In short: The incoterm allocates delivery, risk and cost between seller and buyer, and the ICC is explicit that it says nothing about transfer of title, price or payment method. Under FCA, FOB and the four C terms risk passes at origin, so the weeks of ocean transit are your exposure and your working capital while the planning run is often still treating those units as the supplier's problem. The C terms split cost from risk, with the seller paying carriage to a destination it stopped bearing risk for at the load port, and Incoterms 2020 raised the required cover on CIP to Institute Cargo Clauses (A) while leaving CIF at Clauses (C). Supplier on time performance and replenishment lead time then get measured at different points on the same journey, and only one of those points belongs in a reorder calculation.
Somewhere near most import planning teams there is a spreadsheet with a column called on the water, listing shipped purchase orders, a vessel name, and a guess at when the container clears. The ERP holds the same information in principle. The spreadsheet exists because the planning run treats those units as absent until a goods receipt is posted at the warehouse door, so a projection that should start with six weeks of cover afloat starts at zero every Monday.
Underneath that spreadsheet is a decision somebody made during sourcing and nobody carried into the parameters. Three letters on the purchase order, agreed by a buyer optimising unit price, determine where the goods become your risk, which legs of the journey belong in your lead time, and whose balance sheet carries the stock while it moves.
What the eleven rules actually allocate
Incoterms 2020, published by the International Chamber of Commerce in September 2019 and in force from 1 January 2020, sets out eleven rules. Seven work for any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU and DDP. Four apply only to sea and inland waterway carriage: FAS, FOB, CFR and CIF. DPU replaced the older DAT in the 2020 revision, and the FCA rule gained an optional mechanism under which the buyer instructs the carrier to issue an on board bill of lading to the seller, which matters when a letter of credit demands one.
Each rule answers four questions: where the seller delivers, when risk of loss passes, who pays which costs, and who handles export and import formalities.
The ICC is equally clear about what the rules leave alone. They do not transfer ownership of the goods, set the price, specify the payment method, or govern the consequences of breach. Title passes where your contract of sale says it passes, and if the contract is silent the governing law decides. For international sales the UN Convention on Contracts for the International Sale of Goods, in force since 1988, carries its own default rules on risk in Articles 66 to 70, which operate where the parties have not agreed otherwise.
So the three letters are a strong signal about who bears the loss and who pays the freight, and a weak signal about who legally owns the pallet. Most ERP configurations blur the two, because ownership is the field the system needs and the incoterm is the data it has.
The term decides which legs of the lead time you own
Take an item bought FCA Ningbo. The supplier's obligation ends when the goods are handed to the carrier the buyer nominated, at the named place. Everything after that point is on the buyer: main carriage, arrival, customs, inland leg to the distribution centre.
Now look at how that supplier is measured. The purchase order carries a delivery date, receiving posts against arrival at the DC, and the on time report compares the two, which scores the supplier on roughly forty days of activity it does not control. A supplier handing over every consignment on the agreed day looks unreliable because the ocean leg moves around, and the report cannot tell you whether the problem is production or the port.
Break the journey into legs and measure each. A typical Asia to Europe replenishment has five: production and readiness at the factory, origin handling and export clearance, main carriage, import clearance and release, inland transport to the receiving site. Say those legs average 21, 4, 32, 5 and 3 days. Total 65. Under FCA the supplier owns the first leg and part of the second, which is 23 or 25 days of the 65. Under DDP the supplier owns all of it except the last mile you asked for.
Two numbers come out of the same journey and they answer different questions. Supplier performance is the first. The replenishment lead time that goes into the reorder point is the full 65, because that is how long a decision takes to become available stock. Using one where the other belongs is the common failure, and it shows up as a supplier scorecard reading fine while the site keeps running dry.
The variability matters more than the mean here, and the legs behave differently. Production readiness under a stable contract is fairly tight, while main carriage is not. The World Bank's Container Port Performance Index, published annually since 2021 with S&P Global Market Intelligence, exists because vessel time in port varies enormously between terminals, and that variance lands on whichever party owns the leg. How it sizes a buffer is a separate calculation with its own post (I3), and what customs does to the release leg belongs with FF4.
In-transit stock is on your books before it reaches the warehouse
Under FCA, FOB, CFR, CIF, CPT and CIP, risk sits with the buyer from the origin point, and under most contracts written against those terms title follows shortly behind, so the stock is yours for the whole time it is moving.
Work the arithmetic on one item. Weekly demand of 1,200 units, 32 days of ocean transit plus 8 days of handling and clearance either side, so about 5.7 weeks of pipeline. That is roughly 6,850 units permanently in motion. At a landed cost of 34 per unit, about 233,000 of working capital is sitting in the pipeline at any moment, and it never appears in the inventory report finance argues about, which runs off warehouse stock.
Two consequences follow. The working capital figure the business manages is understated by the pipeline, which distorts every conversation about inventory reduction, and the planning projection is understated by the same units, so the system recommends orders for stock already paid for and moving. Netting in-transit quantities into projected available balance is an unglamorous configuration question in most planning systems, and it changes recommendations immediately on any item with a long ocean leg.
The comparison people reach for here is DDP, where the supplier delivers to your door, cleared, so the pipeline is theirs. That does not make the cost disappear. The supplier funds the same weeks of stock and prices them in, usually with a margin on the financing, and the buyer loses sight of what it is paying for. Comparing an FCA quote with a DDP quote means normalising both to delivered cost plus the carrying cost of whichever pipeline you fund, which BB11 works through in detail.
The C terms split cost from risk
CFR, CIF, CPT and CIP each require the seller to contract and pay for carriage to a named destination while risk passes to the buyer at origin. This is the part practitioners get wrong most often, understandably so: the seller arranged the shipment, paid the freight and is named on the booking, while the goods travel at the buyer's risk.
Play it out. A CIF shipment is damaged by water ingress mid ocean. The seller has performed, its obligation having ended when the goods were on board at the load port, and the buyer still owes the full invoice. Recovery runs through the cargo insurance, which under CIF the seller need only hold at Institute Cargo Clauses (C), a named perils cover that does not respond to much of what happens to containers.
Incoterms 2020 changed exactly this in one place. CIP now requires cover at Institute Cargo Clauses (A), an all risks basis. CIF was left at Clauses (C), on the reasoning that bulk commodity trade uses it heavily and all risks cover is not the norm there. If you buy manufactured goods CIF, you are relying on the narrow cover unless the contract raises it, and raising it takes one sentence in the purchase agreement.
Under the D terms the position reverses. DAP, DPU and DDP keep risk with the seller until arrival, so a mid journey loss is the seller's to solve and your replenishment arrives late instead of arriving ruined. Which of those two outcomes hurts more depends on whether your constraint is cash or availability.
EXW and DDP create work nobody prices
The two ends of the range look convenient and both come with a catch.
EXW puts every obligation on the buyer, including export clearance in the seller's own country. A buyer with no establishment there often cannot file the export declaration in its own name, and the practical fix is that the seller does it informally while the contract says otherwise. The ICC's own guidance points buyers towards FCA for this reason. What planning sees is a gap at origin where nobody has a documented responsibility, showing up as consignments sitting at the factory waiting for someone to book them.
DDP puts import clearance and all duties and taxes on the seller. Sellers routinely price this without being able to recover import VAT in the destination country, so the unrecoverable amount returns inside the unit price. It also makes the seller the importer of record, which decides who carries the compliance liability if a classification is challenged later.
Both terms tend to be chosen because they simplify a conversation rather than because they fit the trade. When a buyer tells me every supplier is on EXW, the follow up question is who actually files the export declaration, and the answer is usually a person nobody in procurement has met.
Putting the term into the planning parameters
The work here is small and mostly plumbing.
Store the incoterm and the named place as attributes on the item supplier record, somewhere the planning system can read them rather than only inside a signed PDF. A term without its named place is incomplete, since FCA Ningbo and FCA seller's works are different agreements with different risk points.
Split the lead time into legs and measure each. Four timestamps is the minimum: purchase order date, ship or handover date, arrival date, receipt date. Most companies hold the first and last, and the forwarder holds the middle two in a format nobody has loaded. Getting those two dates into the planning data is the highest value hour in this piece.
Point supplier performance at the legs the supplier owns. Score against handover at the named place for origin terms, and against arrival for D terms. Anything else measures the ocean and calls it the supplier.
Set the ownership flag from the term, then check it against the sale contract. Where the two disagree the contract wins, and the disagreement is worth raising, because it usually means one of them was copied from a template.
Normalise quotes to delivered cost plus pipeline carrying cost before comparing suppliers on different terms, or the DDP supplier will look expensive and the EXW supplier cheap for reasons unrelated to either.
Where this stops
Incoterms govern the contract between seller and buyer. They do not bind the carrier, so a CIF seller's freight contract can carry provisions the buyer never sees and still lives with. They say nothing about a party that cannot perform at all, which is HH4's territory.
The bigger limit is that reallocating a term does not reduce the underlying variability by a single day. Moving from FCA to DAP transfers the ocean risk to the supplier, who prices it, and the port is just as congested afterwards. What the term changes is who is exposed and where the cost is visible. Transferring exposure to the party with more control over it sometimes improves the outcome, and more often it relabels the same cost.
The measurement recommendation also has a data floor. Leg level timestamps come from the forwarder or the carrier, and the quality of that feed varies by lane and by provider. Six months of clean ship and arrival dates characterises the main carriage leg well enough to plan with. A spreadsheet updated by hand from emails does not, and the honest interim step there is a fixed transit allowance per lane, reviewed quarterly.
Pull the top fifty item supplier combinations by value this week, put the incoterm and the named place next to each one, and check whether the replenishment lead time in the system covers the legs after that named place.