Incoterms
Incoterms are the standardized three-letter shipping terms (FOB, CIF, DAP, EXW, FCA, DDP, and others) that define which party (buyer or supplier) is responsible for freight, insurance, customs, and risk transfer at each stage of a shipment. They are published by the International Chamber of Commerce; the current version is Incoterms 2020.
Part of the Procurement Glossary
How it works in practice
A typical production buyer sees the same handful of Incoterms over and over: EXW (you pick up at the supplier's dock), FOB or FCA (the supplier hands off to your carrier at an agreed point), DAP (the supplier delivers to your dock), DDP (the supplier delivers to your dock with all duties paid), and occasionally CIP (the supplier ships and insures to a named place). The other Incoterms exist but rarely come up in production buying outside of bulk commodities.
The Incoterm on the PO determines three things the buyer cares about. First, who pays for freight (and who pays the premium when an expedite ships air instead of ocean). Second, who is liable when a shipment is damaged, lost, or delayed in transit. Third, when the receipt actually counts for ERP and AP purposes (which can be at the supplier's dock under EXW or at your dock under DAP, with very different planning implications).
A senior buyer reads the Incoterm on a quote the same way they read price and lead time. An EXW quote that looks cheap may not be cheap once the inbound freight is added; a DDP quote that looks expensive may be the same number once you account for what the buyer's side actually costs.
Why it matters
Getting the Incoterm wrong (or misreading what it implies) is how cost surprises and liability disputes start. A buyer who assumes a DAP quote means the supplier handles customs and discovers at the border that DAP leaves customs to the buyer is now chasing a shipment held at the port. A buyer who treats an EXW shipment as "the supplier's responsibility until it arrives" is going to have a hard time when the carrier loses the box.
Incoterms also shape when an expedite makes sense. Under DAP or DDP, an expedite often means the supplier upgrades the freight and bills it back. Under EXW or FCA, the buyer's freight forwarder makes the upgrade and the buyer pays directly. Same urgency, very different invoice.
Tips
Confirm the Incoterm on every new supplier and every new region
Defaults vary by company and country. Do not assume the supplier's standard term matches your standard term. Read the line on the quote and the PO; if it is missing, ask.
Know who pays expedited freight under your common terms
When you call for an expedite, you should already know whether the cost lands on the supplier's next invoice or on your freight bill. Surprise freight charges are a common source of friction.
Treat customs as its own decision, not a freight detail
DAP, DDP, and the older variants split customs responsibility differently. For international shipments, confirm explicitly who clears customs and who pays duty before the shipment leaves; do not assume the Incoterm letter alone is sufficient.
How PO-Relay helps
PO-Relay's Email Intelligence catches shipment-related supplier emails (acknowledgments, ASNs, delay notifications, partial-shipment notes, freight updates) and surfaces them on the affected open POs. Open Loop Tracking keeps the loop visible from acknowledgment through receipt regardless of which party owns which leg of the shipment.
PO-Relay does not classify Incoterms or interpret risk-transfer rules. The Incoterm itself lives on the PO in your ERP, and the freight, insurance, and customs decisions stay with the buyer, the supplier, and the freight forwarder. PO-Relay's contribution is making sure the supplier-side communication that follows from those decisions stays tied to the right open PO.