International Commercial Terms or Incoterms are a set of commercial terms published by the International Chamber of Commerce (ICC) that state the rights and responsibilities of both buyer and seller in international trade. There have been eleven different types of incoterms since its revision in 2010. The ICC revises the incoterms every ten years. Evidently, a precise understanding of the incoterms help uninterrupted global supply chain management.
Incoterms are very significant in the global trade scenario. Undermining its importance may negatively impact the entire trade process. Here we breakdown a few points with respect to the role of incoterms to prevent disruption in the global supply chain.
Ignorance of Incoterms Lead to Chaos
As mentioned above, both buyers and sellers should know how incoterms differs in each aspect concerning trade. Ignorance of incoterms can create problems in the supply chain process pertaining to payment and delivery of goods. Furthermore, it may cause excessive cost, poor inventory management and appalling customer interactions. Not knowing the intricacies involved in incoterms, it would certainly affect the flow of goods right from the point of distribution to the customer’s doorstep.
Incoterms Help Minimise Risk
Usually, it is perceived that language and connotations in one location may not be understood easily in another location. To a large extent, it acts as a barrier in international trade. However, with incoterms in place, it clearly eliminates this downside as it defines precisely the responsibilities of each of the parties to the contract. The incoterms removes all differences in language by providing the parties the same definition for each term concerning global trade and helping them understand their roles and responsibilities for carrying out the trade deal with less chaos.
Helps Standardise Shipment
Incoterms has a great role to play in standardising the process of international shipment in an orderly manner. Absence of incoterms would lead to issues concerning language barriers particularly in the shipping and transportation process. Incoterms assists in removing all such irregularities and help shipment done according to the standard practices and thereby facilitating an undisrupted supply chain management. Indeed, incoterms is as important as the parties to the contract; if they do not exist there is no trade and so does the case with incoterms as well.
Incoterms also defines the financial aspects of a trade. It is required to ensure prompt payment of goods shipped. In case incoterms are not used as prescribed, odds are that the parties involved would suffer from lack of clarity in interpreting the related terms regarding their responsibilities and also affects the global trade itself. Furthermore, the incoterms offers competitive advantages as well. It prevents one party from taking advantage of the other for instance, making changes in local terminology. Therefore, the likelihood of unfair trade practices are avoided thoroughly when incoterms are properly understood and used in global trade.
Global trade is an activity involving a lot of complex processes. The presence of incoterms is a real boon as it provides a standardised set of rules defining the smooth execution of these trade related activities. It is very evident that every party to the contract should have a thorough understanding of the shipping incoterms alongside responsibilities of buyer and seller incoterms for facilitating an undisrupted global supply chain.