Following the interest in the Incoterms post that I shared a while back, I reflected on the most common situations I have been faced with, and what caused them. The shared post clearly lists the passing of risk in the various Incoterms, yet why is it that they are frequently poorly used?
1) Lack of knowledge?
Sadly, lack of experience is the most common reason, and the easiest to avoid, in my experience. In my corporate life, I have been through no fewer than 4 different corporate Anti-bribery and Corruption trainings, yet not a single one for Incoterms. In two companies I developed materials to train and update teams, yet in others, my offer was not taken up. Were those companies less risk averse? No, but the companies who chose to train, were those where senior management were well aware of the consequences of using an Incoterm incorrectly. Allied with this is that, Incoterms change, yet few companies make a rule of regular training on Incoterms for their Sales, Purchasing, Finance, Legal and Logistics teams.
2) “It’s what the customer wants”
What most negotiating teams fail to appreciate is, that most of the times, the customer’s/supplier’s knowledge and appreciation of Incoterms is patchy, at best. Even some of the largest companies in the world have been known to request an Incoterm that would have been impossible to fulfil, in the strict interpretation of the ICC rules.
In discussions with sales or purchasing teams, I have been given the following reasons:
“The customer/supplier is too powerful” – subtext ‘we need this business/product, and we will just have to accept the business risk’
“If we don’t agree to it, then our tender will be disregarded” – see previous subtext
“That’s what we did last time” – Incoterms change, and perpetuating a risky situation, is never a good thing
“Ok, we know that EXW means FCA in reality” – subtext ‘we will knowingly expose the company to risk, anything for a quiet life’
“It’s on the Letter of Credit” – subtext ‘it will be a pain and cost money to change, so we’ll accept the risk’
Purchasing and Sales negotiations with powerful companies, can be challenging, but agreeing to an unworkable Incoterm, puts both companies at risk. It’s best to use these opportunities for discussion and determining the conditions around the delivery terms.
3) Incomplete Master Data?
When documents are produced from an ERP, it is not unusual for master data, either on the Customer, Supplier, or the contract not to have been set up properly. Master data is often viewed as a pain to maintain, a “black box”. It need not be this way, with the correct training, and trust. Upon investigation, the I have come across the following statements:
“Oh, the Data Maintenance team look after that” – Subtext ‘not my problem, I hope those folks know all the contractual details of the orders I’m dealing with’
“Well, the place changes, so we leave it blank” – subtext ‘we’re covering all eventualities, but know that it’s not how it should be done’
“But I haven’t got access to that field” (from those who generate the paperwork) – subtext ‘we don’t trust our staff to make sure that the Incoterm is used correctly’
While some companies have a robust, audited review policy, far too many do not. When coupled with a lack of appreciation of the legal implications of Incoterms, this exposes companies to unnecessary risk.
So, what should companies do?
Treat Incoterms with the same level of respect and training as they do Anti-bribery & corruption
Ensure that Master Data is accurate and regularly audited
Not negotiate Incoterms that they know are incorrect, or cannot meet
Issue documentation where Incoterms are used incorrectly
An incorrect Incoterm, may not result in incarceration, yet it has the power, through litigation, to wipe six-figure sums off the bottom line. It’s time to recognise the risk and do something about it.
Further reference:
ICC - https://iccwbo.org/
Brief Incoterms 2010 overview - https://www.morethanshipping.com/incoterms-an-overview/
Common Mistakes - https://www.incotermsexplained.com/the-incoterms-rules/common-mistakes/
ps. Constructive comments and insights, as ever, are most welcome.
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