Every seller should have FOB terms defined to determine when the buyer accepts ownership of goods being shipped.

What Does FOB Mean?

Every seller should have FOB terms defined to determine when the buyer accepts ownership of goods being shipped.

What does FOB mean?

During a site visit with a prominent shipper a high-level purchasing person called it fob (rhyming with “bob”). That highlights a need to understand how this often-misused term is defined.

First of all, FOB – or F.O.B. – stands for Free On Board. It is the point in the supply chain where the seller relinquishes ownership, and the buyer accepts ownership of products purchased in a specific transaction. Every vendor/client relationship should have the FOB terms specified in their PO (that’s purchase order) purchase terms.

Along with purchase terms, shipping terms are equally as critical to your logistics carrier management best practices. Identifying both terms will determine ownership, risk, and logistics cost.

Here is more detail about FOB, beginning with common transportation terms you may encounter. We will also explore steps you can take to deal with FOB issues at your business.

FOB Terms to Know and Understand

Making sure the FOB terms suit your company’s needs is a powerful way to gain a competitive advantage in your day-to-day when shipping and accepting goods.

FOB Terms: FOB Origin, Freight Collect

“FOB Origin” refers to the legal fact that the buyer assumes title of the goods the moment the freight carrier picks up and signs the bill of lading (BOL) at the origin pick-up location.

“Freight Collect” refers to the legal fact that the buyer is responsible for all freight charges. The buyer also assumes all risks of transportation. That means they are responsible for filing claims in the case of loss or damage.

FOB Terms: FOB Origin, Freight Prepaid

“Origin” refers to the legal fact that buyer takes ownership at the time of carrier pickup.

“Freight Prepaid” refers to the legal fact that the seller accepts responsibility for all freight charges and freight claims exposure.

FOB Terms: FOB Destination, Freight Collect

“FOB Destination” refers to the legal fact that the seller retains title and control of the goods until they are delivered. The seller selects the carrier and is responsible for the risk of transportation and filing claims in case of loss or damage.

“Freight collect” refers to the legal fact that the buyer is responsible for the freight charges.

FOB Terms: FOB Destination, Freight Prepaid

“Destination” refers to the legal fact that the seller retains ownership until a claim-free delivery is affected.

“Freight prepaid” refers to the legal fact that the seller is responsible for all freight charges.

How can FOB Terms Affect Your Company?

Failure to properly manage and assess risk regarding purchase and transportation terms can affect any company’s bottom line. 

One distributor receives many shipments from various vendors on a daily basis. The policy on this company’s dock is that personnel refuse any order that has the slightest sign of damage. The hassle involved with filing a claim or ordering replacement parts for potential damages motivates this blanket policy to refuse these shipments.

When you think about legal liability, you need to know your FOB terms with vendors. In this case, the vendor with most refused shipments set “F.O.B. Origin, Freight Prepaid” terms. This meant that even though the vendor was paying the freight transportation cost, the distributor owned the freight from the time the shipment was tendered to the carrier. That puts responsibility of loss or damage with the receiver. By refusing these shipments, the distributor was returning something that it actually owned.

Fortunately for this distributor the vendor had agreed to accept the goods back into inventory,  even though they had no legal obligation. 

With this new awareness, the distributor rectified the problem by adjusting the purchase terms for future orders.

Having an advocate to review your agreements and explain your day-to-day business procedures to each of your vendors provides insight and clarity to all involved. Each department may not know what the other is doing in your organization, but your logistics provider can facilitate the best transition of goods for your company.

How Do You Handle FOB Issues?

A late shipment, a break down, a shipping slip filled out improperly – no matter what it is—a circumstance can arise to challenge the best working dynamic in logistics.

When an incident occurs in the shipping and receiving of goods, it usually causes some level of disruption. With that in mind, it is very important to have proper documentation, especially in regards to FOB terms.

If you are a shipper, make sure the FOB terms are clearly defined, understood and established to properly reflect the needs of the business relationship. You may want your customer to be FOB Origin so they own the goods when they leave your door. Alternately, you may want to own the goods until they are delivered intact. In fact, that is a great customer service selling point. The same holds true with companies that receive a lot of goods.

Knowledge is powerful, and having a great business relationship with your vendors can overcome multiple barriers. The personal relationship will provide flexibility for difficult situations.

What Does FOB Mean Around the World?

According to the International Chamber of Commerce (ICC) standard trade definitions known as Incoterms, FOB means Free on Board. In 2010, the ICC altered the definition to state the seller must load the goods on board the vessel nominated by the buyer.

The cost and risk are divided when the goods are actually on board of the vessel (this rule is new!). The seller is responsible for the goods to be cleared for export. The term is applicable for maritime and inland waterway transport only but NOT for multi-modal sea transport in containers.

The buyer must instruct the seller on the details of the vessel and the port where the goods are to be loaded, and there is no reference to, or provision for, the use of a carrier or forwarder. Free on Board is a term has been greatly misused over the last three decades ever since Incoterms 1980 explained that FCA should be used for container shipments.

When developing any business agreement, to avoid a dispute, the buyer should seek to specify in the contract of sale what costs will be borne by the seller and what costs fall on the buyer.

According to the rules established by the ICC, where the buyer has given an indication of the loading point but later wants to change these instructions, the seller is not obliged to cover the expenses of transferring the goods to a new loading point, provided the seller has acted in line with the buyer´s first instructions and the buyer´s new notice arrived too late for the seller to comply without extra cost. It is essential in the contract to make it clear when ownership passes from the seller to the buyer.

Below are four different ways in which F.O.B. domestic terms and the international equivalent are used in a purchasing agreement.

North American domestic FOB terminology differs from terminology used in international shipping.

Each situation differs depending on place, parties, industry, applicable laws and relevant customs and usages. General guidance cannot be expected to determine an outcome in a dispute.

Having a trusted partner with international trade expertise can relieve the headaches and provide insight for future growth.

Transportation Costs in 2021: Less-Than-Truckload

Transportation costs are volatile for less-than-truckload shipments as capacity constraints persist.

Carriers are reacting to market changes in other ways beyond transportation costs, as well. One example: early in 2020, one national carrier indicated it would match any volume LTL quote from another carrier. Six weeks later, that carrier wasn’t accepting any volume shipments due to the dramatic shift in the market.

Carriers also have grown more comfortable implementing LTL surcharges that further drive up transportation costs. Some are turning away freight that is more difficult to handle.

The LTL transactional market is seeing tight capacity and generally widespread delays, including with premium carriers. Driving this is a 10-12 percent growth in demand, several times the typical range. 

Capacity constraints in the LTL markets may seem out of step with some of the economic news, which continues to reflect the pandemic toll on many businesses. The September 2020 unemployment rate (7.9 percent) was more than double the rate a year earlier. And while the gross domestic product jumped by $1.64 trillion in the third quarter of 2020, that followed a drop of $2.04 trillion in the second quarter.

One reason for the disconnect is the drop in the consumption of services, which dwarfs the drop in the consumption of goods. Between the first and second quarters, consumption of services dropped 13.3 percent, according to the American Trucking Association. The consumption of goods dropped by a more modest 2.8 percent, also according to the ATA. 

Looking at LTL Transportation in 2021

Even as the economy slowly recovers, demand for goods likely will outpace demand for services, the ATA predicts. Until a vaccine has been broadly distributed and COVID cases drop drastically, consumers appear comfortable continuing to spend more time at home. As they do, newly formed online shopping habits probably will continue. Online purchases of furniture and appliances, apparel, and groceries, among other items, are likely to remain at least 10 percent higher post-pandemic, consulting firm McKinsey found. 

This shift is contributing to expected ongoing capacity tightness. In turn, that likely will contribute to a favorable carrier’s market next year. The rate increases some carriers are imposing in high-capacity lanes likely will continue into 2021, until capacity corrects itself.

The level of those rate increase can vary. LTL carriers develop market-specific rate bases so the impact of increases passed along in 2021 can be influenced by carriers’ operating needs and your shipping characteristics. 

Carrier mergers also appear poised to continue. Most take one of several approaches. Some companies join forces to pool resources and become more efficient. Others bring together companies in different sectors, allowing all to expand their range of services.

Shippers of bulky, low-density, non-dock-to-dock freight, along with shippers of over-dimensional freight that parcel carriers are trying to price out of the parcel network, may face additional obstacles. Some LTL carriers are trying to push these freight types to the truckload market and are raising rates accordingly. 

Surcharges appear likely to remain and even increase. If some states, as predicted, add taxes, other LTL surcharges may appear. 

Prior to the pandemic, some LTL carriers began investing in box trucks so they could more easily handle residential e-commerce deliveries. These efforts have slowed during the pandemic and capacity crunch. However, once demand and capacity rebalance, expect to see LTL carriers make another move into this market. 

Managing Transportation Costs Through Capacity Constraints

While shifting from one carrier to another might seem like a way to improve service and transportation cost, jumping may not help. In fact, it’s possible service will further decline. 

Several other steps tend to be more effective. One is to take a longer-term perspective, work with a carrier, and establish a partnership that benefits all involved. Another is to build lead time into processes and set realistic expectations with end customers. 

For more insight on the motor freight environment we expect to emerge in 2021, watch our webinar focused on Brokerage and Capacity Planning 2021. We take a deeper dive into the outlook for LTL, Truckload and International transportation in our Freight Rate Outlook 2021. Read it today for multi-modal rate forecasts and analysis from our Supply Chain Masters.

Outsourcing in Logistics Management? 4 Questions to Ask

If you are a growing company and are not already asking questions about outsourcing in logistics management, you will soon – especially considering all the changes we’ve experienced in our economy. 

When weighing pros and cons of this important operational decision, start with a look in the mirror. Who are you as an organization?

You examine closely potential partners for any outsourcing relationship. You should pursue the same due diligence within your own organization. Knowing where your business stands in key areas can help you decide if the time is right to insource or outsource logistics management.

Here are four things you need to know about your organization – and any of your partners – to drive your insource/outsource decision. 

  1. Do We Have the Supply Chain Talent? People are the driver behind success. This is incredibly important in today’s supply chain environment. There’s so much change happening in the marketplace you have to stay on the cutting edge

    How do you stay on the cutting edge? Experienced people with tons of drive, in terms of learning and bringing innovative ideas to your organization.

    The supply chain talent gap is already big, and it is only going to get bigger. Companies are fighting for the top talent, and it is difficult competing against companies with unlimited budgets – Amazon, Apple, DHL or Transportation Insight.

    Are you confident that your company has the ability and the resources to attract and retain top-tier supply chain experts? As a mid-market or small market company, it is not going to be easy to get.

    And it’s not just the talent. What is your bench strength? Is your supply chain resource depth going to be able to rise to challenges and power your company’s disruption-filled environment? 

    The intelligence, and the experience that these people have is critical, but it also comes down to raw numbers. If you are a growing organization, maybe at one point, one person with the experience and intelligence necessary to do the job can effectively handle every step of your supply chain. 

    As you scale your business, you may need more than one person. In our webinar we talk about how possessing the agility to scale up your organization rapidly can make a big difference in the responsiveness you need to deliver on sales. 

    Other organizations experiencing their own growth face those same needs for people. That exacerbates the talent gap.
  2. Do We Innovate Processes by Nature? As you continue to scale your business to meet demand, are you confident that you have the processes in place to not only support that, but also innovate within those processes over time? Is that driven through KPIs? Or through the talent that you have?

    Many organizations are not set up to consistently advance innovation and measure that evolution. Companies like Amazon have process innovation inherent in their DNA, but not everyone has it at their core.

    The first half of 2020 has been a stark reminder: processes that were sufficient yesterday may not position you to compete tomorrow. To respond rapidly during a global economic disruption, a dynamic shift to e-commerce, or even a simple hiccup, it is necessary to evolve.

    As you do, collecting and monitoring data around process change determines whether you are heading in the right direction or toward more required adjustments.

  1. Do We Have the In-House Technology? The speed of change in technology is nearly impossible to keep up with unless that is your primary focus. Does your current technology platform support your supply chain management now? Will it continuously evolve with you as your customers’ demands change?

    You can build your technology stack, maintain it in-house, and join the race with the Joneses of the Technology World – SalesForce, Microsoft and Amazon. This generates a need for ongoing capital investment. 

    Unless you are a technology company, this might not be your area of expertise. One of those technology companies will sell you a base solution and customize it at added cost.

    Alternately, you can realize cost effective value working with a partner built on technology to suit your specific business needs. Be mindful of the cultural effects a new partnership might create. 

    Change management is a huge piece of outsourcing in logistics management, but it can also allow you to redeploy current resources toward supporting your core competency. 
  2. Does this Fit Our Culture? Culturally, what does your organization look like? How do you make decisions? Is it a top-down, “You’re going to do what I tell you to do,” or a bottom-up, “Hey, I want ideas, bring the ideas.” 

    Are you seeking internal innovation or are you more focused on your core competency? Do you build or buy to solve challenges? What will our culture tolerate? What will it support? What does it really need?

    You have to be honest with yourself, and your company, and your partners. Having this perspective is imperative to the success of any relationship. 

    You could be the best company in certain spaces, but outsource certain things that you are not good at, culturally. To do that, you have to understand your organization. Even though Amazon is extremely good at what it does, it also recognizes the areas where it is not good. That drives focused Amazon investment into supply chain improvement opportunities.

    Understanding your culture will also help determine how you work with your partners, and whether your organization is in a position to realize success from an outside relationship. 

Master the Logistics Management Dilemma: Insource vs Outsource

People, process innovation, technology and culture. If you are considering outsourcing in logistics management, develop a clear understanding of these four aspects of your own organization. Keep them in mind when considering potential partners.

For more insight that can help you determine whether your company is better suited to insource or outsource logistics activities, watch our webinar in Transportation Insight’s Supply Chain Masters Digital Event Series. 

Open the webinar today for real world examples of companies evolving their supply chain strategy for growth. You will also get insight on the three types of strategic outsourcing approaches and four things that your logistics partner must be able to deliver.