In an era where large companies tend to outsource all activities away from their core business (security, cleaning, IT outsourcing, etc.), the return to downstream vertical integration redefines, to a certain extent, the limits of this outsourcing.
The multimodal dimension of international transport has "forced" some major customers to redeploy internal logistics resources in order to optimize the cost and efficiency of their supply. This is confirmed in particular by the increased adoption of the FCA Incoterm when concluding contracts with their foreign suppliers. But what exactly is this about and what are the reasons for this trend?
Incoterms, factors in the homogenization of international transport standards
Incoterms (INternational COmmercial TERMS) are international standards that determine the mutual obligations of the seller and the buyer, as well as the allocation of costs and risks, in terms of transport in the context of a purchase or sale contract. These standards are established by the International Chamber of Commerce (ICC) and were last amended in 2010 to redefine the most important relevant scenarios observed. The ten-year review of Incoterms is underway at the ICC; the new standards are expected to be announced in 2019 and will apply from 1 January 2020.
Usually, major principals use these different standards according to their needs, their own capacity but also that of their suppliers. But recently, one of these standards has been recognized for its increasing use in all purchasing segments. Here, we suggest that you specify the reasons why the use of FCA Incoterm takes precedence over EXW, FOB, and DDP.
The pre-routing is in the hands of the seller
On one side, a shift is observed from EXW to FCA. When a company buys in EXW, its supplier should in principle limit itself to making the goods available before picking them up.
It is common for the loading of this merchandise to be carried out by the supplier in question because he has the appropriate tools at his disposal for this purpose. However, the responsibility for any damage resulting from this task often lies with the buyer.
"By switching from the EXW incoterm to the FCA, the supplier will handle customs administrative documents and will more easily justify the departure from the production territory to the local authorities."
Goods must also be cleared through customs before they are shipped and this process is costly, time-consuming and can be complex depending on the rules of the exporting country. As a result, by switching from the EXW Incoterm to the FCA, the supplier will handle customs administrative documents and will more easily justify leaving the production territory to the local authorities. This will relieve the buyer of this task, which requires expertise to acquire and time to devote to it.
In addition, the risks during loading, transit, and unloading of the goods will be borne by the supplier who has a better knowledge of his country, his product and the potential risks associated with its transport.
In fact, our studies indicate that the use of EXW Incoterm is now limited to national orders and is still used in the rare cases where the supplier does not have sufficient internal "logistics and customs" skills.
All inclusive' is becoming rarer
On the other hand, the decision to rotate from the DDP to the FCA is becoming more and more frequent. Indeed, the multimodal dimension of international transport makes it possible to split the logistics journey so as not to leave the entire delivery to the supplier in question or to a single transport company, in a logic of risk control, cost optimization, and transport flows.
In practice, when an order is placed under DDP conditions, the supplier will either use an external service provider, whose contracts are rarely as well negotiated as a major client could, or use its internal resources, but will probably not ensure logistical excellence that meets the company's expectations.
Consequently, the "downstream" phase of FCA delivery will either be fully internalized by the principal with its own logistical resources or partially internalized with the intervention of a third party carrier for delivery to a central warehouse in the buyer's country. By taking over the last link in the supply chain, the buyer "mitigates" his risk and can demand more from his supplier in terms of upstream logistics (loading and transit). Controlled transport flows are becoming a strong business requirement in an economy where the demands for speed and responsiveness are ever more stringent.
The use of the DDP Incoterm is therefore restricted to a single order - often for machines, samples or spare parts - and is quickly abandoned when a purchase frequency is established.
Maritime transport: Ubiquitous containerization restricts the use of FOB
FOB incoterm, the closest to FCA, although used exclusively for inland waterway and maritime transport, is also neglected for another reason: FOB is one of the oldest trade terms used since the 18th century in England and is not appropriate for container transport which is becoming the norm.
FOB conditions stipulate that the supplier must deliver the goods on board the ship, but currently, about 80% of world trade is carried out in containers that must be deposited at the container yard or at a freight station. As a result, unless the seller owns the port of origin, he cannot deliver the cargo directly to the ship. In addition, if the goods were damaged during transit, the issue of transfer of responsibility can be a difficult one.
FCA Incoterm has been specifically designed for the containerization of modern shipping and its use implies that the buyer collects the goods at the seller's premises or at another location designated by the buyer.
The total cost of transport can be broken down and, as a result, good control of the supply chain links (including tax) makes it possible to optimize it. But the decision to move towards FCA is not only a decision of the "direct" economy. For example, in the automotive equipment manufacturers sector, it is essential to optimize upstream and downstream logistics flow to meet the classic triptych: cost, quality, lead time. The use of Just-In-Time (JIT) is predominant in this sector. To facilitate the organization of the JIT, the upstream transport flows must be optimally managed because it will facilitate the management of downstream flows. To do this, the milk-run (the "slag tour") is a solution to transport goods from a central warehouse to different assembly areas or to collect goods from different suppliers using the same means of transport. This control makes it possible to obtain better-monitored inventory management and contributes to lean management.
"The definition of Incoterms must be verified as it may vary from one country to another"
Is it completely safe?
Our experience shows us that the decision to switch to FCA Incoterm must be carefully studied and prepared in advance between the principals and their suppliers to anticipate possible disagreements. First of all, to make sense, FCA Incoterm must be followed by a location (example: FCA Supplier Depot Shanghai). It is also noted that:
- The definition of Incoterms must be verified as it may vary from one country to another. Emerging and developing countries do not always have a "strict" or "up to date" reading of Incoterms, which creates an imbalance in contractual relations.
- Incoterms obviously do not govern the entire transport and purchase process, the general conditions of purchase or sale are essential and refine the relationship between buyer and seller.
However, there are still limits to the standardization of FCA and the assumption of responsibility for part of the transport. It is mainly noted that:
- The investment can be significant and the decision will mainly take into account the expected return on investment.
- This task towards FCA cannot be done without the expertise and innovative capacity of a third party specialized in transport.
What lessons can be learnt from this trend?
As part of the project management assistance missions entrusted by its Clients, CKS has observed that the use of FCA Incoterm takes a predominant place with certain major players in industries that are highly exposed to offshore supplies. The purchasing and supply chain practices of the latter are quite normally advanced and their feedback is valuable. A thorough knowledge of the rules (including tax) of international trade, combined with a mastery of logistics and procurement processes (approach costs, contractual engineering) are the keys to a successful procurement strategy.
The agility and the ability to "pivot" remain, as in all professions, the condition to better perform.
