An FOB, or free on board, shipping point, is a record that explains where merchandise for a shipment is going and when it was shipped. The configuration of an FOB shipping point contractually binds the buyer and the shippers unde the same liability once shipped.
That said, FOB shipping point can also default to just being an FOB origin if the specifics are not clarified. Keep reading to learn more about this crucial shipping term so that you don’t get stuck footing the bill on your own.
How Does FOB Shipping Point Work?
An FOB shipping point is a catch-all term for a contractual obligation that identifies the person who must bear the liability of a shipment. In an FOB origin arrangement, a purchaser pays for shipping from the factory to the shipment point.
This places full responsibility on the buyer for the goods while they are in transit. For FOB destination contracts, the shipper, who is also usually the seller, will remain liable until the goods physically reach the buyer.
What Is FOB Destination?
The complete opposite of FOB origin is FOB destination. In an FOB destination configuration, the seller holds all of the liability until the product reaches the buyer. This keeps a purchaser’s inventory costs low while also imparting far less risk on part of the buyer.
Who Pays For Freight on FOB Shipping Point?
Regardless of whether something is being shipped via FOB origin or FOB destination, the person who ends up paying for the freight is still the buyer, no matter which shipping point you’re referring to. It’s just a question of when they pay it.
For most FOB destination shipments, the buyer will be billed for the freight charges immediately. Then, the seller will pay for it. This is extremely helpful when you need to know the total costs upfront while also taking the guesswork out of any surprise fees along the way.
With this specific configuration, the title of the goods transfers from the seller to the buyer once the goods are shipped. Even so, the liability is still on the shipper until the goods arrive at the final destination.
Inversely, if something is shipped via FOB origin, FOB freight collect can be used by a seller to retrieve payment for the freight and other charges that may occur. However, their liability is gone the moment the freight has safely departed the warehouse.
Freight collect defines who is responsible for all of the costs and charges associated with a shipment, including any additional charges that may be accrued. Those are then passed along to whoever receives the freight. Think of this as an expanded and generally more expensive version of cash-on-delivery.
Are Rules Different When Operating Under FOB Destination?
Since FOB originated long before our digitally-connected world came to be, the rules for FOB shipping can vary from one country to the next. That said, some international commonalities exist within Incoterms, which were created by the International Chamber of Commerce.
All of the guidelines that must be followed in the U.S. were created by the International Chamber of Commerce. As a rule of thumb, the terms agreed to in FOB shipping must be clearly stated and followed in proper purchase order to prevent any conflicts.
How Is FOB Calculated?
To calculate your FOB price, you’ll need to know your ex-factory price plus other costs. As vague as that sounds, it is rather simple, but the other costs can quickly add up.
Here are some of the other costs you will need to take into consideration:
- Domestic Transport and Shipping Fees
- Loading and Unloading
- Carrier Fees
- Storage and Warehousing
- Customs and Duty Fees
To determine your ex-factory price, look at the following factors:
- Raw Material Cost and Insurance
- Total Labor Cost
- Salaries
- Taxes
- Benefits
- Overhead Costs
- Rent
- Security
- Taxes
- Utilities
- Maintenance
Example of FOB Shipping Point
As an example of an FOB shipping point, let’s say a shipping point has been set, and a buyer just purchased $20,000 worth of merchandise from a seller. The seller has packaged the goods and shipped the merchandise on a specified date.
An ETA of Net 15 was provided to the buyer. The sale is now complete and documentation of it should be on the books for both parties. The seller will record the transaction as a sale, while the buyer will record the purchase the moment the shipment leaves the seller’s warehouse.
Both of these actions will ensure that each party is properly handling their inventory management. Once the shipment is picked up from the agreed shipping point, a receipt of goods will be waiting.
Differences Between FOB Shipping Point and FOB Destination
For an FOB shipping point, a sale is complete the moment the shipment leaves the warehouse and ends up en route to its FOB destination. For an FOB destination shipment, the seller is liable until the buyer receives the undamaged goods.
Accounting Rules
As stated before, an FOB shipping point sale transfers liability to the buyer the moment a shipment leaves the warehouse upon being safely shipped. Buyers are responsible for logging the transaction, changing their accounts payable and updating their inventory.
Transfer of Sale
FOB shipping is not a bill of sale. As such, FOB shipping does not regulate nor determine ownership. Rather, ownership is transferred to the buyer once the merchandise is delivered to the shipping point or its origin.
Costs of Transport
The costs will typically remain the same regardless of FOB shipping configurations. Even so, costs can end up being higher in an FOB shipping point because they are not fully pre-determined.
Transport costs that must be taken into account are loading vehicles to go to port, unloading the vehicles and then loading the vessel carrying the merchandise, the freight transport, and its insurance, finally unloading once at port, and then the buyer picking it up, which could be an entirely other set of expenses if not properly planned for.
A New FOB Point of Origin
Now that you know what you’re getting into and how intricate this process is, it is purely in place to protect both the buyers and the sellers. In turn, the experience will not be a headache to those involved.
As a result, you will be able to expand your business with confidence. To find out more about other import and export terminology, check out FreightWaves Ratings so that you can stay as informed as possible.
Sign up for a FreightWaves e-newsletter to stay informed of all news and trends impacting supply chain careers and operations.
