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?

I recently visited a prominent shipper, and a high-level purchasing person who called it fob (rhyming with “bob”). At that moment, I knew I needed to write to further explain 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. 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. I visited a distributor that 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.

Concerned about who had legal liability, the first thing I wanted to know: the distributor’s FOB terms with vendors. As we discovered, 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.

In this case, the distributor was very fortunate in that the vendor had agreed to accept the goods back into inventory, although they had no legal obligation to do so. The company was grateful for the explanation and took steps to rectify 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.

Budget Planning 2021: 9 Supply Chain Things to Know

The booming e-commerce marketplace opens access to new segments of consumers seeking direct delivery on a growing list of staples previously procured through brick-and-mortar channels. Meanwhile, end users seeking personal protective equipment, sanitizers, cleaning supplies and other products required for contagion response will create new revenue streams for organizations nimble enough to shift supply chains and adjust processes to meet fluctuating demand.

Responding in this environment, executives who prioritize supply chain strategy will be best positioned to not only meet and exceed customer expectations, but also control costs that jeopardize bottom line profit.

Looking ahead to the remainder of 2020 here are some looming trends I expect to emerge, as well as recommendations for how a supply chain master can continue to control business performance, even through the disruptions that are bound to happen in 2021.

4 Supply Chain Predictions Influencing 2021 Planning

Looking ahead to the remainder of 2020, ongoing marketplace awareness informs a few predictions that will determine priorities for 2021.

  • The recovery will be a saw tooth, with an upward trend. There will be ups and downs as economic activity re-emerges, particularly in regions that experience fluctuating levels of COVID-19 outbreak and control. Companies have to really protect themselves for that and plan alternative ways to serve their customers and compensate for workforce disruption. As Gartner points out, the path to recovery will be unique for every organization as they respond, recover and renew.

  • Companies that deal in non-essential goods will struggle, and they need to be the most agile. Consumer spending will continue to shift, largely toward e-commerce channels. There’s going to be fluctuating demand for hand sanitizers, cleaning products and personal protective equipment. A lot of companies can maintain workforce in the manufacturing realm by pivoting to secondary products that support pandemic response and recovery. Expect demand spikes, particularly related to the back-to-school and Christmas shopping seasons. Organizations impeded by shipping limitations, will depend on a nimble supply chain to access available shipping channels.
  • Boards and executives will expect robust contingency planning to deal with disruptions. Contingency planning is one of the most critical pieces that informs everything else about how you respond to another likely disruption, whether it be a COVID relapse, an unexpected stop in production or depletion of raw materials.
  • Companies that invest in process and technology during this time will see the best long-term growth. These companies will be in the best position to take advantage of consolidation in their respective industries.

Five Recommendations for 2021 Planning

Organizations creating budget plans for 2021 should consider these recommendations to maintain customer service levels while controlling costs.

  • Treat the 2021 budget as a range and be prepared to adjust as conditions on the ground evolve. In many ways budgeting will be a guessing game, and companies need to put together a plan based on contingencies. When revenue doesn’t meet expectations, have a plan for cost-cutting measures to implement. If earnings swing the other way, identify investments to make. Executive leaders must commit to evolving cost management so that scarce resources and funds consistently flow to the most valuable business outcomes.

  • Leverage supply chain resources to determine corporate impact (cost, service, risk) of plans produced by the other departments (sales, procurement etc.). Experts working in supply chain possess analytical capabilities and a global picture of an organization’s total business. This supports acute awareness of the control levers that affect cost and service. When you put supply chain masters in the role of trusted advisor, they are in the best position to help those executives and leadership boards navigate tumultuous waters.
  • Take a partnership approach with all relationships. The supply chain is dependent on everyone succeeding. Often, by working with an expert supply chain partner you can access end-to-end transparency that facilitates more opportunities across your network. That visibility allows you to be a better partner to your domestic and foreign vendors. With good clear communication around sales information, time-in-shipping data and other key performance indicators, you can help predict when you will need to reorder supplies and track trends that can help drive production guidelines. This supports a workflow that keeps your shelves stocked with the right items, and customers happy with the efficiencies of their orders.
  • Aggressively evaluate the entire supply chain and take an open-minded approach to the long-term structure. Ensure the supply chain strategy aligns with corporate strategy – and leverage analysis and expertise to inform that strategy. This is especially important as e-commerce demands continue to drive increased expectations for flexibility in customers’ end delivery options. You may be getting product shipped out the door – but are you making any money on it?
  • Low water exposes a lot of rocks. Take the opportunity to evaluate internal processes and systems. Balancing resiliency and efficiency, supply chain leaders can secure their networks. A recent Gartner survey revealed that only 21 percent of respondents believe their supply chain is resilient enough to provide “good visibility and the agility to shift sourcing, manufacturing and distribution activities around fairly rapidly.”

A global pandemic changed priorities for many supply chain leaders, elevating the agility of their network alongside the balance of service and cost. As Gartner points out, more than half of its survey respondents expect their supply networks to be “highly resilient” within two to three years. 

Master your 2021 Budget Planning

The first half of 2020 provided painful lessons for many organizations, some of which still face jeopardy. The businesses that quickly adapted to dramatic marketplace changes have often done so through an effective strategy for risk management. 

Future success relies on your ability to assess potential risks that exist in your network and create alternative ways to plan demand response. Contingency planning today, especially in light of network weaknesses revealed in the past six months, will position your business to not only weather the storm but also seize growth opportunities.

While you are in the midst of managing your business, a supply chain master can provide the risk assessment and strategic planning required to establish a flexible responsive network. With that, you will always satisfy customers in the most cost-effective way.

Serve Customers With a Personalized Supply Chain

Society’s sudden move to a shelter-in-place and work-from-home environment dramatically affected buying behaviors, and, in the process, expectations increased on companies responding to demand.

Organizations equipped with an agile, customer-centric supply chain network are capitalizing by evolving their service to the current environment. Distributors are re-locating inventory to meet emergent demand for products needed to support COVID-19 response in specific geographies. Retailers have kept Americans fed and working by adjusting online fulfillment strategies to utilize brick-and-mortar curbside pick-up or alternate home delivery methods. Manufacturers are drop-shipping products directly to homes to meet newfound interests in exercise.

As customer preferences carry even greater weight in modern supply network planning, the organizations with a holistic network view will deliver the most cost-effective shipping strategies that empower choice-conscious clients.

Customers Take Control

In 2016, parcel and express delivery volume bypassed railroads to become the second-largest transportation sector behind motor freight, according to the Council of Supply Chain Management Professionals’ 28th Annual State of Logistics Report. With that leap, consumers seized control of logistics spending and “supply chain as we’ve known it” changed forever.

In the past, traditional retail strategies put the brand in control, using a push-based system with consumers at the end of the supply chain. Throughout the rest of the supply network, past experience drove inventory decisions, and product was pushed to stores based on what consumers “should” like and purchase.

Ongoing expansion of e-commerce has increasingly shifted decision-making for many organizations toward the customer experience. With the outbreak of COVID-19, historical buying behaviors are no longer valid and the consumer is in charge now more than ever. Companies that didn’t have a consumer-centric approach are adapting to survive.

Adopting a consumer-centric approach isn’t automatic, however. It requires thorough understanding of your customers’ preferences from point of purchase to final delivery.

Consumer Behaviors Changing Forever

While society has steadily shifted more buying to online platforms, COVID-19 sent more people online to buy a broader array of products than ever before.

In March, online grocery sales hit an all-time high. And in April, online grocery retailers topped that record by about 37%, according to survey data from grocery consultant Brick Meets Click (BMC) and research firm Symphony RetailAI.

Driving the sales growth was a 33.3% increase in the total number of orders: 62.5 million in April vs. 46.9 million in March. Spending per order grew more modestly, as did the number of online grocery shoppers.

Retailers like Wal-Mart and Target are reporting record online sales growth as well, giving further evidence that more buyers are turning to e-commerce sales channels for everyday needs. As the convenience of online buying appeals to a broader population, the need for diverse delivery options will increase, just as it has since parcel transportation took the No. 2 spot in logistics spend in 2016.

Effectively fulfilling those customer delivery demands requires a transportation strategy supported by multi-modal expertise and technology. Transportation management systems that integrate vital transportation information from freight and parcel service providers, along with historical shipping data, can offer a strong basis for decisions that improve customer service and protect bottom line profitability.

A Case for a Personalized Supply Chain

Organizations that can create a supply chain personalized to the expectations and behaviors of their customers can achieve greater brand loyalty. By allowing customers more control over their delivery experience, brands can create greater loyalty and improve customer retention.

At the same time, the shippers that establish a nimble network can rapidly respond to fluctuations in supply and demand and capitalize on opportunities for growth.

To learn more about creating a truly personalized supply chain that serves your customers’ needs, read Transportation Insight’s Guide to Mastering Your Supply Chain.

In it, we share more data about emerging customer trends as well as strategies and tactics to create a stronger supply chain that ultimately drives growth. Read it today to evolve your supply chain to meet your customers changing fulfillment and delivery needs.

The Logistics of Valentine’s Day: Signed, Sealed and Delivered

February 14 marks the most romantic day on the calendar: Valentine’s Day. It’s certainly not a cheap endeavor: The National Retail Federation estimates Americans will spend a record $27.4 billion on their showcases of love this year, with an average spend of $196.31 per person. 

While it’s not unusual to be loved by anyone, making sure every rose, heart-shaped chocolate box and sentimental card takes an unusual amount of effort. Valentine’s Day is the second busiest time of the year for shippers, behind only the Christmas season. And just like for Christmas holiday shipping, the logistics of Valentine’s Day highlights how the right supply chain network is needed to delight every end customer – no matter what product you’re providing.

We love and care for supply chains. That’s why I wanted to share some thoughts on the logistics of Valentine’s Day – so you can understand how suppliers and shipping companies ensure everything arrives on time – before the last candlelight dinner ends.

Flowers, Chocolates, and Cards: Managing Valentine’s Day From Multiple Fronts

With the shortest shelf life of all traditional Valentine’s Day gifts, fresh-cut flowers depend on the cold chain for success. Over 80% of flowers are imported, with most coming from Colombia. 

The International Trade Centre estimates over 500 million tons of flowers are sent for Valentine’s Day. After the flowers are harvested, the blooming buds are cooled to 35 degrees and loaded onto both commercial and freight aircraft for transport to the United States. 

At each point of entry, U.S. Customs and Border Protection officers thoroughly inspect every shipment for pests, disease and contraband. Once they clear Customs, it’s back to near-freezing temperatures for the flowers as they go to the warehouse, then the distribution center, before finally arriving at the florist. 

But what if there is a problem clearing Customs? Or a network disruption impacts a climate-controlled facility? Without the proper logistics processes – and contingency plans – one problem can quickly spoil the Valentine’s Day bouquet.

Many of these bouquets are accompanied by exquisite German chocolates. According to the UN Comtrade Database, 5.6% of all the chocolate imported into the United States comes from Germany. Getting the sweet treats to the United States poses an equally daunting task. 

While the chocolates can take an intermodal route into America, they have to be transported very carefully. After packaging, each load must be protected from moisture, humidity and temperature changes. The German Transport Information Service recommends all chocolates be transported in refrigerated containers to maintain the cold chain from start to finish. Doing that requires a lot of visibility to the product and its transit across the supply chain.

And what would these gifts be without the written words of love to accompany them? Hallmark estimates over 145 million Valentine’s Day cards are exchanged across the United States. The mid-February tradition is the second largest holiday for greeting cards, trailing only behind the Christmas season. 

As with anything you send through post or parcel service,  planning ahead is vital for mailing chocolate and gifts Based on the 2019 USPS holiday season estimates, sending gifts to APO, FPO and DPO addresses can take up to six weeks to arrive!If your loved ones are in America, you can still get away with Priority Shipping within the continental United States four days in advance. For those extreme procrastinators, a parcel carrier like UPS can guarantee delivery even if you are shipping on Feb. 13 – but it will cost you hundreds of dollars. 

Understanding the characteristics of your shipment – size, weight, destination and delivery timing – can help you avoid some of those costs, while still warming a heart at the end of the love line.

Tying The Logistics Knot 

In every stop, each of these gifts face unique challenges in their supply chains. Matching them all together requires an intricate dance that depends on every stage of the transportation process going nearly perfect. One mis-step in the supply chain, like exposing chocolates to moisture or keeping flowers outside a cold environment, results in a product that is unsellable.

Without proper planning and coordination of all the moving parts, your items could either arrive too early, or too late. Valentine’s Day gifts aren’t as effective on Feb. 13, and they’re completely useless on Feb. 15. 

The good news is that many of these situations can be mitigated using modern technology. While all the pieces are dependent upon each other to make Valentine’s Day pass without a hitch, technology plays a critical role in avoiding broken hearts.

To maintain quality, companies use robust logistics monitoring, modelling and execution tools. This supports planning for the most effective port of entry, warehouse and distribution center locations, and network reach. Often an enterprise logistics company helps analyze all these factors to determine the best route forward. Supply chain data combined with analysis supports  real-time decisions if there is disruption in the chain. 

Enterprise logistics providers also offer insightful observations when there are unique breaks in the supply chain. It is important to be able to trace and track every transportation activity in the best scenarios, just in case a contingency – or official record – is needed for the worst.

In those cases, the solution for wilted flowers is not the same as the solution for ruined chocolate. Sometimes it helps to have a partner that has experienced challenges in other just-in-time supply chains. They can bring an objective viewpoint to tie everything together and determine solutions if one piece breaks in the overall supply chains. 

We’ve created a map of your Valentine’s Day rose bouquet from the time it arrives in the U.S. to its last mile delivery to your door.