Expeditors International of Washington, Inc. (EXPD) Earnings Call Transcript & Summary

Okay, it seems to be slowing down. So we'll go ahead and kick off. So we have the full hour here with our expert today. So we just wanted to say thank you from everyone at Expeditors for joining our webinar today. We are going to be discussing Incoterms. So we're so thankful you're here to join us. Our presenter today is Kerri Kwolek, she is a regional risk manager for Expeditors. She's been in the logistics industry for over 39 years and has worked a variety of roles, but her most recent role has been working in our risk area. So she has her license in property and casualty in the state of Michigan and also her associates and risk management from the institutes. So we'd like to thank Kerri for taking the time to meet with us today, and I'll hand it over to you. One quick note, we will have some time at the end for Q&A. So as the presentation goes along, if you'd like to enter any questions into the Q&A box, we'll make sure to address those at the end of the presentation.

Thank you. Appreciate that. Thanks, everybody, for joining us. As [ Lauren ] said, my name is Kerri Kwolek, Regional Risk and Insurance Manager here in Expeditors. We're here to discuss Incoterms basics. And so really, what we're looking to do is talk about what Incoterms do, how do you use them properly, how not to use them, I kind of start with that and then also break down each of the Incoterms and talk through what that means between the seller and the buyer. We are also, just to let you know, twinning with an idea of having an Incoterms 201 seminar -- webinar in the fall. And what we thought might be an interesting thing is to have you, as you fill out our questionnaire or whatnot, maybe send us some of your examples that you've had, if you would be willing to share, obviously, we won't share customer names but we thought we might go through some of these examples on more of a workshop type webinar in the fall. So if you be willing to share some examples that you've experienced within your organization, that would be great. So without further ado, we're going to go into Incoterms 2020. So I do want to share the Incoterms book. I hope I'm holding this up properly, but this is the Incoterms 2020 book. This is where I get all of my information. I was fortunate enough to be able to -- have been trained by Frank Reynolds. And Frank Reynolds is the U.S. delegate to the International Chamber of Commerce. He actually owns an import export company in Toledo, Ohio and they offer every time new Incoterms versions come out, we'll talk about that in a minute, they offer the trainings that are usually about 6 hours long and really in depth. We're going to try and deliver a condensed version of that in 45 to 50 minutes and then allow time for questions. However, when the new Incoterms come out, you want to join the greater overall session. Frank is a really a great presenter and good at delivering the long term one so. Right. Let's just talk about basic supply chain here. So you have your manufacturing facility and then the trucker is going to pick it up and take it to a consolidator or freight forwarder. They're going to then do their thing with it, send it to a driven, it's going to go to the port or the handling agent, and then it's going to go on the main carriage. And I think it's important to point out that this is the main carriage here, the boat or the airplane. And then you'll notice on the bottom line, it's going to turn around and repeat the process, but it's going to be unloaded and then it's going to go on a tray to a deconsolidator that will send it to truck and to the final warehouse. First, I think it's important to point out how many different touch points that your freight has during this process. And the second thing I'd like to point out is that this is a really simple supply chain and not all your supply chains are this simple. I bring that up only because of the fact that if you have something like a drop shipment, where you're picking it up from a vendor and then sending it to your customer directly, there are more challenges than what are in play here with this simple process. Okay. So Incoterms literally stand for International Commercial Terms, Incoterms. They were first developed by the International Chamber of Commerce in 1936. They were revised again in '53, '67, '76, '80, '90, 2000, 2010, 2020. If you might like to take a guess at when the next version comes out, I'm sure that you will get it right, was 2030. So one more version before I retire. Incoterms are really there to talk about 3 main areas. And remember, this is something that's determined between the seller and the buyer. This is something that to help with a simple 3-letter code using a name place properly to determine cost, risk and obligation. So who's paying for that leg of the transit, who's applied to pick up the phone and call the trucking company or call the freight forwarder and then who's holding the badge should something go wrong? Again, between the seller and the buyer. Now to us, the freight forwarder, it tells us a story. It lets us know who we should bill and who we should call in case of a loss or damage. But really, this is a decision that's made between the seller and the buyer. Everything you need to know about Incoterms again, I'm going to show the book one more time, is in the Incoterms 2020 book. Everything you need to know is in there. It's a full publication, used to be you could only buy them from the International Chamber of Commerce, but they have partnered with the Amazon now, so you can buy the book on Amazon. And I do recommend if anybody on the call here is negotiating contracts. So whether you're on the sales side or you're on the purchasing side, you do want to have a copy of the book because it gives you everything that you do need to know. So let's talk first about what Incoterms don't do. First and foremost, they are not law. So nobody has to use them. But remember, they're really there to identify the rules of the road between the seller and the buyer when it comes to cost risk and obligation. So it's important that if you are deciding upon them to put them into your contracts, so maybe that's a sales order or a purchase order. Basically, it's an offer and acceptance where there are terms and conditions involved. That way, if you do end up in an international court of law, then that would be the way that you would make sure that you're covered. Now putting them on your commercial documents, I think goes well towards intent. But if you really want to make sure that you're doing it properly, make sure it's built into your contract. Also, Incoterms do not address the passage of title. It does not talk about ownership. That's something else that's going to be covered in the contractual terms and conditions. But the Incoterms itself does not address the passage of title. It also does not address recognition of revenue. We all know how important that is these days with Sarbanes-Oxley and the different -- like the generally accepted accounting practices, it's important to understand when is the right time to transfer that recognition of revenue. In 2011, I was giving this Incoterms terms classes, and I was getting a phone call from a lot of our customers on the finance side, controllers, CFOs. And they were like, hey, we're trying to tie our Incoterms to our recognition of revenue. And of course, grabbed my little book and said, but wait, you can't because in here, it says that you shouldn't. And finally, after many phone calls, I kindly ask one of the controllers, hey, why is the business coming up all of a sudden? Well, it turns out they changed the GAAP loss. And in GAAP, they recommend that you tie your recognition of revenue to your Incoterm. So you have your Incoterms book that recommends that you -- that says it doesn't get addressed and then you have GAAP that says it's a good idea to do so. So what a lot of customers did during that time period of time together was just to write something else in the contract that said passage of title and recognition of revenue transfer at point of risk. So it can be any point, but they're going to put in there where that transfer is going to take place from the seller to buyer, thereby tying it to the Incoterm without saying a specific Incoterm. So title transfer and recognition of revenue transfer at point of risk or a seller store, buyer store, something to that effect. But something that will tie that together. You'll notice that I have in red, the things that I'm talking about. The rest of it is what we've received from the Incoterm subcommittee. And really, I think a lot of them are self-explanatory. So they do not address around these for breach of contract, for example. Well, of course, not. You're going to have something in the terms and conditions in your contract that's going to touch on that. The stuff that we have in red is really areas where we've had repetitive customer requests or questions around these particular areas. So the fourth area that I always like to address are drop shipments. And we call them this. Sometimes they're called trader shipments. People use different terminology for them. But it's basically when you, the customer, for example, here in the U.S. maybe you're purchasing from China because who does that, right? So maybe you're purchasing from China and you have a regular set rule when you're buying from China that you're going to use FOB or FCA. And let's just say that you have a new salesperson, that new sales person is on Latin America because that's a great idea. And so you have the salesperson that's selling it to Brazil. He gets his first request, he tells the customer don't you worry about anything. I'm going to pay for everything we're going to call that DAP. So now you're smart enough to know that you're not going to send that freight from China to the U.S. then on to Brazil. You're going to have it sent directly from China to Brazil. The problem is, is that you have 2 distinctly different Incoterms in this transaction here because it's a triangle transaction or drop shipment. The thing is, we need to remember Incoterms follow the contract, not necessarily the movement of the cargo. So therefore, if you want to send it from China to Brazil directly, you need to tell China specifically what you want from them and keep the Incoterms out of it. They don't work well in a drop shipment environment, really, what you're talking about is, hey, please take it to Terminal A where Maersk is located. Please, please, please do not send my commercial documents with the shipment. There might be -- they're happy to add to the commercial invoice to the side of the freight, but you obviously don't want your customer to see what you're paying for the goods from your vendor. So just the simple instructions, very pointed. Instead of using an Incoterm, which a drop shipping case doesn't work well. So -- but now we want to talk about how to use Incoterms properly. I actually had an insurance customer of mine that was located in Niles, Ohio. And I was dealing with the risk manager, we sold them a cargo policy. And she went through the Incoterm's training and came back to me and said, "holy cow, I didn't realize that there were certain Incoterms that were risk for and that were not for." so I basically have been buying insurance at everything we have moving, whether we're at risk or not. Will you work with my sales manager, Vice President of Sales and determine which Incoterms were at risk for, which ones are not. So I said, absolutely, she set up some time, he sent me the list of Incoterms, and they had 33 Incoterms on there. What's the problem with this? There are only 11 recognized Incoterms. So there are 11. Now when I get on the phone with them, I have to tell you that when we talk through each and every one of these Incoterms, he was able to explain to me why they did it. Maybe it was for an accounting purpose within their organization or maybe they were trying to address the transfer of title. Both of those were some examples that he gave me. But at the end of the day, remember, the whole point of Incoterms is to reduce potential misunderstanding. So if you're not going to use one of the 11 Incoterms and you're going to tinker with them, sometimes that's -- not even sometimes, that's going to be more confusing. So I guarantee you that if you are trying to shove a square pad through a round hole, you're using the wrong Incoterms. And again, we're available for consult should you ever have a need to talk through what you're trying to do -- what you're trying to accomplish and how we can assist. Small caveat here, Mexico can be the one area where it does get a little bit more confusing than the rest of the world. So Incoterms really are there to make things easy. And again, they're only talking about cost, risk and navigation. Cost navigation, so who's paying for that leg of a transit and then who applies to pick up the phone, they always bear each other. Regardless of the Incoterm, if you're paying for it, your job is -- you're obliged to pick up that phone. Now under the C terms, the risk does transfer at a different location, and we're going to talk about that when we break down the Incoterms. All Incoterms are represented by a 3-letter codes. So for example, FCA, free carrier paid to and then a named place, And it's really important that we use the named place as specific as possible. I'm going to talk about this more when we break down the Incoterms. But just naming a port sometimes doesn't always tell a story about who's paying for the terminal handling charges or who's paying for loading and the unloading. So as we break down the Incoterms, there's probably 5 of them, FCA being one of them that we're really going to dig into that named place a little bit more closely. And then another thing to remember under the Incoterms is that we've had different versions of Incoterms, '36, '57, '76, '89, 2000, et cetera. So with each of the variations on Incoterms, they're addressing a problem in trade that has arisen during that time period. So it's important that we name the version of Incoterms that we're using. Remember, there's nothing that says -- it's not law. There's nothing that says that we have to use the most recent version of Incoterms. So -- but it is important, let's just say you're married to DDU. And for those of you that are not [ listening ] on that call, when we get into the Incoterms, you're we're going to be like, "wait a minute, where is DDU? " It's because it went away in 2000. But a lot of customers really like using it. And that's fine as long as you say, DDU, named place and reflect the version of Incoterms such as Incoterms 2000. So it's Incoterms itself, the 3-letter code, the named place, point or port from here, I'm going to be called place just because that's in the literation, I feel like dealing with here. So it's going to be Incoterms, the named place and then the version of Incoterms that you're using. So I've got this listed in here. We're going to share the slide deck with you. These were the changes that took place from 2010 to 2020. You'll notice I have 3 up at the top and then a 5 that are kind of listed down below. The reason for this is that everything the -- up at the top is what the actual changes that happened to Incoterms. What's happening below is really more about what changed in the book itself, how the layout of the book changed. If you're not familiar with the book at all, you probably don't care about those 6 -- sorry, I can't count. However, if you are familiar with the book, you'll want to go through the new book and kind of see where this layout has been changed. We'll be only to use this as a guide to go through that. Any questions, of course, we're always available for consult. So under CIP, it used to be that under CIP and CIF, carriage and insurance paid to and carriage insurance freight that the insurance that the seller had to buy on behalf of the buyer was just kind of a cargo class C. It was simple insurance. It was just basic insurance. However, under CIP now with the changes, they are saying that you do have to buy cargo class A. That means any loss of damage, while in transit caused by an external force. So they really upped the game where the seller has to buy better insurance for the buyer under CIP. I'd like to point out that CIF is still cargo class C. And then under FCA, FCA is now reflected as an onboard bill of lading. That's really helpful when you're doing letters of credit, you're doing documentary requirements with the bank, something like this because it used to be that free on board was the way to show in the banking environment that it was onboard bill of lading. While the Incoterms have been changed to reflect that FCA is now an onboard bill of lading. Having said that, we have not had confirmation that the letter of credit or the banks have changed that. So it's important that you confirm with your bank. If you do have a letter of credit and you're trying to move to FCA. The third change to the Incoterms themselves are DAT. DAT is now gone, delivered at terminal, delivered at place with the named places kind of covering both of those and they've added an Incoterm DPU. Again, we're going to cover that really closely when we break down the Incoterms. So this is just, again, the quick changes that happened between 2010 and 2020. I think we have this at the end as well. So if we have any questions after we break down the Incoterms, definitely be open to that. But DAT is gone as in Incoterms 2020. DAP has remained and covered both of those and DPU has been added. So here are the 11, only 11 Incoterms that we have out there. And we have been broken up in a couple of ways. There's a couple of things that you can plan to tell kind of a litmus test to see what's going on with them. So for example, the first 7 are good for all modes of transportation, planes, trains and automobiles. So that means that no matter the mode of transportation, any of these omnimodal terms will work. So that's the Ex Works, FCA, CPT, CIP, DAP, DPU and DDP. The ocean-only, marine cargo only, we're going to talk about -- when we break down the Incoterms as well. That's FAS, FOB, CFR and CIF. And when we get to those Incoterms, I'm going to read you a section of the book under one of those Incoterms to talk about why they're separating them from the omnimodal to the ocean-only. So that's one way of looking at Incoterms. We have the omnimodal and we have ocean-only. And then here's my very simple depiction, we've simplified this supply chain down even further. You'll notice that we have the sellers facility, the pre-carriage, export clearance person, then you have the main carriers. So keep your eye on the boat here. That's the main carriage, whether it's flying, whether it's gone by rail or truck. We're going to depict that for this presentation as the boat itself but then it's going to be unloaded. The import clearance person is going to take over, that's going to be onboarded to the buyer store. Again, very simple. There are usually more steps involved here. But just for the sake of the Incoterms training itself, we want to keep it somewhat simple. So here's something interesting, regardless of whether it's an export or import, if the Incoterms begins with an E or an F, so it begins -- Ex Works, it's FCA, it's FOB. If the Incoterm begins with an E or F, this main carriage right here is being paid for by the buyer. It's what we consider freight collect. We need Incoterms because they give us more to the story. But in simple terms, it's freight collect. It mean the buyers paying for the main carriage. That means that regardless of whether it's an importer or an export, the named place is always going to be at origin. So under an E in that term, the main carriage is being paid for the buyer, that means the named place is always going to be at origin. Conversely, if it's a C or a D term, that means the seller is paying for the main carriage, what we consider freight prepaid. Again, the sellers paying for main carriage, C or D terms. That means your named place is always going to be a destination. And that's regardless if it's an import or an export. Let me give you an example. I have a customer that moved product FOB Pune, FOB Pune, FOB Pune. Pune is in India, by the way, it is a port. They received some product that it was bad, they had to send it back to the vendor. They send it back to the vendor. Of course, they've never done exports before. So what do they put in their commercial invoice, FOB Pune. So we had to, at that point, to stop the process because it did make sense because it wasn't an apt term and named place or a destination and call the customer and ask them where they expected, who was paying for what, where they expected that transfer to take place. Again, they didn't know. They just copied the commercial of the import invoice because they weren't an exporter. So these simple rules like this that we can use and that you can use to make sure that we understand fully what you're requesting that we have, we move for you. Okay. We're going to start to break down the Incoterms. We're going to start -- I always say we read left to right here in the United States. Not that everybody on the call is from the U.S., but I am. So -- and that basically means we're going to start with this blue line over to the left. That blue line is what is cost, risk and obligation. So that's where that transfer takes place from seller to buyer. So under the Ex Works terms, the seller is responsible for nothing more than getting that freight ready to move. So technically, under Ex Works terms, the buyer is responsible for loading the truck at the seller's facility. So can you imagine anybody who's an exporter on the phone or even if you're an importer, pretend you're an exporter, if the -- you were like, okay, I've got my freight ready. It's sitting in the warehouse, now come and get it. Are you going to let them jump onto your hi-LO or forklift? Probably not. There's ocean rules. There's -- are they grabbing the right freight? Do they know how to drive a forklift? I mean I guarantee, you don't want me driving the forklift in your facility. So it's just a matter of remembering that even though this is what the Incoterms says, more likely, even under Ex Works terms, the seller wants continuous business from the buyer. So therefore, they're going to load the truck. However, for the Incoterms Ex Works, the buyer's responsible for loading. Also, the buyer is responsible for packaging the freight export ready. Somebody used an example of pencils, right? We're sending pencils to a distributor who is then going to distribute them to a bunch of schools. If you're moving these pencils, more than likely, you're going to put these pencils in a 5 or 4 box. You're going to seal them up nice and tight, throw them out of skid, shrink wrap the skid. And that's probably what you're going to do with them if you move them to Singapore or San Francisco. It's going to be the same either way. However, if you're moving a pencil making machine and let's just say, I made this up because I have no idea what a pencil-making machine looks like. Let's just say it's really tall, right, made of metal. And so in order to package that, you're going to want to put that skid probably bolted to this skid. You're going to want to fully enclose it. Skeletal crate is not enough to hold that in place. You're going to want to put a full crating around it. Before you crate it, you might have to do some Visqueen packing. You want to make sure it doesn't oxidize while it's on the water. So there's a lot of extra steps that go into keeping that machine safe moving into Singapore versus San Francisco. For San Francisco, you may just put it at a low buoy target centers, let's wait and hope for no rain. But with the ocean, you really want to protect it a lot further. The cost of that packaging can be somewhat substantial. So under the Ex Works terms, those costs are technically on behalf of the buyer. A lot of customers just say, hey, we're going to package it either way because we want to take care of our customer. But I know other customers that move large capital equipment, that they say "no, what those charges are on behalf of the buyer, if they want to buy Ex Works so then we're making sure that they pay for them." The third thing is export clearance. Under Ex Works terms, the buyer is also responsible for export clearance. Now I'm going to talk for just a minute about U.S. export laws because I don't know what the export laws are for the other 200 countries that are out there. But we need to remember that the Incoterm say one thing and the export laws may not farther up nicely together with this, but they might actually bump up against each other. So for example, you have the export administration regulations that are written by the Bureau of Industry and Security here in the United States. They basically say, that any shipment that is being paid for by the buyer is a routed shipment transaction. That means that the buyer is responsible for export clearance. And so it would include Ex Works or any of the F terms. Under the Incoterms, Ex Works is the only Incoterm where the buyer is paying for that. So we need to be cognizant of the fact that they don't always kind of farther up nicely together. This is not an export compliance class, however, so we're going to talk about Incoterms only. I just want to make sure I clarify that in advance in case there is like, wait a minute, I don't really understand compliance really well, this doesn't make any sense. So under the Ex Works terms, the buyer is responsible for the export clearance. However, here in the United States, the U.S. principal party of interest, that would be the seller who receives money from an overseas company, so that's persons receiving the money, in very simplified terms. That person is responsible for 4 pieces of information. They have to file that information with the U.S. government or they can get fined. Things like Schedule B number, export commodity control number, licensing determination, all of that is on the U.S. PPI. However, in export situation, the seller is sending that information to the buyer who then gives it to their broker on their side of the world who then sends it to their 2-person office in L.A. to file with the U.S. government. And then the information, once that's filed, gets sent back to the buyer because that's who hired the forwarder. So the U.S. PPI under Ex Works terms may never know if it was filed or if it was done properly. Then you can request that information, that's what a lot of companies do, but sometimes it can be a real chasing of -- for the Incoterms themselves. So my point is, is that I think most people use Ex Works somewhat improperly by saying, hey, once it leaves my door, then it's the buyer's responsibility. And I can test that actually FCA, freight carrier paid to is a better use of that Incoterm. So if you wish the seller to be responsible for packaging the freight ready -- packaging the freight international ready. If you want the seller to load the truck, which you're probably going to do anyway, and if you want the seller to understand their export compliance rules, which I certainly would want to know if it would be being done probably if I'm outsourcing it to somebody. Then FCA is a better Incoterm. So it takes a lot more to talk through the Ex Works to FCA. So anybody who's looking at their watch, is like holy cow, we're not going to be here for an hour, we're going to be here forever. I promise you I will get you the lunch on time. This is the hardest one to kind of talk through because of that piece right there. The rest of them are pretty straightforward. However, having said that, there is somewhat a problem with a flat document. So I know we like to give out those -- the sheets that you can hang on your board or if it's electronic, you might save it to your C drive, and it shows you where the seller's responsibility and so the buyers begin. Certain Incoterms, however, such as FCA, the named place really comes into play as to where that transfer takes place between the seller and the buyer. So if we're looking at freight carrier paid to, you'll notice the blue line moves slightly from Ex Works which is right over the manufacturing facility to next to the manufacturing facility. Because you might say FCA and name your manufacturing facility, address Plant One in Romulus, Michigan for example. But that's going to mean that, that transfer from the seller to buyer, cost, risk and obligations are going to happen once that truck is loaded and it gets on its way. However, you can use FCA origin airport, FCA origin port. And so we have to remember that as that blue line moves, we can't make it move on the screen here, probably I could with some graphics. But as it moves on the screen here, you have to remember that the seller is then taking on the extra step of giving it to wherever that end place is. So I was using FCA Romulus, Michigan happens to be where I'm sitting right now. However, I might say FCA, Detroit airport. That means the seller's taking out that extra expense to get it over to the airport, where maybe FCA Long Beach port. That seller's taking out an extra expense of getting it to the port. So while we have these 5 documents that are great guides, we need to take into consideration what that named place is and what it does to the Incoterm term itself. So there, we're done with all the freight collect shipments for omnimodal terms, Ex Works and FCA as all there is. Now we're going to move into the C terms. Under CPT, that's carriage paid to, you'll notice we have -- all of a sudden, we have a different risk model. We don't have a blue line, still moving them left to right. But now under carriage paid to, that main carriage is being paid for by the seller because it begins with the C. However, it's the cost and obligation of getting it to that name port or airport destination. Really, the C terms are meant to stop. Once that boat lands, seller's responsibility ends, buyer's begin. Once the airplane lands on the airport destination, that means the seller's responsibility ends and the buyer's begin. Some customers will use further on in the supply chain. And that just means that when it gets to that place, that's where the seller's responsibility ends but really, the Incoterms subcommittee has said that it really is meant to stop there at the port or the airport. However, you'll notice by the red line, so we have cost, green. We have red, risk. So even under CPT, the risk transfers from the seller to the buyer, once that truck leaves is -- the location. So what is called first touch. So once that truck leaves, it's now the buyer's responsibility even though the named place is at the destination. So -- and I understand that people might do this because the buyer might have better buying power with their cargo insurance. However, the seller has better buying power with the same ship line. So it's just a matter of being able to delineate that. People do use CPT sometimes but means the buyer needs to know that they're at risk. I often caution sales people. I do these single-term classes for individual customers. And I often caution sales people hey, make sure your buyer knows what CPT means because if they don't, if something happens on the way to the port, for example, at port of origin, then your customer may look to you to make, hey I'm your best customer, you told me I was your best customer. You should make me hooked because I didn't understand this. Technically, an integer contract legally, then it's the buyer's risk, but we all know we're looking for long-term customers. And so therefore, you might have that discussion. So any new contracts when it comes to CPT on the sales side, I would definitely make sure to talk about that. On the inbound side, just understands your risk. And if you don't have a global insurance program, for example, then you may want to look at other ways to cover it. I personally don't love CIP, carriage insurance paid to. You'll notice that the risk model doesn't change. The risk transfers, what it leads to sellers store, the named place is still the importer destination. However, by very nature of the Incoterms, the buyer is purchasing insurance on the seller's behalf. But it's a third-party buy, right? You know what your risk is, you understand what your supply chain looks like. Under CIP, you're asking somebody in a foreign country to purchase insurance on your behalf. Another thing to note here is that it's still the buyer's risk. So if there is a loss then it's really up to the buyer to file with the seller's insurance company, maybe more likely as a foreign country, maybe language barriers, maybe the policy isn't written in English. So just be aware of what you're buying here. If you trust your seller, if you've been doing it for years, and it's working for you, I would say no problem. But when you're going into a new contract, it's important to take into consideration that the buyer's risk, the seller is purchasing insurance on the buyers' behalf. Now we're going to roll into the D terms. I know we're going fast. The unfortunate thing about a webinar, and we have only an hour here and want to make sure that we cover everything but make sure that you have your questions, feel free to chat box for Q&A. We'll make sure we address them when we get to the questions and answers part. Now under the DAP, let me go back to DAT, delivered at terminal. That was an Incoterm that went away in Incoterms 2020. And basically what DAT meant, I took out the terminal piece of it and used the word transit. It meant that DAT, that named place, again, we're back to that blue line, cost, risk and obligation, that named place is where it could transfer from the seller to the buyer. They really intended it to be somewhat in transit like somewhere in here, not at the boat, not at the buyer store, but some place in transit. And then DAP was really intended to replace DPU, which means it was meant to be the buyer's store. But this is another Incoterm where they realize, hey, we don't need 2 Incoterms. We just need to name the place appropriately. So it may be DAP, the broker and destination or it may be DAP the buyer store. But again, flat documents don't always tell the whole story. So the seller is responsible for the cost of risk and the obligation of getting it to that named place a destination. If it's the broker, I would be an importer now here in Romulus Michigan, that's where we are -- we act as a broker here in Detroit. But maybe the customer is located in Farmington Hills, Michigan. That means that if a DAP, the broker, the buyer is responsible for picking it up at the airport and getting it to their door. But if it's DAP Farmington Hills, Michigan plant A, because they might have 2 plants in Farmington Hills, then the seller is taking out that additional cost, risk and obligation of getting it to the buyer store. But -- so that flat line, the blue line doesn't tell the whole story, we need to take into consideration what that named place means. So DAT went away, DAP replaced both by naming the named place properly. And then they created what's called DPU, delivered at place unloaded. So again, the named place comes into consideration here. But under the DAP terms, the buyer was responsible for unloading that truck. Under DPU terms, the seller is responsible for unloading that truck. So we have a customer down in Kentucky that they focus on refurb-ing hotel rooms. And the same way you've ever seen like the containers, like you pull into the parking lot, like you see the containers backyard. That means that they're refurb-ing some of the floors or some of the hotel rooms or some of the floors. When they unload that container at that hotel, they don't have a dock door and they have to kind of unload it right there in the parking lot. So they have to hire a crane to come in and unload that container from the chassis. So that costs money. If we're going back to the pencils example, where it's delivering to a DC, you're going to unload it. Nobody cares. DAP or DPU will probably going to be interchangeable. The buyer needs the products. That's why they bought it, therefore, they're going to unload that truck. However, in the example I just gave you with the hotel refurbished company, somebody needs to pay for a crane. And so they determined between DAP and DPU, who's going to pay for that? And so you might have people that are waiting around. We all know that containers arrive exactly on time, right? I mean our truckers have to go sit, wait at ports, there are a lot of things that can go wrong. So the delivery isn't exactly on time. So you might be paying for the crane, for example, and some hired help to stand around and wait for that the container to be offloaded. So that's the difference between DAP and DPU. Most people that just move cartons are going to stick with DAP. But when you're moving capital equipment or anything that's unusual, like the example I just gave, we need to remember that unloading is going to be determined DAP, buyer unloads, DPU, the seller unloads. And then there's store duty -- delivered duty pay, DDP. The seller is responsible for the cost, the risk and the obligation of getting it to the buyer's door, has some clear duties and taxes included. From an exporter standpoint, this can be pretty dangerous. I mean you're agreeing to all the rules, laws of regulations in a foreign country and assuming that you understand what their duty rates look like and assuming the duty rates don't change between the time that you sent it or you quoted it and by the time it arrives. A lot of companies will restrict DDP to -- for certain items. You have to go through compliance, for example, and get approval from them to move DDP because it can be an expensive dangerous type of a thing. An example of that would be -- let's just say that you're moving sales samples. Well, yes, the buyer is probably not going to pay for the duties to get their sales samples in when they're already using another vendor. But if you're trying to sell them on something, then DDP would make sense. It's also going to more than likely be a lower value. Or you might have warranty replacement items that you've agreed to contractually, that it's your responsibility for getting it to that buyer store. Having said that, DAP is a nice example to use instead of DDP if it's anything else outside of those 2 examples. Another thing to remember about DDP is that not all countries allow for DDP. So a lot of Latin America, for example, they require the importer to -- in Mexico. They require the importer to choose the broker, and then that needs to be filed with the government in that country. And so DAP is not allowed in a lot of those countries. It's usually Latin America, the Middle East. So be aware that if you're doing DDP, understand if it's even allowed in that country or not. So that's a whole lot of dangerous -- the warning Will Robinson warning about exports. On the import side of things, it's not that dangerous, right? You'll basically tell your vendor, I don't feel like dealing with it. I don't have good customs controls. I don't want to deal with it. So basically, you just take care of getting it cleared and delivered to my door. The only danger here is they can lose some control over your supply chain. So for example, you tell the vendor, hey, I want you to get me here by April 4 or else I'm going to -- what are you going to do, right? Book your phone. If there's some kind of a hiccup going on at the destination country and the vendor is unable to take care of that, that does become a challenge for your supply chain. But again, it's a minimal risk as compared to the exporting DDP. Okay. Those are all of the omnimodal term, so good for all modes of transportation. We're going to now dip our toe into the ocean-only terms and we're going to start out with free alongside ship. So you notice we're back to the blue line. We're talking about cost, risk and obligation, transferring from the seller to the buyer. Under free alongside ship, the seller is responsible for the cost of risk and the obligation of giving it to the name port at origin. So basically, they need to get it next to the ship. So one of the reasons that they've moved these to the back of the book. It used to be -- it was Ex Works, FAS, FCA, FOB, CPT, CIP, et cetera, et cetera. They incorporate them altogether moving from left to right. However, with the invention of ocean containers, which happened in the late '40s, that's when they developed them, they kind of became the mainstream in the early '80s, late '70s, early '80s. So they really needed to address that fact with the Incoterms book. So I'm going to open up to the Incoterms FAS and I'm going to go to what's called the explanatory note. So this is a section in the beginning of each of the Incoterms that describes what -- kind of what the rules of the road are for the Incoterms that are the rules of the road for the contract. Just being explanatory notes that talk about what that Incoterm really means. So under mode of transport, number two, the explanatory notes, it says "This rule is to be used only for sea or inland waterway transport where the parties intend to deliver the goods by placing the goods alongside a vessel. Thus, the FAS rule is not appropriate where it goes their handed over to the carrier before they are alongside the vessel. For example, where goods are handed over to a carrier and a container terminal. Where this is the case, party should consider using the FCA rule rather than the FAS rule." So what they're saying is that if goods are in containers it's -- you're not taking it to the port, you're not placing it next to the ship. What you're doing is you're taking it to a container yard. Let me try and explain that kind of in a backwards way. So if you take a look at who pays the same ship line, it's the terminal. Wait, I'm going to go backwards. Who pays a longshoreman? It's the terminal. Who pays the terminal? The steamship lines. Who pays the steamship lines? Well, it's either going to be a freight forwarder or it's going to be a customer directly. So you're so far removed from that, and all you're really going to do is take that container to the container yard. So that's what they're saying is that for all the 4 ocean-only terms, they're really not recommended for goods in containers. Now I'm going to stop here real quick because a lot of times what I do is with customers in front of -- in front of them, in person, they're like, oh, my gosh, I have all my contracts. They're FOB. Look, if you've been moving FOBs for 20 years and you haven't had any problems, I'm not suggesting that you go out and change all of your terms and your contracts immediately. What I am suggesting is that as you negotiate new terms, try to move them from these omni or these ocean-only terms into the omnimodal terms. There has been talk for the last 20 years about moving away from these ocean-only terms. But it's hard to do because so many people still use them. But I understand that's what the book says. And just -- and then know that if you're moving it like that currently, and it's working, no issues. Okay. So then we have FOB. So it's taking that extra step forward, the seller is responsible for the cost of risk and the obligation of giving it nestle safely onboard the vessel. The other 2 ocean-only terms are CFR, cost and freight. You notice we're back to a risk model here, where the seller is responsible for the cost and obligation of getting it to that main port of destination. However, the risk transfers once it's on board the vessel. So that means if under CFR, if the truck rolls over on the way of the origin port, that risk is on the seller compared to CPT where it would be on the buyer. However, if a container falls off of the vessel, that risk is on the buyer even though the named place is the port of destination. So it just takes it that little step further. The other thing is remember, it doesn't have to be great insurance, it's just cargo class C, minimum cover. And then you have CIF, risk model doesn't change, but by the very nature of the Incoterm, the buyer is asking the seller to purchase insurance on their behalf. So again, something happens to a container, it falls off that boat. That means that the buyer is responsible for filing a claim with the seller's insurance. I think this is where we stop. Here is where you can find information on Incoterms itself. And again, we will be sending out the presentation at the end if you're willing to fill out a survey for us. But now I think we're going to open it up to Q&A.

Thank you, Kerri. That was wonderful. Really appreciate all of the detail you provided, and we have quite a few questions as well. So I'm going to start with some general questions and then some more specific questions. And I'd like to just mention off the hand at the top, if we do not get an opportunity to get to all the questions, we will follow up with you individually after the fact. So -- but thank you so much for all of your interest. So the first question, Kerri. So hopefully, I can simplify this for you. Okay. In the case of a drop shipment, there seems to be always an issue with the price because the price -- there's a price given to the buyer, which is going to be different than the final consignee. Do you have any advice?

Yes. Make sure that you tell your vendor overseas, please, please do not send my commercial invoices with the freight. They also are often concerned because there's an export clearance component to it. The seller should give the original sales document to the broker who is clearing the freight. However, they should also be instructed to not send that in advance because when you take it to that final destination country, they need to be paying duties on the sales price. So that's the second layer of -- that second invoice that where you've increased the price. So it's important just to take the Incoterm right out of it and spell it out directly what they need to do.

Perfect. Thank you so much. Okay. Our second question is when a 3PL is involved, does that impact Incoterms?

So in my mind, sounding of a 3PL, might be a forwarder. There's always that little fine line there or maybe somebody who's been -- who is helping the customer internally figure out what they're doing with the goods. It shouldn't, because to us, whether you're a 3PL, you're a freight forwarder, you're a 4PL, it doesn't matter. It tells us a story. It tells us who to reach out to, seller or buyer. But this agreement is between the seller and the buyer. So it really should not matter to the 3PL.

Our next question is, and there's a couple in the same vein. Are Incoterms only applicable for air or ocean shipments. What about domestic trucking?

That's a great question. And you know what, a lot of times when in person, I kind of remember to incorporate that, but I didn't. So whoever asked that question, thank you. The thing is that before Incoterms 2010, I believe, it was just good for international. In Incoterms 2010, there were a lot of companies that were like, hey, I don't want you to figure out if this is -- we're using a uniform commercial code term, which is kind of a domestic U.S. thing or whether we're using an Incoterm. We're a global company, we want to use one set of rules. So they changed the Incoterms in 2010 to reflect they were good for domestic or international usage. So if you're using Incoterms 2010 or Incoterms 2020, then they can be used for domestic as well. What I would say is this, though. There is a customs component to international that is not bearing domestic that you can then take out of it. So when you talk about DAP versus DDP, for example, it's irrelevant because there's no customs clearance. But I would still say most people would understand that domestic move is being DAP sellers paying for it.

Perfect. I'm going to jump to another question. It's a little bit more specific, but it's on -- it's in the vein of the trucking. So in the example, you gave of an order shipped by standard trucking from the U.S.A. to Canada as prepaid on the shippers account, but is prepaid and add on the final invoice, what would be the appropriate Incoterm? So the final terms are pre-paid and add. So FCA or CPT or something else?

So remember, there are 2 things that work here. You have the Incoterm. And what the Incoterm is telling you is what the seller has agreed to do, where he has agreed, he or she have agreed to deliver it to the buyer. So that's one piece of it. If you're moving DAP, but you're prepaying and adding it to the invoice, that's an accounting function. So it's still -- the Incoterm would still be DAP even though ultimately, the buyer is paying for the freight forwarding and any other charges associated with that.

Thank you. I have a couple of questions clarifying some of the Incoterms. So in the case of the named place being ports, does that mean the vessel has been -- has birth? Does it mean that it's just in the harbor? Does it mean cargo-loaded What is the trigger there when it's port.

I'm going to use my lawyer speak right now. It depends. So here's why it depends. So if you have a C term, that's really where -- once that vessel is birth, if it's in a port waiting to come in to -- and hopefully, we don't see ugly situations like that ever again. But if there's any waiting to come into the port, then under the Incoterms, C terms, for example, or even the D terms, the seller's obligation has not been met until it births. However, under the C term, let's just say we're going to talk about unloading those goods or internal handling charges at destination. Under the C terms, it's on behalf of the buyer. Under the D terms with that name port, it becomes unclear. So that's why it's important to really name the place more precisely or if you just want to use the port, then make sure you spell it out, have something in writing between the seller and the buyer that say, hey, when we're talking about DAP, the terminal handling charges are on behalf of the seller, the terminal handling charges are on behalf of the buyer. C terms are really clear, the D terms can be muddy if you're just using a name port.

And then same type of question for FOB. So for FOB, what is the trigger there for the transfer. So over rail, onboard the vessel, on hook.

Yes, I've got this. Okay. So remember, free on board literally means nestle safely onboard the vessel. I get these questions usually internal, my internal team, so we get newbie, whose things are going to trip me up. They're like, what happens if they're loading it onto the vessel and the container drops off the gantry crane, half of it falls in the water, breaks in half, half falls in the water and half is on the vessel. Under FOB terms, it's not nestled safely onboard the vessel, that means that the seller is at risk. However, under FAS terms, the buyer's at risk. So FAS is free alongside ship, and I'm going to sneeze, bear with me here. Excuse me for that. So under the FAS terms, the buyer would be at risk for that. And under the FOB terms, the seller would be at risk of that.

And then for a term FCA onboard bill of lading, can you elaborate a little bit more on that one?

Yes. So FCA is tough when it comes to like whether it's going to be on board, kind of going back to the FAS, FOB thing. Really, the new change to the Incoterms 2020, that's really reflected -- is meant to reflect the banking side of it. So if you're not doing banking, then you don't have to worry about it. But just remember that, again, you're so far -- as a seller or a buyer, you're so far removed from actually loading the goods on the vessel. So if your responsibility is just to take it to the container yard, then that's one thing. But acting as an FOB, it's a little bit of semantics, right? So if it's FOB, for example, and there are charges that are taking it from the freight forwarder in the inland -- freight forward in Shenzhen, China, for example, to the port in Shenzhen, which I think has a different name, but I've been out of logistics for a while. But it is like -- they transfer right there. If the terms are FOB and something goes wrong, I may transfer from the forwarder to the actual dock, that's the seller's risk and cost of getting it there. But if it's FCA, that named place. Again, when you're naming a port, that's not exactly clear. I know a lot of people have done it for a long time. But under FCA, that's where it becomes unclear. And we do have negotiations between the seller and the buyer. A lot of times what will happen is we'll make the assumption, and we'll bill somebody. And at the point that we bill somebody, then they come back and say, wait a minute, we thought that was on the other party. Well, that's because that named place isn't clear. So being as clear as possible is the key to alleviating that risk.

Okay. There are a lot of questions about appropriate Incoterms. So I'm going to move on from those. And just because we only have a couple of minutes, and again, anyone who submitted a question related to the best Incoterms to use, we will follow up with you to make sure that your answer -- that your question gets answered. But what I wanted to -- this is a good question. So a manufacturer wants to change Incoterms from DAP to CIF in order to recognize revenue earlier. Does revenue recognition need to be included in the contract instead of the Incoterms?

Yes. Yes, it does. Because it's not addressed at all in the book. But a lot of companies are tying it to that by saying where it transfers. And if you wish to just change it to CIF versus DAP, remember that their costs associated with either, so know where that cost is going to transfer from seller to buyer because you might be asked as a seller to make some concessions when the buyer is taking on extra transport cost and risk.

Okay. Okay. So another question is, although you clarified Incoterms are not law, does that mean that even though 2 companies agree in the contract on an Incoterm. In the court of law, the liability can vary from what the Incoterm dictates.

No. So once you put them into that contract, it's very clear in any of the National Court of Laws should see that as the contract. What happens, though, what we see more often is that it's not specifically addressed in the contract, it's assumed that by putting it on the commercial documents such as the commercial invoice that, that is going to tell the whole story. I contend that it would go towards intent. And if you end up in a court of law where they're sanity involved. And I'll just pause there for a minute, but if sanity be involved, then yes, they're probably going to recognize that but to really protect yourself, you should put that in the contract.

Okay. Perfect. Okay. What about Incoterms that transfer title such as the first sale or if there's a middle man involved? What type of Incoterms should someone look for?

So Incoterms don't address that specifically. So whenever there is doubt, my first instinct is to move away from the Incoterms. They are there for the 98% of freight moving from point A to point B, and there's not a lot of deviation. So if you're talking for sale, maybe an Incoterm isn't the way to go, but really having detailed spelled out instructions between sellers and buyers that you've agreed to specifically what you're looking to do.

And I'm going to do one more. So the question is, if we have cargo insurance. At what point does our coverage starts?

This is a great question. And I'm going to answer this twofold. The first thing is, is that your coverage starts when you become at risk. So if you're the buyer and it's DAP, your door, your cargo insurance is never going to cover that, which is why you need to make sure that you exclude that when you're negotiating your cargo insurance. However -- so it's whenever you're at risk. I'd like to touch on the C terms here because what happens a lot of times is that people will buy CIP or CIF. So you're purchasing insurance, you have your own insurance and it's going to cover you when your risk begins. So let's go with CIP. Risk begins at the seller's door once it leaves there. However -- so you've got coverage and it covers you. However, by very nature of the Incoterm, you've asked a seller to purchase insurance on your behalf. You're now double-dipping in insurance. And by the way, just because you buy insurance twice doesn't mean that the insurance companies are going to pay you twice. It's actually going to make it very convoluted to have a claim. So you really want to understand what you have for your global insurance policy, and that will pick up your warehouse -- your coverage is warehouse to warehouse, so door-to-door basically. However, it's only going to take effect when -- it's only going to take effect when the risk transfers to you.

Thank you, Kerri. So we are at time. Thank you so much, everyone, for attending again and for your questions. We will be in touch, we'll be sending out a survey after this webinar. And if you answer the questions, then we can go ahead and send you the presentation. But thank you for attending. We look forward to seeing you at our future webinars. And thank you, Kerri.

Thank you.

Take care.