The Incoterms Square

Incoterms, officially known as “International Commercial Terms”, are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) that are widely used in international commercial transactions and procurement processes.

There are 11 three-letter trade terms related to common contractual sales practices.

Here they are: EXW, FCA, FAS, FOB, CFR, CIF, CPT, CIP, DAT, DAP and DDP.

These terms are intended primarily to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods as they move from seller to buyer.

LWL034 Incoterms Who Pays for WhatFor anyone in supply chain (the folks in Procurement or in Logistics), these 11 incoterms can be a jumble of letters with no real meaning. Yet these terms probably impact us the most!

An easier way to think of these 11 incoterms is to break them down into the 4 categories that these terms represent. Then it becomes easier to understand each and its impact on your sales transaction and your logistics costs.

The 4 categories are:

  1. the single incoterm where the buyer is basically responsible for everything: EXW
  2. the 3 incoterms where the main transportation is paid by the buyer: FCA, FAS and FOB
  3. the 4 incoterms where the main transportation is paid by the seller: CFR, CIF, CPT, CIP
  4. the 3 incoterms where the seller delivers the goods to the buyer’s side: DAT, DAP and DDP

Each category reflects varying degrees of cost and risk for the buyer and seller.

In the first three categories, the seller delivers by handing over the goods to a carrier somewhere on the seller’s side, that is, within the seller’s country. Depending on the terms, the place could be the seller’s premises, a carrier’s terminal, a forwarder’s warehouse, or alongside or on board a ship. Revenue can be recognized as soon as this happens.

The “C” terms are the most seller-friendly, as they give the seller the ability to select the carrier and forwarder and they allow revenue recognition as soon as the goods are handed over to that carrier or forwarder, even though it’s on the seller’s side (in the seller’s country).

The fourth category, often called “arrival incoterms,” is a destination contract term, since the seller delivers somewhere on the buyer’s side (to the buyer’s country).

Delivery on the buyer’s side means deferred revenue recognition for the seller. It also theoretically implies tracing every shipment to determine the date the goods physically arrive at the destination.

We developed this simple square to help you to better remember these 4 categories of the incoterms.

When you start at the top (EXW) and work your way clockwise around, you move from the incoterms where the most responsibility is on the buyer (the red zones) to those terms where the most responsibility is on the seller (the green zones).

LWL034 The Incoterms Square

Good luck!

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About Lenny

Many years of experience in a Fortune 1000 companies, especially in the logistics and I.T. areas of manufacturing companies. Through process improvements and the use of many of the tools mentioned here, I have been able to identify and implement savings opportunities worth up to $10 million. I hope that some of these real-life stories, suggestions and tools can help you!
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