What are the most common incoterms in the medical device industry? Why do you need an incoterm? What incoterms are commonly not used, when dealing with expensive medical devices? If you have these questions, we hope this article will answer all of them.
What is the Purpose of Incoterms?
With a growing global economy, the number of international trades is growing year after year. Strict instructions and responsibilities need to be agreed upon. And with barriers such as distance, language, and culture, it can be a challenge to move products internationally. To manage this challenge, a set of rules (called Incoterms) have been made by The International Chamber of Commerce. The incoterms serve to minimize the risk for both buyer and seller, during the transport of goods. The latest version is called Incoterms 2015, these define:
- Who is responsible for insurance of the goods during transport?
- Where are the goods transported to?
- When does the legal ownership of the goods change from sellers to buyers goods?
- Who is expected to file export papers?
To agree upon the same incoterm, and understand what responsibility it implies, is of paramount importance. Without the agreement and proper care, the transported goods could lack insurance or export papers. For instance, a discrepancy in the transport documents, can result in prolonged transit time, and add further expenses. Nobody wants that. Furthermore, a clarification about insurance is important. Needless to say, this can lead to an expensive incident for both parties.
What incoterms in the medical device industry do we use?
DAP (Delivered At Place)
DAP is our most common incoterm. You might wonder, how come the DAP incoterm is so popular? In DAP the buyer proposes a destination for a seller to deliver the goods at. The risk passes on from seller to buyer, when the goods arrive at the agreed upon destination. When dealing with medical imaging equipment, a lot of our buyers want to have their goods delivered at their clinic/hospital, which makes a lot of sense. LBN Medical have a professional logistics staff, which will coordinate the transport up to this very point. After that, it is the buyer of the equipment, that will take care of the goods unless anything else is specified in the contract (e.g. with turn key solutions).
EXW (Ex Works)
Ex Works is the second most used incoterm and implies the seller will make the goods available for a buyer, at their facility. All charges regarding transportation are the buyer´s responsibility. Ex Works is for instance used, when buyers come to our facility in Aalborg, and picks up the goods, or if we book it on the customers DHL, TNT, FedEx and UPS account number. If a truck or container is needed, we will use the incoterm FCA (Free Carrier). In Ex Works, the ownership of the cargo changes the very second the cargo leaves the floor of the LBN Medical warehouse.
FCA (Free Carrier)
The third from the most common incoterms in the medical device industry, FCA – Free Carrier, is very similar to Ex Works. The seller will make the goods available for the buyer, at their facility. However, FCA is primarily used when the cargo is loaded. That is the main difference between FCA and EXW. For example, Ex Works is used when you buy a small part, and take it with you in the car. However, it can be very difficult to fit a 4,000 kg CT into the back of a car (if you do try though, please share a picture with us), and in such cases, we use the FCA incoterm. The risk passes on from seller to buyer the very second the goods hits the deck of the lorry or container.
CFR (Cost and Freight)
The seller is responsible for the goods up to the named port of destination, where the goods are loaded onto a ship. After the goods are loaded onto the ship, the seller is no longer responsible for the goods. The buyer is liable for any loss or damage that may occur during transit, which is why an insurance can come in handy. This incoterm is primarily used in sea freight.
CIF (Cost, Insurance, and Freight)
This incoterm is more or less similar to CFR, except here the seller agrees to buy a full insurance, to cover any loss or damage that may occur during transit. This incoterm is also primarily used in sea freight.
CIP (Carriage & Insurance Paid To)
In the CIP incoterm, the buyer names a destination, where the goods shall be freighted to. This destination can be a port or a place in a city. From that destination, the buyer is responsible for a further arrangement of the goods, and the further transport. In the CIP the buyer is the legal owner of the goods when the goods are loaded onto a ship, plane or lorry – but the seller is committed to insure the goods, all the way up until delivery at the agreed destination. The seller is also committed to make the export declaration, and pay for the carriage. CIP can be used in both air, sea and/or transport on land.
Not so popular incoterms in the medical industry
FOB (Free On Board)
The FOB is a very popular incoterm, especially when mass importing from Asian manufacturers. However, in the medical industry, it is not preferable, for a matter of reasons. FOB can be used when importing cheap objects, and you want to save the insurance – in FOB neither seller nor buyer are obligated to buy an insurance. That does not come in handy when we export the expensive medical imaging equipment. FOB can be beneficial for the buyer, if you import a lot of goods. It can be easier to save costs and transit time.
Also in FOB, a defined destination of delivery must be negotiated. This can be when the goods land on the ship, or when the goods are unloaded at the dock or a third place. If this is not defined, damage to the shipment can raise a lot of frustration and questions about legal responsibility from both buyer and seller. At LBN Medical, we would like to avoid those frustrations.
Next, in FOB, a defined destination of delivery must be negotiated. This can be when the goods land on the ship, or when the goods are unloaded at the dock or a third place. If this is not defined, damage to the shipment can raise a lot of frustration and questions about legal responsibility from both buyer and seller. At LBN Medical, we would like to avoid those frustrations.
DDP (Delivered Duty Paid)
The DDP incoterm describes a shipment, where the seller is obligated to all expenses that may arise. In the field we operate in, the medical imaging equipment field, this can be a bit tricky incoterm to use, as there sometimes may be a local customs duty, which will affect the price. For instance, Russia is a very expensive country, to import medical equipment. We prefer not to use the DDP incoterm, however – if it is a condition to use DDP, we can find out the customs duty, and give you a price. At LBN Medical, we have a very skilled logistics team.
Questions regarding incoterms in the medical device industry and your deal with LBN Medical, can be directed to our logistics coordinators.
If you want more insights into the world of incoterms, we recommend watching this great video on the subject:
(please notice, the video is about incoterms 2010 and not 2015. However, the changes are few.)