COVID-19 is continuing to influence international trade. The supply chains of small and medium-sized enterprises (SMEs) are facing all kinds of disruption due to the current fast-moving and ever-changing situation. The reality is that many SMEs are struggling to continue their businesses, an element of which has been conflicts or disputes with their suppliers.
The Incoterms® rules are an internationally recognized standard and are used worldwide in international and domestic contracts for the sale of goods. Incoterms® help businesses operating internationally avoid costly misunderstandings by defining the costs, risk and obligations in each international trade transaction, protecting both parties.
Incoterms are one element of many in building strong, clear contracts that can protect both SMEs and their vendors, ensuring proper communication, expectations, and clear procedures in the case of disruptions. For SMEs especially, this is critical to their success, and even survival in challenging times.
To help get some answers on how SMEs can protect their supply chains and their businesses during this time of disruption we brought together experts in supply chain management, contracts, customs and the Incoterms® 2020 rules to answer key questions on how SMEs can protect themselves and have confidence in their international transactions.
The conversation was led by moderator Emiliano Introcaso, CITP – Export Advisor, Export Development Canada, EDC
Emiliano has close to two decades of experience working with manufacturers and exporters looking to increase their global growth by providing them with support and guidance in all things export.
His work focuses on navigating companies through the complexities of global supply chains, but also in the small details that can make or break an international trade transaction. Emiliano is an Export Advisor at Export Development Canada (EDC), a Certified International Trade Professional (CITP) with the Forum For International Trade Training (FITT) and an International Chamber of Commerce (ICC) Registered Trainer on Incoterms® 2020.
Incoterms rules are key to mitigating risk with your suppliers
Floyd Simpkins, CITP – Founder Simcor Solutions Inc., Incoterms® 2020 Trainer
Floyd Simpkins has over 35 years of international business experience in both the private and public sectors. He’s worked as a senior trade consultant with the government of Ontario, led multiple private sector companies to success in their international ventures as Founder of Simcor Solutions and is a certified Incoterms® 2020 trainer.
Emiliano: How can Incoterms rules be used to ensure contracts have covered all the different key areas of risk and provided proper instruction for any disruptive scenario of the deliveries?
It’s a very important question in today’s environment, and what it comes down to depends on the risk tolerance of both parties. How much risk is a seller willing to take given its size and capabilities, and correspondingly, how much risk is the buyer willing to assume, and how will this affect the prospective sale?
Using Incoterms in a COVID environment requires first and foremost, a whole lot of upfront discussion between sellers and buyers about that risk tolerance before the contract is established, and then the acceptable Incoterm can be applied to the shipment, because if we don’t have that, we’re not going to have any agreement on the contract.
Deciding which Incoterm to use is also more important now for sellers and buyers to access certain practical capabilities of their carriage partners, because we’re moving goods from seller to buyer.
For example: protocols that our providers have in place to manage COVID risk on delivery. Does a carrier now use some form of digital confirmation that delivery has taken place like a “no-touch” solution? An example of a possible solution to this matter is what Conestoga College is doing – they are building a mobile software application that will help supply chain workers maintain physical distancing, and still obtain the necessary signatures to complete their delivery documentation.
For delivery drivers, typically when they arrive, they have to go into a building and get a physical signature, but this application will use geo-fencing to get a reading on where the trucks are, how they can be monitored to travel within that range to their destination, and then be routed to the correct door to deliver, and then stay in their truck and complete their documentation digitally. Those kinds of innovations might help us with a critical element, which is ensuring delivery has taken place.
Emiliano: What are some of the specific Incoterms that are particularly important for contracts in this type of environment?
If we look at it from the seller’s perspective, any term where the seller takes more responsibility for getting the shipment closer to the customer before officially transferring risks is particularly important. We can also think of Incoterms as a marketing and sales tool to keep our customers satisfied that delivery is going to be in their hands where, and when they want them. Using Incoterms to clarify risk where risk actually transfers in the contracts of carriage is the most critical at this time, especially where many different carriers are being used to deliver contracted product to buyers.
So we want to use the terms that get the product closer to the customer:
- CPT “Carried To Pay”
- CIP “Carriage and Insurance Paid”
- DAP “Delivery At Place”
- DPU “Delivered At Place Unloaded”
- DDP “Delivery Paid”
Those are terms that are particularly important in this environment to make sure that, above all, we’ve got the delivery point clearly identified because we’re trying to get it in the buyer’s hand safely and securely, and ensure that delivery is in the right place at the right time.
Learn more about the latest edition of Incoterms® and learn how to properly incorporate them into sales contracts and invoices
Emiliano: Since Incoterms® 2020 was just updated in January, what are some of the changes that importers and exporters should know about? Are there any specific resources that you would recommend?
There are a few technical terms that have changed. And one of the big ones was FCA where the buyer selects the means of transport. This is one to look at because FCA was clarified to make it very clear that when the goods are handed over to the buyer’s means of transport, that’s when delivery takes place. There are a lot of resources out there, both public and private.
I would suggest that FITT’s Incoterms training, now delivered online, is as good as any resource out there because it’s based directly on the partnership that they have with the International Chamber of Commerce – ICC, who defines the Incoterms in trading guides and materials.
Customs issues can quickly eat up profits and damage your reputation with customers. Avoid them by doing due diligence and working with experts.
Audrey Ross, CITP – Logistics & Customs Specialist, Orchard Custom Beauty
Audrey is the in-house expert on global shipping, supply chain operations, customs and international tax for Orchard Custom Beauty, a cosmetics and private labeling global project management specialist where she also manages the logistics coordinator position.
Emiliano: What are some of the problems that people are dealing with at the border with international shipments right now? And what are some of the tips you could provide to businesses on how to prevent those common issues?
The current situation specifically around COVID is just an increased scrutiny, which a lot of businesses weren’t prepared for. Depending on your product line, if your business had made pivots into making hand sanitizer or making fabric face masks, for example, there will be increased scrutiny because these are highly regulated health and safety products.
For most businesses it was a great idea to pivot, but at the same time when there were some regulatory concerns that they may not have been aware of.
So for those kind of the hot items, anything around PPE fabric, face masks, even hand sanitizer pivots in general, the most common custom problems are around HS codes.
Make sure that your businesses is using the tariff tools, there’s a number of resources on TariffFinder.ca. The World Customs Organization can also help you out there. If you’re going into different countries, the World Trade Organization has lists as well. In terms of customs, HS codes are really the most important kind of descriptor. The next problem you might encounter is that your descriptions are too vague. Along with your HS code, customs authorities have to see what the description of your product is because they want to ensure that matches. So if you say that it’s say a bag, you need to specify what kind of bag, because as it turns out in chapter 42, there’s something like 50 different types of bags. Is it made of leather? Is it made a PVC? Is it a handbag? Those kinds of key descriptor words on your commercial invoice and even on your bill of lading are very important to helping match that HS code.
When you’re dealing with free trade agreements and cross border trade, there’s country of origin versus country of transit. I know here in house there can be some confusion from my teammates around this. If you see that a product or component is coming from this country and it’s going to the U.S., where was it made? Was it actually made in Canada? Was it made somewhere else? Because that’s going to have a big impact on the usability of those free trade agreements.
Another thing I’ve noticed is that the parties who were involved in the transaction are unclear. Now your business might be a bit more straight forward and you are a seller and you have a buyer. But for some of us, it’s much more complicated and we have a manufacturing partner. You might have an agent involved and you yourself are the overseeing party, which is sort of what Orchard does. We call these contracts triangulation. And then we have a buyer and we also have the party we are delivering to, and that might be five different addresses. How do you fill out that paperwork?
It’s important to be really clear on who’s doing what and show in your Incoterms who’s responsible at each point.
If you are doing importing, depending on what your Incoterm is and what you’ve set up, if you are the importer of record, you should be aware that in some countries you can’t have a foreign importer. For example if you’re making Canadian exports and you’re shipping down to Mexico, Mexico, doesn’t have a non-resident importer program. You need to rely on the person who’s buying the goods or another party to be able to import on your behalf because they have to be Mexican resident. And if you are the importer of record, the key from a customs department’s perspective is who’s making the payment of these duties and taxes? CBSA here in Canada wants to know who they’re getting the money from and that they’re going to get it.
Supply chain management has never been more complicated for SMEs. In today’s environment, it’s all about risk management.
Bruno Morin, CITP – Global Market Manager, Axens
Bruno has been working in international trade for 25 years. During that tenure he has been to more than 60 countries negotiating contracts. He has experience and expertise in all aspects of international trade, including shipping, customs, and finance. He also served on the FITT Board of Directors.
Emiliano: What are some of the main issues that suppliers and shippers are facing in terms of delivering the products and how can the SMEs work with their vendors to prevent them?
As an SME or a buyer, it’s perfectly normal to be nervous these days. So many things can go wrong.
And it’s not always the fault of the buyer or the supplier. We saw the strike at the Montreal port earlier this year, and all the COVID related problems and shut downs around the world at the ports. A common problem historically, is when a container gets damaged at the transshipment port, while in transit. That wouldn’t be the fault of the supplier or the buyer. It just happens.
So for me, it’s really important as a buyer, and as an SME, that you make sure your supplier has a good insurance policy, and that when you make a list of the required shipping documents, that the insurance certificate is included in that list. This you know your supplier is serious, and that if there’s a problem you have an insurance company that’s going to help both the supplier and buyer to resolve the problem, because the problem in international trade is the costs go up.
If you have a problem in transshipment or at arrival at the seaport, and you don’t have your documents done properly, your goods will get stuck at customs. The fees you have to pay will be on a per day basis. And if you are small, it won’t be long before the buyer is going to abandon this cargo because the fees are more than the value of the goods. So as a supplier, you’re stuck. Right now, again, it’s perfectly normal to be nervous, to ask for extra time. As an SME you probably can’t afford to go for just in time delivery. In my opinion, you need to plan for extra time for delays from A to Z. Your trucking company might not have a driver, because there was an explosion of COVID cases in that specific city. It’s better to receive the goods a little bit earlier than to wait until the last minute and risk having problems.
Emiliano: So what happens in the inverse situation where the buyer is dealing with a supplier delinquency? How would you address that?
The main point is as a buyer, you need to document each step. Before you signed the contract, you should have made sure the supplier had a good insurance contract. So with that assumption as a buyer, you need to document everything you did. As soon as you have a problem with the supplier, you need to file an “intent to claim” letter and send it to the freight forwarder and the buyer. Then, six months down the road after you went back and forth with the supplier and the insurance company, it’s documented that your intention was to get your money’s back either from the supplier or the insurance company.
Emiliano: Where should you position your suppliers and manufacturers to prevent disruptions and/or build in redundancy in case of emergency? Should you go closer to your customer base?
This is the whole other aspect of risk management.
In general, it’s recommended to have more than one supplier, because particularly these days with COVID, it’s quite risky to put all your eggs in one supplier.
For example, you might have a local supplier that has higher costs and the product that they sell is not perfect. But as a backup plan, it’s really important that you keep a good relationship with that local supplier, because your international supplier, that may have a better product at a lower price is physically very far away and therefore riskier in times of disruption.
Negotiating and signing a contract that clearly defines risk and responsibility is key to protecting your business, and even more important during times of disruption.
Clarecia Christie, CITP – Founder, Global Compass Consulting
With over a decade of experience, Clarecia’s professional focus is the intersection of international market access and women’s economic empowerment. She has managed projects commissioned by regional and international development agencies such as Global Affairs Canada, in various sectors in the Caribbean region, Central and South America.
Emiliano: Before the contract is written, what should SMEs be asking for from their suppliers/manufacturers to ensure that they cover their bases? As a buyer, what can you expect the suppliers to ask for during negotiations?
From an SME perspective, it’s always good to have an understanding of your supply chain from end to end.
And you need to know the rules of the game – the trade rules. If you’re going to be supplying to a country where you have a trade agreement, understand what you can capitalize on within that trade agreement and what you’d have to do to that product to make sure that it can enter that country.
Capitalize on different trade rules or different provisions that are in a trade agreement that you can utilize. You may have to modify your product to adhere to the rules of that trade agreement which will have associated costs, so it’s extremely important to be aware of these considerations. Another thing that you’d have to look at is your suppliers to produce the goods, or if you’re manufacturing the goods offsite from out of your country, will they be able to deliver and what are their costs? Do you expect any change in the cost to produce that modified product? When you’re doing the costing of your product, you’re going to have to include that in it, to come to your final price.
So the questions you’re going to be asking that supplier include the cost to deliver time, and the capacity to deliver. You should also know before going into negotiations, are you going into a country where the culture is different from yours? Do you have to look at language changes? These are some of the many aspects that you have to take into consideration before the contract is written. And even before going to negotiate, you have to pull your costs together. Then, think about how you’re going to get the goods from one place to the next. Are there any problems or anticipated risks along the way? These are some of the things that an SME will be asking their suppliers and manufacturers, to ensure that they can actually deliver on the promise that they’ve made to their potential buyer.
Emiliano: What are some red flags that may come up during contract negotiations?
There are many red flags that can come up during a contract negotiation. Let’s take a look at something that’s a creative product. During your negotiations the other party may ask for transfer of your IP. You have to be diligent to understand why they would want that. Will that restrict you, your IP, or your product from selling to another company? So that is a red flag to look for. Another thing that we could look at is non-competition. Why would you ask for a non-competition clause for a product? Maybe you have plans to go into that field. And eventually the person who is your first supplier will be pushed out. Look out for payment. If someone is asking for payment upfront, from a buyer perspective that’s a red flag.
If you have a lead, you have to do your due diligence to learn more about who your buyer is and what their performance has been with other suppliers.
Emiliano: What are the most common contract errors SMEs make and how can they fix them/ prevent them? And when should an SME engage lawyers, or contract experts to help?
A common error I see is that a business gets an order and they’re really excited about it. It’s just a verbal agreement, and because the seller may be inexperienced and excited to fulfill this opportunity, they go ahead and start making preparations without due diligence. They haven’t thought about risk. Who’s going to take on the risk at what point of the logistics chain? A verbal contract is not a sound contract.
Another common error is also is flip-flopping on price.
You have to do your costing analysis and pricing analysis so that you know that the price that your contract is proposing is the price that will give you your profit will cover your costs and cover your risk.
I have seen instances where a price was quoted and the seller was very happy about that price, but inflation, foreign exchange, fluctuation rates have eaten away that profit. You don’t want to come back to a buyer who you have signed a contract with to say, I can’t supply these goods at that price.
Another thing that you have to be clear about is in which jurisdiction will any sort of dispute settlement occur and which method of dispute settlement. Make sure you have all your I’s dotted and your T’s crossed before going into a contract negotiation. It’s always good to pull together a team so that you have the expertise to cover all your bases. You’re covering most favored nation. You’re covering certificate of origin. Making sure you have the right HS code because you don’t want to be a burden on the buyer, but you also don’t want to be losing anything on your end.
And yes, you have to have legal counsel, whether you’re a seasoned exporter or a new exporter, because laws change. Even if you have a revolving contract, there are instances when laws change and whether you have a revolving contract or not, you’re going to have to make amendments to those contracts to go with the law of the land, especially if you’re using a third party jurisdiction for dispute settlement.