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Incoterms: why are they so important for private label manufacturing?

What are Incoterms?

Incoterms refers to International Commercial Terms, and it’s a series of predefined commercial terms published by the International Chamber of Commerce (ICC) and relates to international commercial law. Founded in 1919, the ICC is the most important business association in the world, representing more than 45 million companies in over 100 countries around the world, and was created to allow the free flow of capital in open markets for goods and services. Now, these rules represent the world’s essential qualifications for the sales of goods, controlling and guaranteeing the standard quality for purchasing, packaging, labeling, or shipping, and provide direction to those participating in the importation and exportation of goods as services.

The use of these three-letter trade terms is encouraged by trade councils, courts, and international lawyers since it helps communicate the tasks, costs, and risks of a shipment of goods, to multiple nations. Essentially, these terms are used to make clear who is responsible for paying and managing the various steps of the shipping process. These steps include:

  • Transportation of the shipment
  • Cargo insurance
  • Export clearance
  • Export formalities
  • Customs clearance and documentation
  • Import duties and taxes
  • Cargo unloading and delivering

Not only that, but they also assure who – between the seller and the buyer – is responsible for loss or damage in the shipping process; liability for export compliance obligation; and cost of a potential customs delay. This way, the Incoterms make sure that every party knows exactly their responsibility.

What are the Incoterms?

Incoterms are divided and classified into a few categories and have to do with the way of transportation and shipment. These terms are important to clarify who is responsible for what in the delivery of the goods, and at what point the responsibility switches from one party to the other, avoiding conflict and legal processes, and making the importation and exportation a smooth and clear process.

Any mode of transportation

EXW – Ex Works (named place of delivery)

The seller delivers the goods at a specified space for the buyers to pick up, often at a factory or depot storage unit. The seller must help with documentation and security requirements, but the buyer is the one responsible for automated export system filling and export compliance. Depending on the country, like the United States, for example, the seller can still be liable for correct export documentation and clearance. This incoterm places the maximum obligation on the buyer and the minimum obligation on the seller.

FCA – Free Carrier (named place of delivery)

The seller delivers the goods and is responsible for export clearance and the buyer is responsible for the shipment. The buyer should name the location of delivery and the seller has the responsibility of delivering to said destination, as well as loading the goods into the designated buyer’s carrier.

CPT – Carriage Paid To (named place of destination)

The seller manages the cost and all the processes to ship to the foreign destination point, and the risk of loss or damage is transferred automatically to the buyer once the shipment arrives at the port, making it unattractive for some buyers.

CIP Carriage and Insurance Paid To (named place of destination)

Similar to CPT, but in this case, the seller will also obtain insurance for damage or loss of goods while in transit. The CIP requires the seller to obtain insurance for 110% of the contracted goods.

DAP – Delivered at Place (named place of destination)

The seller arranges and pays for the delivery of goods to the destination, and the buyer is responsible for import clearance, unloading, and in-country transport.

DPU – Delivered at Place Unloaded (named place of destination)

Similar to DAP, the seller is also responsible for unloading the goods when they arrive at the destination.

DDP – Delivered at Duty Paid (named place of destination)

The seller delivers all the goods to the destination, while also being responsible for any foreign customs clearance and potential delays.

Sea and Island waterway transport

These next four Incoterms are used when the transportation and delivery happen exclusively by water and through ships, not passing through the land at any moment.

FAS – Free Alongside Ship (named port of shipment)

The seller makes the delivery of the goods to a port, and it’s responsible for all the export documentation and clearance. Usually used for bulk or non-container shipment

FOB – Free on Board (named port of shipment)

The seller delivers the goods when they are on the shipping vessel while being responsible for documentation and clearance. In this case, the seller might not be responsible for the bill of landing, and the buyer is typically responsible for those expenses. Besides that, the seller is also responsible for charges such as terminal charges and the risk of damage and loss.

CFR – Cost of Freight (named port of destination)

The seller pays for all costs related to the transportation of the goods to arrive at the destination country’s port. As soon as the goods arrive and are put into the carrier of the buyer, they become the responsibility of the buyer, who should also be responsible for every cost from then on.

CIF – Cost Insurance and Freight (named port of destination)

Similar to CFR, but includes the seller’s responsibility to provide insurance for damage or loss of the goods while they are still in transit. Same as the previous, the seller is only responsible for the goods while they are in transit, and as soon as the delivery happens, the goods become the responsibility of the buyer.

Why are they so important for private label manufacturing?

When starting your own business through private label production, and the search for manufacturers that fit your taste and can bring your idea into reality, sometimes the perfect manufacturer is in another country or even on another continent. When your manufacturer is far from you, and the production process involves the importation and exportation of goods, it’s important to know all the commercial agreements and be aware of all the incoterms. With Incoterms, you can be sure of your own scope of responsibilities, as well as the responsibilities of any other seller or buyer involved in the process. Essentially, the Incoterms are here to make clear who is responsible for each part of the delivery and transportation, which costs are the responsibility of who, and when the seller’s commitment ends and the buyer’s starts.

Create your own product line with Wonnda – the European platform for white label, private label, and contract manufacturing

Now that you are aware of all the Incoterms involved in the importation and exportation of goods, it’s time to start your very own private label production, with manufacturers from all over Europe.

Are you interested in launching your own brand but don’t know how to get your production up and running? Whether you’re an aspiring startup entrepreneur with an innovative product idea, or an existing retailer looking to diversify your assortment with your own products, launching your own brand through a private label or contract manufacturing could be just the step you need to take your business to the next level.

Here at wonnda, we work with top European producers for private labeling and contract manufacturing. The first step in getting your supplement product to market is probably the most crucial – finding the right production partner for your project. The great advantage of wonnda.com is that you can simply let us do the heavy lifting. Just tell us quickly about your project or product idea. We will then approach the most suitable producers for your project and connect you with them. Sounds interesting? Then just fill out the form or send us an email with your desired product.

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