Incoterms and the Organization

Trade compliance is not the only function within an organization that is concerned with Incoterms. In fact, almost every aspect of supply chain is in someway or another affected by it.

Hence, when the organization is doing any review of Incoterms or making any changes to the way it does business (with relation to the terms), all supply chain functions should be consulted for feedback. However, the feedback gained is only useful if the supply chain has a good level of awareness and understanding of the latest version of the Incoterms and what they mean.

Let’s look at how various function within supply chain & logistics are impacted by the terms:

  1. Trade compliance is interested in the terms to ensure that Customs declarants provide the correct value to Customs. Since the accepted basis of valuation for Customs in different countries can vary, it is important to ensure that the value of shipments is never over or under declared as it can lead to wrongly paid duties and taxes.
  2. Logistics needs to know how to interpret Incoterms, since they need to make the necessary arrangements for pick-up and delivery, depending on which term is used. When logistics is unaware of what they terms mean, a lot of misunderstandings can happen, resulting in costly mistakes such as duplicate bookings being made for freight.
  3. Procurement needs to know what the terms mean when they source for suitable vendors. For example, if the vendor being considered has a strict policy about only selling on EXW terms, but the company has a strict policy of never buying in EXW terms, it may be a clear deal-breaker. Unfortunately, some vendors do not clearly spell out these terms in their tender contracts.
  4. Finance needs to know about the terms in order to correctly book revenue. Although the Incoterms DO NOT dictate the terms for revenue recognition, many finance departments use the point of delivery as the basis for recognizing revenue. Hence, it becomes important for Finance to know about the terms. Finance also needs to understand the terms when setting prices and assigning peg rates to account for freight and other costs.
  5. Sales teams need to know about the terms to avoid making promises they cannot keep to customers. For example, a customer may request for door step delivery using DDP, however the company may not be able to sell on such terms for various reasons. The most common reason would be that the company does not have a legal ability to act as importer of record. If the sales team were to make such promises, there would be many challenges to meet the orders when they come.
  6. Customer service needs to have a level of understanding about Incoterms that allows them to respond to customer queries quickly. For example an ad hoc or one time customer may call to ask about import licenses. The customer service representative must be able to explain who is liable to apply for these licenses, depending on the terms being used.

A final note about Incoterms and the organization

Incoterms can be a complex topic. Although the terms are very comprehensively written, there are many areas of concern that they do no cover. Moreover, there are many myths about Incoterms that stubbornly persist despite the years. Due to a lack of understanding – compliance or finance professionals may insist on adhering to these myths and create unnecessary complexity for the organization. It is critical to avoid these mistakes that may increase the cost of doing business in an organization.

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