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.
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.