What is DAP Shipping?
- The seller agrees to pay all costs associated with the shipment and is liable to pay for any potential losses arising in transit to the final destination. The seller should obtain a contract of carriage that matches the contract of sale, until the agreed delivery point.
- The buyer is responsible for unloading the goods and paying import duties and any applicable taxes. For example: custom duty, import tariffs, and local taxes.
DAP shipping was first introduced as an International Commercial Term (Incoterm) in 2010 by the International Chamber of Commerce (ICC). The ICC is a representative institution made up of 45 million companies that promote and facilitate international trade. ICC occasionally publishes a set of Incoterms that aim at bringing clarity to international business transactions and contracts.
Understanding the Importance of DAP Shipping
DAP shipping agreements usually have clear guidelines, but may sometimes result in disputes, for various reasons. For example, sometimes the carrier of the goods may incur demurrage. This means that they failed to unload the goods on time, possibly from a delay in the receipt of proper clearance from either of the parties to the trade agreement.
In this situation, the party that failed to discharge its duty of providing timely authorization and complete documentation to the goods carrier is at fault and must pay a fee. Determining who is at fault can be complicated, because the documentation requirements and definitions may vary from place to place.
The fee/cost is prescribed by national authorities, and are different in every country. Often, ports within one country may be controlled by various local authorities, making it a complicated situation with unanticipated issues.
Understanding DAP shipping is essential for multiple reasons:
- Risk allocation: DAP shipping clearly establishes the point at which risk transfers from the seller to the buyer. This provides clarity to both parties and allows for better risk management.
- Cost clarity: by specifying DAP shipping, both parties have a clear understanding of who pays for what in the shipping process. This can prevent unexpected expenses and disputes later on.
- Customs and duties: under DAP shipping terms, the buyer is responsible for import clearance and any applicable duties or taxes. This distinction is crucial because import duties can be a significant cost, and the buyer needs to be prepared for this.
- Certainty in operations: by adhering to internationally recognized terms like DAP shipping, businesses can operate more confidently. Both parties understand their responsibilities, leading to smoother transactions and fewer misunderstandings.
- Global standardization: since Incoterms like DAP shipping are recognized worldwide, they facilitate international trade by providing a common set of guidelines. This helps in reducing misunderstandings and ambiguities in international transactions.
- Logistical planning: sellers will be responsible for ensuring that goods are safely transported to the destination. As such, they need to plan the logistics thoroughly, which can result in more efficient and safer transportation methods.
- Protection for buyers: the buyer only assumes risk once the goods have arrived at the specified location. This provides a level of protection for the buyer, as they’re not accountable for issues that might arise during transportation.
People often compare the benefits of delivery duty paid (DDP) shipping vs. DAP shipping. Let’s take a look…
The Comparison: Delivery Duty Paid (DDP) vs DAP Shipping
- Delivery Duty Paid (DDP) shipping is where the seller takes all responsibility for fees and risks of shipping goods, until they are delivered to an agreed place by the buyer and seller.
- DDP shipping gives the buyer security and reduces risk, especially when shipping internationally.
- DAP shipping offers security and protection to both parties, at different stages of the journey.
- The buyer can have confidence knowing that their goods will be delivered from the origin to their delivery location (agreed on by both parties), and will be ready for unloading.
- The seller receives a secure method for international shipping that works for the customer. They’re also then not responsible for any potential issues that may occur around customs clearance, and import taxes and duties.
- Some buyers may prefer that the seller takes most of the responsibility, so that they are not at risk. The sellers need to decide whether they want to handle most of the risk and cost.
DAP Shipping and the Supply Chain
Here’s how DAP shipping influences various aspects of the supply chain:
- Planning and forecasting: knowing that a seller is responsible for delivering goods right up to a specified location (under DAP shipping) allows buyers to plan inventory and sales forecasts more efficiently. Buyers can anticipate when goods will arrive and allocate resources accordingly.
- Cost management: under DAP shipping, the seller bears significant logistics costs up to the point of delivery. This clarity allows both parties to budget appropriately. Sellers can factor in transportation and other associated costs, while buyers need to focus on duties, taxes, and further distribution expenses.
- Logistics optimization: since the seller is responsible for ensuring goods reach the specified location, they’ll likely optimize routes, choose appropriate shipping methods, and select reliable carriers to minimize risks and ensure timely delivery.
- Vendor-client relations: clear demarcation of responsibilities, as is the case with DAP shipping, can lead to better vendor-client relationships. Both parties understand their roles, which can reduce disputes and foster trust.
- Inventory management: for the buyer, knowing when goods will be delivered to the specified location means they can better manage warehousing needs. Space can be allocated, and resources can be arranged in anticipation of the goods’ arrival.
- Risk management: clarity in risk transfer is one of the most significant benefits of DAP shipping. The seller bears the risk until the goods are delivered at the specified place. Buyers are protected from any mishaps during transit.
- Customs and compliance: while the seller handles transportation, the buyer oversees import clearance. This clear division ensures that both parties can focus on their areas of expertise. Buyers, being more familiar with their local regulations, can efficiently handle customs procedures.
- Flexibility: since DAP shipping can be used regardless of the mode of transport (be it sea, air, rail, or road), it provides flexibility in supply chain strategies. Depending on the urgency, cost considerations, or other factors, different modes of transportation can be employed.
- Customer satisfaction: at the end of the supply chain is the customer. Efficient and timely delivery of goods, as facilitated by DAP shipping, leads to higher customer satisfaction levels. If buyers can rely on sellers to provide punctual deliveries, it ensures that the end customer gets products on time.
- Competitive advantage: companies that effectively utilize and manage DAP shipping terms can achieve a competitive advantage by offering reliable deliveries, managing costs, and reducing lead times.
With DAP shipping agreements, it is critical for the seller to track the location of their container, throughout the container voyage. These situations can be mitigated by having vessel tracking and ETA prediction technology, ensuring greater visibility.
DAP shipping profoundly affects supply chain dynamics by clearly defining roles, optimizing logistics, and ensuring the smooth flow of goods. But, as with all Incoterms, both parties must fully understand their responsibilities to reap the benefits.