A term fully concerned with the liability of a shipment, FOB shipping determines whether the buyer or seller is liable for damaged or destroyed goods. Short for Free On Board, FOB shipping generally includes two specific shipping points which dictate who the liable party is for a specific shipment.
How Does FOB Shipping Work?
FOB shipping is a catch-all term for a contractual obligation that informs who must bear the liability of a shipment. In an FOB origin arrangement, a purchaser pays for shipping from the factory to their shipment point.
This places full responsibility for the goods while they are in transit on the said buyer. For FOB destination contracts, the seller remains liable until the goods reach the buyer.
What Does FOB Stand For?
So, what does FOB shipping stand for? As mentioned earlier, FOB stands for Free on Board, a term originating from the use of seafaring shipments.
What is Freight Collect?
Freight collect defines who is responsible for all of the costs and charges associated with a shipment. This includes any additional charges that may be accrued, which are then passed along to whomever cosigns for or receives the freight.
Are Rules Different with FOB Shipping?
Because FOB originated in seafaring shipping, the actual rules for FOB shipping can vary from country to country, but there are some international commonalities that lay within Incoterms, created by the International Chamber of Commerce.
The International Chamber of Commerce published and created all of the guidelines that must be followed in the U.S. The terms agreed to in FOB shipping must be clearly stated and adhered to in the purchase order to eliminate any confusion.
That being said, FOB shipping is not a bill of sale. As such, FOB shipping does not regulate nor determine ownership.
Understanding FOB Shipping Terms
FOB shipping services date back to times when items were largely transported by ship in the United States. Though the term now includes all forms of shipping, there are a few terms you must know, and be able to delineate between.
For FOB origin shipments, the person liable for the damaged or destroyed goods is the buyer, but this is only true once the seller has shipped the items. This, in turn, can make a buyer’s inventory costs rise dramatically due to the possibilities of breakage, loss or theft if insurance policies are not in place.
The complete opposite of FOB origin is FOB destination, which means the seller holds all of the liability until the product reaches the buyer. This will keep a purchaser’s inventory costs low while also including far less risk on part of the buyer.
FOB Shipping Point
A FOB shipping point is a record of where the merchandise for shipments is going and when it was shipped, which is important information for accounting and insurance purposes of liability.
What Are the Benefits of FOB Shipping?
Though FOB shipping can be complicated, there are some major advantages that will save you time, headaches and money.
- FOB minimizes import costs
- FOB also increases convenience
- There is no middleman with FOB shipping
- Shipping FOB puts buyers in full control of their freight costs
- Timely and transparent information is included in service updates
Difference Between FOB Shipping and FOB Destination
For FOB shipping, a sale is complete the moment the shipment leaves the warehouse on route to its FOB destination. For a FOB destination shipment, the seller is liable until the buyer receives the undamaged goods.
When Not To Use FOB Shipping
If you are unsure about your terms, know that FOB shipping has come under fire for being overly complex within its contracts. As much as you would expect something to be cut and dry, for FOB shipping, specificity is key. All parties involved need to be fully transparent from start to finish.
Key Comparisons: FOB vs CIF Shipping
Though they are both international shipping agreements between buyers and sellers, FOB and CIF have differing uses. As two of the most common international commerce terms, both established in 1936, these two terms deal heavily with the specificity of origin and destination liabilities.
Shorthand for cost, insurance and freight, CIF, all of the liability is placed on the seller until a shipment arrives at its final destination. Then and only then does the liability get transferred to the buyer.
FOB Shipping Is As Simple As ABC
One of the more cost-effective options for buyers, FOB shipping can guarantee you peace of mind and peace of wallet. If you want to learn more about your FOB shipping options, reach out to FreightWaves to find the best FOB shipping services for your needs.