What are Shipping Terms?
Shipping terms are specific terms and conditions that define the responsibilities, risks, and costs associated with the transportation of goods from the seller to the buyer. These terms are crucial in international trade as they help prevent misunderstandings and disputes.
The most commonly referenced shipping terms are the Incoterms (International Commercial Terms), which are published by the International Chamber of Commerce (ICC). However, there are also other shipping terms and concepts used in logistics and freight forwarding.
What Are the 11 Incoterms (Incoterms 2020)?
As previously mentioned, these are standardized international trade terms that define the roles and responsibilities of buyers and sellers during the shipping process. The 2020 Incoterms include:
- EXW (Ex Works)
EXW places the maximum responsibility on you as the buyer. The seller makes the goods available at their premises. You cover all costs, including transport and insurance, and bear the risk from the seller’s location onward.
- FCA (Free Carrier)
FCA requires the seller to deliver the goods to a carrier or another party at a named place. Risk passes to you once the goods are delivered to the carrier. The seller pays for transport to the handover point, and you take over from there.
- CPT (Carriage Paid To…)
CPT means the seller pays for carriage to the destination. The critical part here is that the risk transfers to you once the products are handed over to the carrier. You’ll have to pay for any insurance beyond the initial handover point.
- CIP (Carriage and Insurance Paid To…)
CIP is similar to CPT but includes insurance. The seller pays for the carriage and insurance to a specified destination. Risk shifts to you once the carrier takes possession of the cargo. The seller ensures coverage to protect the goods during transport.
- DAP (Delivered At Place)Â
With DAP, the seller covers all costs to get the goods to a specific location, not unloaded. Risk transfers to you once the goods arrive at the named place of destination. You, as the buyer, handle unloading and any subsequent steps.
- DPU (Delivered At Place Unloaded) – This replaced DAT (Delivered at Terminal) from Incoterms 2010
DPU places the risk and cost on the seller until the goods are unloaded at a specified destination. This Incoterm is convenient for you since the seller handles almost the entire shipping process, easing your workload.
- DDP (Delivered Duty Paid)
DDP is favorable for you as the buyer. The seller is responsible for all costs, including import duties and taxes, until the goods reach the final destination. Risk is with the seller until you receive the shipment. This term minimizes your logistics hassle.
- FAS (Free Alongside Ship)
With FAS, the seller gets the goods alongside the ship at the port of shipment. From there, risk shifts to you. The seller covers costs up to the ship’s side, and you handle loading, shipping, and insurance.
- FOB (Free On Board)
FOB specifies that the seller delivers the goods on board a vessel chosen by you. Risk passes when the goods are on board. You cover shipping, insurance, and other costs post-loading. This term clarifies precise responsibilities at the loading point.
- CFR (Cost and Freight)
With CFR, the seller covers the cost and freight to bring the goods to the destination port. However, unlike CIF, insurance isn’t included. Risk transfers to you when the cargo is on the ship. It’s essential to arrange your insurance to protect against potential losses during transit.
- CIF (Cost, Insurance, and Freight)
Under CIF, the seller pays for the cost, insurance, and freight to bring the goods to the port of destination. Risk transfers to you as the buyer once the cargo is loaded on the ship. The seller handles shipping and insurance, giving you peace of mind about transport safety until it reaches your port.
List of Other Common Shipping Terms
- Air Freight (Air Cargo)
Air freight, also known as air cargo, refers to the transportation of goods by aircraft. This method is often used for time-sensitive shipments as it’s the fastest way to ship internationally. While more expensive than sea or land freight, it’s ideal for high-value or urgent consignments.
- Backorder
A backorder occurs when a product is out of stock but still available for sale. Customers can place an order, and the item will be shipped once stock is replenished. This helps in maintaining sales and reducing customer dissatisfaction.
- Batch Fulfillment
Batch fulfillment is processing orders in batches rather than individually. This method is efficient for large volumes of orders, reducing handling time and improving warehouse productivity. It’s especially useful during peak seasons.
- Bill of Lading (BOL)
The Bill of Lading (BOL) is a legal document issued by a carrier to a shipper. It details the type, quantity, and destination of the goods being carried. The BOL acts as a shipment receipt and a contract between the shipper and carrier, ensuring accountability.
- Blind Shipping
In blind shipping, the shipper and receiver are unaware of each other’s identities. This is used to protect the privacy of sellers who don’t want competitors to know their suppliers or customers. It helps in maintaining business confidentiality.
- COD (Change of Destination)
Change of Destination (COD) allows for altering the delivery location of a shipment that’s already in transit. This can help adapt to unforeseen circumstances or customer requests, providing flexibility in logistics operations.
- Container Freight Station (CFS)
A Container Freight Station (CFS) is a facility where cargo is consolidated or deconsolidated before being shipped or after arriving at a destination. It plays a role in customs inspections and facilitates efficient handling of Less than Container Load (LCL) shipments.
- Dimensional Weight
Dimensional weight is a pricing technique for freight based on the volume of a package rather than its actual weight. This method helps carriers maximize their cargo space usage. Calculating dimensional weight prevents high-volume, low-weight items from taking up space without appropriate revenue.
- DDU Shipping
Delivered Duty Unpaid (DDU) means the seller is responsible for transporting goods to a specific location, but the buyer must pay for import duties and taxes. This term clarifies the responsibilities and costs involved in international shipping agreements.
- Freight Forwarder
A freight forwarder acts as an intermediary between the shipper and the logistics services. They arrange transportation, handle customs documentation, and provide storage solutions. Freight forwarders simplify shipping processes and ensure smooth movement of goods.
- Freight Shipment
Freight shipment involves transporting large quantities of goods, typically using ships, trucks, trains, or aircraft. Managing a freight shipment includes planning, tracking, and ensuring timely delivery. Different modes affect speed, cost, and suitable type of cargo.
- Freight Broker
A freight broker connects shippers with carriers. They negotiate freight rates, coordinate logistics, and ensure the efficient movement of goods. Brokers do not own transportation assets; they rely on their networks to find the best shipping solutions.
- Order Fulfillment
Order fulfillment encompasses the complete process of receiving, processing, and delivering orders to customers. Efficient fulfillment involves inventory management, packaging, and shipping. Companies may sometimes outsource this process to third-party fulfillment centers.
- Packing Slip
A packing slip is an itemized list of the contents of a shipment. It helps ensure accuracy, confirming that all ordered items are included. Packing slips also aid in record-keeping and help customers verify their orders upon arrival.
- Shipping Carrier
Shipping carriers are companies that handle the transportation of goods. Examples include FedEx, UPS, and DHL. Selecting the right carrier depends on factors like cost, delivery speed, and shipping route.
- Split Shipment
Split shipment occurs when a single order is divided into multiple shipments. This may happen when items are shipped from different locations or when stock availability varies. Split shipping can ensure faster delivery for parts of the order.
- Self-Fulfillment/In-House Fulfillment
Self-fulfillment, or in-house fulfillment, is when a company manages its own storage, packing, and shipping processes. This can provide better control over inventory and customer service but requires significant investment in warehousing and personnel.