SIGNIFICANCE OF INCO TERMS IN SUPPLY CHAIN MANAGEMENT FOR REDUCTION OF PROCUREMENT COST B VISHNU Pursuing PGDMM from IIMM & CMA-Intermediate, M.E (I.E) & B.E (MPIE) Email: [email protected] Abstract - This paper is prepared & submitted with an intention to explain the importance of INCO terms 2010 and also play significance role in reduction/optimization of procurement cost for procurement of various materials such capital expenditure items, consumables ( lube oil, HF HSD, HSD, Chemicals, Liquid nitrogen, gases, calibration gases, PPE items etc ), spares (mechanical, electrical, instrumentation), project items ( static & rotary). Further, this paper shall provide details about buyer & seller obligations for import & export of materials and also cost analysis charts for easy understanding of buyer & seller obligation of risk, cost, document submission, custom clearance, loading & unloading, cargo readiness notices, transport document and inspection of goods under various INCO Terms 2010. Keywords - INCO (International Commercial Terms) I. INTRODUCTION 13. Pre-shipment inspection (mandatory at country of origin) 1.1 INCO terms are a set of uniform rules 14. Pre-shipment of inspection (mandatory as law codifying the interpretation of trade terms of importing country) defining the rights and obligations of both 15. Export license ( if required), customs clearance buyer and seller in an international transaction. (export) and export duty if any. INCOTERMS are drafted by the international 16. Miscellaneous cots e.g. Octroi , local taxes, Chamber of Commerce (ICC). excise duty, VAT, CST etc at origin. 1.2 INCOTERMS 2010 is adopted in major 17. Transport documents fee ( B/L, MTC, AWB trading countries. Eleven INCO Terms enable fee) payable to carrier for obtaining transport the business person to select the most suitable documents terms for company needs. 18. Import license, custom clearance (import) and 1.3 INCOTERMS are designed to arrange for the import duty if any transfer of risk from seller to buyer at an 19. Miscellaneous cots e.g. Octroi , local taxes, convenient place. excise duty, VAT, CST etc at destination. 1.4 INCO TERMS define obligations of buyer & 20. CFS charges if any at final destination. seller such as 1.5 In order to ensure proper selection of INCO 1. Transportation from factory to place of terms, buyers and sellers are expected to look delivery beyond INCO TERMS 2010 publication i.e. 2. Insurance form factory to place of delivery What type of transport document (B/L, MTD, 3. Export license & other export authorization (if and AWB) will be ideal for the transaction. required) What type of logistics service provider one 4. Security clearance payable to carrier at origin must use 5. Security clearance at destination Which will be the “named place” for each of 6. Information required for insurance e.g. carrier the INCOTERMS details, vessel age & registration certificate How and when the payment and banking payable to carrier transaction will take place 7. Loading of cargo on trailer or rail wagon at Buyer and seller must have good knowledge of seller premises import/export procedure and operations. 8. Discharge of cargo from seller’s means of transport at place of delivery II. INTERNATIONAL COMMERCIAL TERMS 9. Loading of goods mean of transport (main (INCO) TERMS carriage) 10. Pre-shipment checking i.e. quality, weighing, 2.1 What are INCOTERMS 2010 :- INCO Terms are measuring, counting etc classified based on nature of shipment in to four 11. Documents e.g certificate of origin, packing group namely E , F ,C & D and are as under list, legalization of documents etc required by buyer for import clearance. 12. Pre-shipment inspection as per buyer’s requirement ( as per contract/PO) Proceedings of SARC International Conference, 03rd December, 2017, Chennai, India 19 Significance of Inco Terms in Supply Chain Management for Reduction of Procurement Cost 2.3 Difference between INCO Terms 2000 & 2010 2.2 Details of detailed INCO TERMs in pictorial Yellow colour indicates in the above table is deleted representation is as under :- and green colour indicates in the above table is added. 2.4 Frequently used terms in INCO Terms 2010 are as under:- 2.5 Place of Delivery: - Place where risk of loss of cargo or damage to cargo passes from seller to buyer. 2.6 Transport Documents :- 2.6.1 Bill of Lading (B/L) 2.6.2 Multimodal Transport Document (MTD) or Combined Transport Document(CTD) 2.6.3 Railway Receipt (R/R) 2.6.4 Truck or Lorry receipt (L/R) 2.6.5 Air Waybill (AWB) 2.6.6Forwarder’s Cargo Receipt (FCR) 2.6.7Sea Waybill (SWB) etc. 2.7 Risk & Cost under various INCO Terms 2010 Proceedings of SARC International Conference, 03rd December, 2017, Chennai, India 20 Significance of Inco Terms in Supply Chain Management for Reduction of Procurement Cost 2.8 EXW (EX WORKS) Seller is not required to pay any charges for EXW (insert named place of delivery) Inco terms this document. 2010(This rule must be used for road, rail or air as a Charges if any will be on account of buyer e.g. single mode of transport or road ,rail, air and sea as B/L or transport documentation fee payable to multimodal transport) carrier Word of Caution: Inspection of Goods Ex Works is suitable for domestic trade. The buyer must pay for pre-shipment For international trade, FCA is more inspection appropriate. 2.9 FCA (FREE CARRIER) The buyer needs to arrange customs clearance FCA (insert named place of delivery) Inco terms hence not in position to customs clear goods at 2010 (This rule must be used for road, rail or air as a country of origin. It is advised not to use single mode of transport or road, rail, air and sea as EXW. Under these circumstances FCA will be multimodal transport) more suitable. The seller’s obligation is least in EXW. Word of Caution: Place Where the Risk Passes from Seller to In this term, as the freight is paid by buyer. Buyer: Many people use wrong incoterm. Risk passes at the seller’s premises Example: “Ex Works” means that the seller delivers “FOB New Delhi ICD” or “FOB Pune ICD” is goods at the seller’s premises. wrong usage Freight (Main Carriage) & Insurance: “FCA New Delhi ICD” or “FCA Pune ICD” is The buyer is responsible to arrange insurance more appropriate and carriage from seller’s premises. FOB must be used only when ocean transport Loading & Unloading: is involved The sellers need not load the goods on means FCA can be applied in two situations. of transport e.g. truck, trailer or rail wagon. If Place where the Risk Passes from Seller to Buyer: the seller does load the goods it is done at the Situation 1 buyer’s risk and expense. The seller delivers the goods to the carrier nominated Customs Clearance: by the buyer at the seller’s premises. (Or) Export Situation 2 The seller need not customs clear the goods for The seller delivers the goods to the carrier nominated export. by the buyer at a named place e.g. air cargo terminal, Import rail and road terminal. The buyer must clear import consignment. Freight (Main Carriage) & Insurance: Cargo Readiness & Notice: Situation 1 The seller must keep the goods ready for The buyer is responsible to arrange carriage (pay delivery on the agreed date or during the freight) and insurance from seller’s premises. agreed period. Situation 2 The seller must give the buyer a notice of The buyer is responsible to arrange carriage (pay cargo readiness to enable the buyer to take freight) and insurance from air cargo terminal, rail delivery of goods. and road terminal. The buyer must notify seller the The buyer must give required notice to seller name and contact details of nominated carrier and about the date and time of pickup. place where cargo must be delivered. The buyer must reimburse the seller additional Loading & Unloading: costs incurred if buyer fails to nominate carrier Situation 1 or carrier fails to accept goods for Named Place- the seller’s premises. transportation or the carrier fails to give The seller must load the goods on the means of sufficient notice to the seller. transport e.g. truck, trailer, container, rail wagon Information & Documents Required provided by the buyer. For Import Clearance:The buyer must reimburse Situation 2 the seller for all costs and charges incurred by the Named Placed –other than the seller’s premises e.g. seller in obtaining/providing documents and air cargo terminal, rail and road terminal. information required for import clearance e.g. The seller must place the vehicle at named air cargo certificate of origin. terminal, rail and road terminal. Nominated carrier or Transport Document (MTD/CTD, LR, terminal operator must discharge goods from the RR): arriving truck, trailer, rail wagon on account of buyer. Buyer or carrier nominated by buyer must give Customs Clearance: proof of delivery to seller e.g. RR, LR or Export MTD/CTD upon taking delivery. The seller must clear the goods for export. Proceedings of SARC International Conference, 03rd December, 2017, Chennai, India 21 Significance of Inco Terms in Supply Chain Management for Reduction of Procurement Cost Seller must obtain export license if required Example: “C&F New Delhi” or CFR New Delhi” is and pay export duty if any. wrong usage. Import First of all C&F is not used anymore and CFR The buyer must clear import consignment. is used only for port to port shipment. Cargo Readiness & Notice: New Delhi is not a sea port therefore “CPT Situation 1 New Delhi” will be more appropriate. The seller must keep the goods ready for Place Where the Risk Passes from Seller to Buyer: delivery on the agreed date or during the When CPT is used, the seller pays the freight till final agreed period and give notice of cargo destination however the risk passes from seller to readiness to buyer.