B2B sourcing & trade glossary

Plain-language definitions of the terms that come up when sourcing from overseas factories — quoting, payment, shipping, and quality control.

AQL (Acceptable Quality Limit): The maximum number of defective units that still lets a production lot pass inspection, defined by the ISO 2859-1 sampling standard. An inspector checks a sample size based on the lot quantity and a chosen AQL level (commonly 2.5 for major defects, 4.0 for minor). If defects in the sample exceed the limit, the lot fails.
Bill of Lading (B/L): The transport document a carrier issues to acknowledge receipt of cargo for shipment. It serves as a receipt, evidence of the carriage contract, and — for an original "to order" B/L — a document of title the consignee needs to collect the goods.
CBM (Cubic Metre): The volume of a shipment in cubic metres (length × width × height in metres). Ocean and air freight is priced on whichever is greater: actual weight or volumetric weight derived from CBM. Knowing carton CBM lets you estimate how many units fit in a container.
CIF (Cost, Insurance and Freight): An Incoterm for sea freight where the seller pays the cost of goods, main carriage to the named destination port, and minimum insurance cover. Risk still transfers to the buyer once goods are loaded on the vessel, so the buyer bears loss in transit despite the seller arranging insurance.
Commercial Invoice: The seller’s bill for the goods, used by customs to assess duty and taxes. It states the parties, description and quantity of goods, unit and total price, currency, Incoterm, and country of origin. It must match the packing list and other shipping documents.
Customs Duty: A tax a government charges on imported goods, calculated as a percentage of the customs value (often the CIF value) according to the product’s HS code and any trade-agreement preferences. It is paid by the importer of record before goods are released.
DDP (Delivered Duty Paid): The Incoterm placing maximum obligation on the seller: they deliver the goods, cleared for import with all duties and taxes paid, to the named place in the buyer’s country. Convenient for the buyer but the seller usually prices in a margin for the risk and admin.
DUPRO (During Production Inspection): A quality check run when roughly 20–60% of an order has been produced. It catches process or material problems early — while there is still time to correct them — rather than discovering them at the pre-shipment stage.
Escrow: A neutral third party holds the buyer’s payment and releases it to the seller only when agreed conditions are met — for example a passed inspection or a delivery milestone. It protects both sides without the cost and paperwork of a letter of credit.
EXW (Ex Works): The Incoterm with minimum seller obligation: the buyer collects the goods at the seller’s premises and handles all transport, export clearance, and risk from that point. It gives the buyer full control of logistics but also full responsibility.
FCL / LCL (Full / Less than Container Load): FCL means your cargo fills a dedicated container (typically 20ft or 40ft). LCL means your cargo shares a container with other shippers’ goods, consolidated and deconsolidated at each end. LCL suits small volumes but has a higher per-CBM cost and more handling.
FOB (Free On Board): A sea-freight Incoterm where the seller delivers the goods on board the vessel at the named port of shipment and clears them for export. Risk and cost transfer to the buyer at that point, so the buyer arranges and pays for the main carriage and insurance.
Freight Forwarder: A company that arranges the movement of goods on a shipper’s behalf — booking carriage, consolidating cargo, preparing documents, and coordinating customs clearance. They do not usually own the transport; they contract carriers and manage the chain.
Golden Sample: The reference sample both buyer and factory sign off before bulk production. It defines the agreed appearance, materials, and construction, and becomes the standard a pre-shipment inspection checks the production run against.
HS Code (Harmonised System Code): A standardised numeric code (at least 6 digits, extended by each country) that classifies a traded product. Customs uses it to set the duty rate, apply restrictions, and compile trade statistics. Getting it wrong can mean overpaying duty or facing penalties.
Incoterms: The ICC’s standard trade terms (EXW, FOB, CIF, DAP, DDP and others) that define where cost and risk pass from seller to buyer, and who handles carriage, insurance, and customs. Every quote and contract should state one Incoterm plus a named place.
Landed Cost: The total cost of getting a product to your door: unit price plus freight, insurance, customs duty, taxes, port and handling charges, and inland transport. Comparing suppliers on unit price alone is misleading; landed cost per unit is the real number.
Letter of Credit (L/C): A bank’s written undertaking to pay the seller once they present documents proving they shipped the goods as agreed. It shifts payment risk to the banks but is slow, document-heavy, and costly — usually reserved for large orders or unfamiliar counterparties.
MOQ (Minimum Order Quantity): The smallest quantity a factory will produce in one order. It reflects setup, material-sourcing, and machine-time costs that are uneconomic below a threshold. MOQ often drops for repeat orders or rises when custom tooling is involved.
ODM (Original Design Manufacturer): A factory that designs and makes a product which buyers can rebrand as their own, usually with limited customisation. Faster and cheaper than a bespoke design, but competitors may sell a near-identical product from the same ODM.
OEM (Original Equipment Manufacturer): A factory that manufactures a product to the buyer’s own design and specification. The buyer owns the design and controls the spec; the factory provides production capacity, tooling, and process expertise.
Packing List: A shipping document itemising how the goods are packed: carton count, contents per carton, net and gross weights, and dimensions. Customs, the carrier, and the receiving warehouse all use it to verify a shipment against the commercial invoice.
Pre-Shipment Inspection (PSI): A quality check on a finished order — usually at 100% production and before payment of the balance — where an inspector pulls a random sample and checks it against the spec and golden sample using an AQL standard. A failed PSI is the buyer’s last chance to hold payment.
Proforma Invoice (PI): A preliminary invoice the seller issues before an order is confirmed, stating the goods, quantities, unit price, payment terms, Incoterm, and lead time. The buyer’s signature or deposit against a PI usually confirms the order.
Purchase Order (PO): The buyer’s formal order document, referencing the agreed specification, quantity, price, delivery date, and terms. Once the seller accepts it, the PO is a binding contract and the reference point for any later dispute.
RFQ (Request for Quotation): A structured request a buyer sends to suppliers asking them to quote on a defined product: specs, quantity, packaging, target price, delivery date, and quality requirements. A complete RFQ produces comparable quotes; a vague one produces guesses.
Tooling Cost: The one-off charge to make the moulds, dies, jigs, or fixtures a product needs before mass production. It is paid upfront, separate from unit price, and raises the effective MOQ. Clarify who owns the tooling and where it is stored.