Guest Post: Allocating Risks and Costs Between Shippers
Our guest post today comes from Dr. Andrew Stapleton, who is Professor of Supply Chain Management at the University of Wisconsin-La Crosse. This is a great follow up to our post on the shipping industry two days ago.
When buyers and sellers (i.e., shippers) transact to move goods in containers across the globe, the shippers must concern themselves with who will take the risk and cost of delivering those goods from the seller’s factory to the buyer’s door. Since the 1930’s conference on maritime and admiralty liability in The Hague, the carrier’s liability has been limited to $500 per container or “package.” So if the carrier loses your container overboard in a storm (i.e., flotsam), or purposefully jettisons your container (i.e., jetsam) to save other assets, that carrier simply owes the shipper $500. Who covers the remainder of the value?
That is where INCOTERMS come in. INCOTERMS are a set of 11 shipping terms that clearly outline the rights, duties, obligations, and responsibilities of both buyers and sellers in transportation. FAS (Free Alongside Ship), FOB (Free On Board), CFR (Cost and Freight paid), and CIF (Cost, Insurance, Freight paid) are INCOTERMS to be used for water transport. EXW (Ex Works), FCA (Free Carrier), CPT (Carriage Paid To), CIP (Carriage, Insurance Paid to), DAP (Delivered At buyer’s named Place), DAT (Delivered At buyer’s named Terminal), and DDP (Delivery Duty Paid) are INCOTERMS for use in any mode or modes of transport.
The most commonly used INCOTERM is FOB, but this is also the most often misused term. Under Free on Board, the seller is free of obligation once the goods are on board the departing vessel at the port of export. The vast majority of shippers continues to use/misuse FOB, creating a “risk gap” and leaving themselves vulnerable. Ex Works represents the most obligation to the buyer and the least obligation to the seller. Firms such as Wal Mart and John Deere prefer transacting under EXW because it allows their supply chains the greatest visibility and control. For instance, under FOB, the inland Chinese supplier has the option of designating any land carrier to move the goods to the port, often leading to unnecessary surcharges and questionable kickbacks. EXW eliminates this opportunity.