How Real-Time Data Enhances Your Incoterms in Risk Management
In the complex world of global trade, Incoterms play a pivotal role in defining the responsibilities, risks, and costs shared between buyers and sellers. But while these standardized terms provide clarity, managing the risks associated with high-value and temperature-sensitive goods requires more than just choosing the right Incoterm—it demands the power of real-time data.
From monitoring temperature-sensitive cherries under DAP to ensuring seamless deliveries of hazardous chemicals under CIF, real-time monitoring transforms how businesses handle logistics. It mitigates risks and ensures compliance and empowers sellers and buyers to negotiate better prices, optimize operations, and stand out in competitive markets.
In this article, we’ll explore how leveraging real-time data with Incoterms can enhance your supply chain strategy, reduce costs, and build trust with your partners.
What Are Incoterms and Why Do They Matter?
Introduced in 1936 by the International Chamber of Commerce (ICC), Incoterms define the responsibilities between buyers and sellers regarding costs, risks, and logistics during the transportation of goods. They clarify:
Who pays for freight, insurance, and customs duties?
Who bears the risk at various stages of transit?
Where does responsibility shift from seller to buyer?
These terms are updated every ten years or so to reflect evolving international trade practices, with the latest update in 2020.
Understanding Incoterms ensures compliance, mitigates risks, and streamlines negotiations for businesses that deal with temperature-sensitive and high-value cargo—such as pharmaceuticals, luxury goods, and fresh produce.
The incoterm chart provides a clear snapshot of the division of responsibilities for key processes like loading, insurance, customs, and delivery. Use it as a quick reference guide during contract negotiations or logistics planning.
Decoding 5 Incoterms for Export/Import and Supply Chain Managers
Navigating the responsibilities between buyers and sellers in international trade can feel overwhelming. To simplify, here’s a closer look at key Incoterms relevant to the supply chain industry, such as FOB, EXW, CIF, DAP, and DDP. These terms outline who manages costs, risks, and logistics responsibilities during a shipment’s journey.
1. FOB (Free on Board):
Definition: The seller’s responsibility ends once the goods are loaded onto the vessel at the designated port. From that point, the buyer assumes the risk and cost of transportation.
Use Case: Ideal for buyers who have established shipping arrangements and wish to control the transportation process from the port of departure.
2. EXW (Ex Works):
Definition: The seller’s responsibility ends at their premises. The buyer handles everything from transportation to customs clearance.
Use Case: Suitable for buyers with established logistics networks but increases their risk and cost management burden.
3. CIF (Cost, Insurance, and Freight):
Definition: The seller is responsible for covering freight and insurance costs until the goods arrive at the destination port, but the risk transfers to the buyer once the goods are loaded onto the vessel.
Use Case: Ideal for high-value, perishable products where sellers want to ensure quality and safety during transit, adding value and trust for buyers.
4. DAP (Delivered at Place):
Definition: The seller delivers the goods to the buyer’s location but excludes customs clearance.
Use Case: A balanced option for temperature-sensitive goods, ensuring timely delivery without assuming all clearance responsibilities.
5. DDP (Delivered Duty Paid):
Definition: The seller assumes all costs and risks until goods reach the buyer, including shipping and customs clearance.
Use Case: Preferred for high-value cargo where buyers demand a seamless experience.
Why Real-Time Data Is Vital for Risk Management
Real-time monitoring solutions enhance your supply chain by:
Mitigating Risks: Proactively address issues like temperature spikes before they escalate.
Ensuring Compliance: Meet regulatory standards for temperature-sensitive goods.
Streamlining Communication: Prevent disputes with clear, data-backed insights.
Reducing Costs: Lower insurance premiums and avoid delays with precise data.
Use Cases: Real-Time Monitoring in Action
Real-time monitoring boosts visibility, mitigates risks, streamlines operations, and builds partner trust. These examples show its value in protecting shipments and optimizing processes, from hazardous chemicals to perishable cherries.
Mitigating Risks and Ensuring Compliance in Real-Time
As an importer, shipping under EXW terms places full responsibility for transport, customs, and risks on you. Imagine a pharmaceutical shipment facing a mid-journey temperature spike. Without traceability, you might only discover the issue when it’s too late.
Real-time monitoring tools track temperature, humidity, and access data while providing comprehensive reporting to share with all stakeholders, enhancing process efficiency. These tools ensure compliance and peace of mind by delivering alerts for immediate action to safeguard shipment and mitigate risks.
Securing Safety and Cutting Insurance Costs
A chemical manufacturer ships hazardous materials to a plant in Europe under CIF terms. During transit at the transshipment port, the container is unplugged during the transfer between vessels. The monitoring system detects this issue and triggers an alert. The logistics team quickly coordinates an inspection and restores the container's condition, preventing product damage, explosions, spills, or environmental harm, while ensuring compliance with regulations.
Thanks to this system, the company negotiates with its insurer to lower annual premiums, arguing that real-time monitoring actively mitigates risks and minimizes incidents backed by historical data and reporting. The insurer agrees to more favorable terms, saving the company up to 15% annually on coverage costs.
Preserving Quality and Expanding Market Share
A cherry exporter ships a large batch to China under DAP terms. During transit, the monitoring system detects a temperature increase caused by a brief cooling system malfunction. An alert allows the seller to collaborate with the logistics provider to restore proper conditions, ensuring the cherries maintain their freshness and quality.
Upon delivery, the buyer in China acknowledges the shipment’s excellent condition and recognizes the added value of real-time monitoring. This proactive approach allows the seller to negotiate better pricing for future shipments, strengthening their position and expanding their market presence in the competitive Chinese market.
Overcoming Challenges in Applying Incoterms
Although Incoterms provide a standardized framework, challenges can still disrupt global trade if not carefully managed. Misunderstandings, delays, and risks are common hurdles, especially in high-stakes industries like the cold chain and high-value goods.
Key Challenges:
Miscommunication: Differing interpretations of Incoterms can lead to disputes.
Customs Delays: Poor management of clearance responsibilities often causes bottlenecks.
Risk Exposure: A lack of real-time monitoring increases vulnerability to claims disputes.
To address these challenges, businesses must ensure clear agreements and adopt advanced tools like real-time monitoring solutions such as Frigga Tech to improve visibility, accountability, and compliance, minimizing potential disruptions.
Are you ready to improve your supply chain management? Reach out to our team of experts today to find the perfect solution for you.
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01-02-2025
