Clear communication between sellers and buyers is crucial for smooth shipping operations and fluid transactions. When misunderstandings arise, it can lead to unexpected fees, shipment delays, and disputes. Fortunately, the Free On Board (FOB) Incoterm® can help businesses and buyers better understand their responsibilities.
Key takeaways:
There’s a lot to cover when it comes to FOB in shipping, so let’s get into the details.
Free On Board (FOB) is an Incoterm® that defines the point at which responsibility for a shipment transfers from the seller (shipper) to the buyer. While Incoterms were created by the International Chamber of Commerce (ICC) and typically apply to international freight movement, they can be altered and used for domestic shipments.
Depending on the agreed-upon FOB terms, either the buyer or the seller takes on the cost and liability for the freight at different points in the shipping process. There are two primary types of FOB terms.
This includes:
We’ll explain each FOB variant in the next two sections.
Related: Domestic Incoterms®
Under FOB Origin, also known as FOB Shipping Point, the buyer assumes ownership and responsibility for the goods as soon as they are dispatched from the seller's premises.
This means:
There are numerous pros and cons that come with using FOB origin. It’s essential you understand what these are so you know what to expect.
The pros of FOB Origin include:
Buyers can select their preferred carriers and shipping routes, allowing them to manage logistics according to their schedules and standards. Sellers transfer the risk and responsibility to buyers once goods are shipped, reducing their liability during transit.
Here are the cons of FOB Origin:
Buyers assume responsibility for goods during transit, bearing the risk of loss or damage once the shipment leaves the seller's facility. Managing shipping logistics under FOB origin can also be complex for buyers, especially if they don’t have experience handling this responsibility.
This includes:
Despite the greater control FOB Origin gives buyers, it comes with more risk and logistical responsibilities.
Under FOB Destination, the seller retains ownership and responsibility for the goods until they arrive at the buyer's specified location.
This means retaining control over:
Now that you understand how FOB Destination works, let’s go over the pros and cons.
The pros of FOB Destination include:
The seller assumes responsibility for the goods during transit, mitigating the buyer's risk of loss or damage until delivery. Buyers benefit from a more straightforward shipping process, as the seller manages transportation arrangements and associated administrative tasks.
Let’s look at the cons of FOB Destination:
Sellers bear the risk of loss or damage during transit, which can impact profitability and reputation if issues arise. Covering shipping expenses may lead sellers to incorporate these costs into product pricing, potentially making their offerings less competitive.
Under the right circumstances, FOB Destination can still strike a good balance for you and your buyer. As a seller, you’ll have more control over the transportation process. Your buyer will have fewer responsibilities to fulfill, which allows them to enjoy a smoother shipping experience.
When FOB shows up in shipping documents, you’ll see it used in four different ways. It’s essential to understand these variations and what they mean.
These include:
The terms Freight Collect and Freight Prepaid further clarify who pays for the shipping costs. Freight Collect means the shipper will pay transport costs, while the Freight Prepaid means the buyer will pay transport expenses. FOB will be included with these notations in domestic shipping documents like the Bill of Lading (BoL) and Purchase Orders (PO).
As a seller, the FOB term will only impact your shipping costs if you’re using FOB Destination. You’ll have to cover any transportation-related expenses until your shipment reaches the final destination specified by your buyer.
The reverse is true should the shipping arrangement fall under FOB Origin rules.
When using FOB Destination, it might be a good idea to incorporate shipping expenses into the total price of your products. This means buyers will pay more upfront costs for the goods, but you’ll be able to make up for your losses. Using a trustworthy and quality freight service can actually serve as a sell point for your businesses.
To better illustrate how FOB works in shipping, we’re going to give you some examples of FOB Origin and FOB Destination in use. First, take a look at this graphic we’ve provided that shows shipper and buyer responsibilities under FOB Origin. I’ll use two fictional companies in a grocery-based example: Nom Nom Flakes as the shipper/seller and Grocery King as the buyer.
As this example shows, all responsibility for the goods transfers to the buyer after the carrier receives the freight. Now, take a look at our graphic that shows shipper and buyer responsibilities under FOB Destination in an agreement between a footwear distributor (Sole Survivors) and retailer (Bigfoot’s Closet).
Under FOB Destination, the shipper has more control over the transportation process than the buyer.
Related: Types of Dry Van Trailers
Although FOB has many advantages and is frequently used for shipping inside the U.S., there are many other terms that are beneficial for shippers.
This includes:
Under FCA, the seller delivers the goods, to a carrier or another party nominated by the buyer, at a specified location. This term is versatile and can be used for any mode of transport. Risk transfers from the seller to the buyer once the goods are delivered to the carrier at the named place.
EXW requires the seller to make the goods available at their premises or another named place. The buyer bears all costs and risks involved in transporting the goods to the final destination. As a result, EXW places minimal responsibility on you as a shipper and maximizes responsibility on the buyer.
If you’re responsible for handling all shipping responsibilities, you’re going to need a reliable 3PL. At USA Truckload, we leverage our extensive experience in the logistics industry and our vast network of carriers to provide tailored solutions that meet your shipping needs. We offer a variety of logistics services you can leverage.
Our Services:
Fill out your Request for Proposal (RFP) to explore how our services can benefit your business. Contact us at (866) 353-7178 or visit our contact us page. Our team is ready to assist you with any questions and provide customized solutions for your shipping requirements.
Meet with one of our knowledgeable logistics specialists for a consulting session. They can provide you with helpful advice and insights that will make your shipment a success.
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