg - Wikipedia, the free encyclopedia View original
Is this image relevant?
Free Image of Cranes for loading cargo on a bulk carrier | Freebie.Photography View original
Is this image relevant?
File:Cargolux B747-400F.jpg - Wikipedia View original
Is this image relevant?
1 of 3
- Sea transport dominates international freight
- Offers high capacity and cost-effectiveness for bulk cargo over long distances
- Longer transit times compared to other modes
- Most common for international shipping (container ships, bulk carriers)
- Air transport provides fastest option for international shipments
- Ideal for high-value, time-sensitive, or perishable goods (electronics, pharmaceuticals)
- Higher cost per unit compared to sea transport
- Enables rapid global distribution (overnight delivery services)
Land-Based and Multimodal Transport
- balances cost and speed for overland shipments
- Particularly effective for landlocked countries or continental trade routes
- Efficient for long-distance, high-volume cargo (coal, grain)
- offers flexibility and door-to-door service
- Used for short to medium distances or as part of multimodal chains
- Allows for easy access to diverse locations (trucks, vans)
- combines two or more modes
- Optimizes efficiency and cost-effectiveness in complex supply chains
- Integrates different transport methods (sea-rail, air-road)
Documentation and Characteristics
- Each mode requires specific documentation
- Sea freight uses bills of lading
- utilizes air waybills
- Critical for international trade compliance and
- Modes differ in speed, cost, capacity, and flexibility
- Sea: slow, cost-effective, high capacity (bulk commodities)
- Air: fast, expensive, limited capacity (urgent medical supplies)
- Rail: moderate speed and cost, high capacity (manufactured goods)
- Road: flexible, variable cost, door-to-door (retail products)
Incoterms Significance
Standardization and Risk Allocation
- Incoterms standardize trade terms in international transactions
- Published by International Chamber of Commerce (ICC)
- Define responsibilities of buyers and sellers
- Allocate costs, risks, and tasks between parties
- Clarify point of risk transfer from seller to buyer
- Essential for insurance and liability purposes
- Impacts responsibility for loss or damage during transit
Contract and Pricing Implications
- Incorporated into sales contracts
- Influence pricing strategies
- Determine which party bears various transaction costs
- Impact customs procedures
- Specify responsibility for export and import clearance
- Affect calculation of duties and taxes
Logistics and Supply Chain Management
- Dictate organization of transportation and documentation
- Influence overall structure of international supply chains
- Determine responsibility for arranging freight and handling
- Latest version (Incoterms 2020) includes 11 terms
- Divided into two categories: rules for any mode of transport and rules for sea and inland waterway transport
- Provide framework for managing complex international logistics
Incoterm Application
Selection Factors
- Choice of Incoterms depends on multiple factors
- Mode of transport (sea, air, rail, road)
- Nature of goods (perishable, hazardous, bulk)
- Level of control desired by each party over shipment process
- Consider local regulations and infrastructure
- Customs procedures and requirements
- Available transportation networks and facilities
Common Incoterms and Their Uses
- (Ex Works) places minimum responsibility on seller
- Suitable for buyers with strong logistics capabilities
- Often used when selling to intermediaries or distributors
- (Free Carrier) versatile for multimodal transport
- Preferred when seller can handle export procedures
- Limits seller's transportation responsibilities
- (Cost, Insurance, and Freight) common in sea transport
- Seller arranges and pays for main carriage and insurance
- Often used in commodity trading (oil, grain)
- (Delivered Duty Paid) places maximum obligation on seller
- Includes import clearance and payment of duties
- Suitable for turnkey projects or buyers with limited import capabilities
Strategic Considerations
- Choice of Incoterms affects competitiveness of offers
- Determines distribution of costs and risks between parties
- Influences pricing and profit margins
- Proper application requires consideration of parties' capabilities
- Seller's ability to manage international logistics
- Buyer's import and customs clearance expertise
Incoterm Risks and Responsibilities
Risk Transfer and Liability
- Each Incoterm defines specific point of risk transfer
- Crucial for determining liability during transit
- Impacts insurance requirements and claims processes
- Terms with more seller responsibility (DDP, DAP) involve higher risk for seller
- May command higher prices to compensate for increased exposure
- Require comprehensive risk management strategies
Split Responsibilities and Potential Disputes
- Terms like FOB and CIF involve split responsibilities
- Risks transfer at specific points in the journey (crossing ship's rail, delivery to carrier)
- Require clear understanding to manage potential disputes
- Party responsible for arranging transport bears additional risks
- Delays in shipment or customs clearance
- Additional costs due to unforeseen circumstances (port congestion, weather delays)
Insurance and Customs Considerations
- Insurance responsibilities vary among Incoterms
- CIP and CIF require seller to provide minimum coverage
- Other terms leave insurance decisions to parties' discretion
- Customs clearance responsibilities clearly defined
- Affects overall risk profile of transaction
- Can involve complex procedures and potential delays (import restrictions, documentation errors)
Financial Implications
- Choice of Incoterms impacts cash flow and working capital
- Determines when payments are due
- Allocates various transaction costs (freight, insurance, duties)
- Influences financial risk management strategies
- Letters of credit terms and conditions
- Currency exchange rate exposure
Key Terms to Review (23)
3PL: 3PL, or Third-Party Logistics, refers to the outsourcing of logistics and supply chain management functions to a specialized service provider. This can include transportation, warehousing, distribution, and other supply chain activities, enabling companies to focus on their core business while benefiting from the expertise and resources of the 3PL provider. By utilizing 3PL, businesses can improve efficiency, reduce costs, and enhance customer service.
Air cargo: Air cargo refers to the transportation of goods and commodities by aircraft, allowing for fast and efficient movement of products across long distances. This method of transport is crucial for businesses needing to deliver perishable items, high-value goods, or urgent shipments globally. Air cargo operates under specific regulations and practices, including adherence to safety standards and proper documentation to facilitate international trade.
Air waybill: An air waybill is a crucial document issued by an airline that serves as a receipt for cargo and a contract for the transportation of goods by air. It contains details about the shipment, such as the sender, recipient, flight details, and terms of carriage. This document is vital in international logistics as it helps facilitate the smooth movement of goods across borders, ensuring compliance with regulations and providing proof of shipment.
Bill of lading: A bill of lading is a legal document issued by a carrier to a shipper that details the type, quantity, and destination of goods being transported. It serves multiple purposes, including acting as a receipt for the goods, a document of title, and a contract of carriage. Understanding the bill of lading is essential as it ensures compliance with transportation regulations, facilitates documentation in global trade, and aids in international transport agreements.
Cargo risk: Cargo risk refers to the potential loss or damage that goods may face while being transported from one location to another. This includes physical loss, damage due to accidents, theft, or adverse weather conditions during transit. Understanding cargo risk is essential for determining insurance needs and liabilities associated with international transportation and the use of Incoterms.
CIF: CIF stands for Cost, Insurance, and Freight, which is an Incoterm used in international shipping. This term indicates that the seller is responsible for covering the costs associated with transporting goods to a specified destination, including the freight charges and insurance during transit. By using CIF, buyers can have a clearer understanding of their total costs and the responsibilities involved in the shipping process.
Consignee: A consignee is an individual or entity that receives goods shipped by a consignor, typically under a sales contract. In the context of international transportation and Incoterms, the consignee is the party responsible for taking possession of the cargo upon arrival at the destination, and may also be involved in customs clearance and other regulatory requirements. This role is crucial for ensuring that shipments are correctly received and processed according to the agreed terms of sale.
Customs clearance: Customs clearance is the process of obtaining permission from government authorities to import or export goods across international borders. This involves submitting necessary documentation, paying applicable duties and taxes, and ensuring compliance with regulations. The efficiency of customs clearance can significantly impact the speed and cost of international transportation, making it a crucial aspect of global logistics.
DDP: DDP stands for 'Delivered Duty Paid', which is an Incoterm indicating that the seller is responsible for delivering goods to a specified destination, covering all costs, including shipping and import duties. This term highlights the seller's obligation to take care of all logistics, taxes, and tariffs, making it a favorable option for buyers who want a hassle-free purchasing experience.
EXW: EXW, or Ex Works, is an Incoterm that defines the responsibilities of buyers and sellers in international trade, where the seller makes the goods available at their premises for the buyer to collect. This term places the maximum obligation on the buyer and minimum responsibility on the seller, as the seller is only required to prepare the goods for pickup and ensure they are available. It is crucial in understanding how risk and costs are allocated in global supply chains.
FCA: FCA stands for Free Carrier, which is an Incoterm used in international shipping that designates the responsibilities of buyers and sellers regarding the delivery of goods. Under FCA, the seller is responsible for delivering the goods to a specified location, where the buyer then assumes responsibility for further transportation. This term highlights the importance of clearly defining transfer points and liability in international logistics, ensuring smooth transitions between different transportation modes.
Freight forwarder: A freight forwarder is a specialized logistics provider that arranges the transportation of goods on behalf of shippers, coordinating various services needed to move products efficiently across international borders. They act as intermediaries between shippers and carriers, handling documentation, booking cargo space, and ensuring compliance with regulations. This role is crucial in international transportation as they help streamline the complex processes involved in moving goods globally.
Just-in-time delivery: Just-in-time delivery is a logistics strategy aimed at reducing inventory carrying costs by receiving goods only as they are needed in the production process, thus minimizing waste and improving efficiency. This approach relies heavily on accurate demand forecasting and effective supply chain management to ensure that products arrive exactly when they are needed, avoiding excess stock and storage costs.
Logistics coordination: Logistics coordination refers to the systematic organization and management of the flow of goods, services, and information throughout the supply chain. It plays a crucial role in ensuring that all elements of logistics operations, including transportation, warehousing, and inventory management, work together seamlessly to meet customer demands and optimize efficiency. Effective logistics coordination also involves managing relationships with various stakeholders, including suppliers, carriers, and customers, to facilitate smooth operations across international borders.
Multimodal transport: Multimodal transport refers to the movement of goods using more than one mode of transportation under a single contract. This method leverages the strengths of different transportation modes—like truck, rail, ship, and air—to provide efficient, cost-effective, and timely delivery of goods across long distances. The coordination among various carriers and modes is essential in international logistics to ensure smooth transitions and compliance with legal frameworks.
Ocean freight: Ocean freight refers to the transportation of goods via cargo ships over large bodies of water, primarily used for international shipping. This method is a key component in global trade, facilitating the movement of bulk goods, containers, and specialized shipments across various sea routes. Ocean freight plays a vital role in logistics, often being the most cost-effective option for transporting large quantities of goods over long distances, making it an essential consideration in supply chain management.
Rail transport: Rail transport refers to the movement of goods and passengers using vehicles that run on tracks, primarily using trains. This mode of transportation is integral for efficient long-distance travel and freight movement, providing a cost-effective and environmentally friendly alternative compared to road transport. Its significance expands through intermodal systems, where rail is combined with other transportation methods, as well as in international trade, where it plays a key role in logistics and supply chain management.
Reverse Logistics: Reverse logistics refers to the processes involved in moving goods from their final destination back to the manufacturer or distributor for the purpose of recapturing value, recycling, or proper disposal. This aspect of logistics focuses on the flow of products in the opposite direction of traditional logistics and is essential for managing returns, waste reduction, and enhancing sustainability efforts.
Road transport: Road transport refers to the movement of goods and people using vehicles on roadways, which is a vital mode of transportation in logistics. It is known for its flexibility and efficiency in connecting various locations, often serving as a crucial link in intermodal transportation systems. Additionally, road transport plays a significant role in international trade by facilitating the movement of goods across borders.
Shipper: A shipper is an individual or business that arranges for the transportation of goods from one location to another, typically acting as the party responsible for delivering the freight to a carrier. Shippers play a crucial role in the logistics chain, coordinating shipping details, preparing necessary documentation, and ensuring that products are shipped in compliance with regulations and agreements.
Supply Chain: A supply chain is a network of organizations, people, activities, information, and resources involved in supplying a product or service to a consumer. It encompasses everything from the initial sourcing of raw materials to manufacturing, distribution, and ultimately delivering the final product to the end user. Understanding the dynamics of international transportation and Incoterms is crucial as they dictate how goods move across borders and how costs, risks, and responsibilities are shared among stakeholders in the supply chain.
Tariff: A tariff is a tax imposed by a government on imported goods and services, designed to regulate trade and protect domestic industries. Tariffs can influence international transportation costs, pricing, and the overall flow of goods between countries. By increasing the cost of foreign products, tariffs aim to make domestic products more competitive in the marketplace.
Transportation insurance: Transportation insurance is a type of coverage that protects goods and cargo while they are in transit from one location to another, covering potential risks such as loss, theft, damage, or destruction. This insurance is crucial in international trade, as it provides financial security and peace of mind for businesses dealing with logistics across various regions and modes of transport.