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In the world of shipping and logistics, Free on Board (FOB) is a common term, but not one that’s necessarily well understood.
Contrary to how it sounds, it’s doesn’t have anything to do with being free, but rather everything to do with the legalities of ownership and liability.
Let’s drill down to understand this important commerce term.
What does FOB mean in shipping?
FOB is a term used in shipping to indicate when the ownership and liability of goods shipped transfers from buyer to seller and who is legally responsible for goods damaged or destroyed during shipping.
Purchase orders between a vendor and a client usually contain FOB terms, regardless of domestic or international shipping.
Depending on the volume and replacement cost of items a company ships, FOB terms can impact the cost of inventory, shipping, and insurance.
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What does FOB stand for in shipping?
FOB stands for “Free on Board” in shipping terms. The buyer and the seller should be aware of the FOB terms and conditions laid out and agreed upon in the purchase order.A couple different FOB options tend to be the most common:
- FOB Origin, also known as FOB Shipping Point, specifies that once the seller ships the product, the buyer assumes all responsibility and liability for the items in the shipment. By assuming the title for the goods being shipped, the buyer agrees to accept responsibility for all loss or damage from the moment the seller ships.
- FOB Destination describes terms indicating that the seller maintains responsibility and liability for the items throughout the shipping process, being responsible for any loss or damage that may occur along the way to the buyer.
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Why does FOB matter?
As you might imagine, one FOB term or the other shifts risk of loss entirely to one party or the other. Depending on how frequently the buyer or seller maintains the title of goods throughout the shipping process, several important costs must be considered and covered.
Not only must vendors and buyers account for the cost of lost or damaged items, but insurance costs can go up or down depending on how many claims are made. Whether the seller or the buyer’s insurance covers loss or damage that occurs during shipping, the costs add up and impact the bottom line.
Usually, unless the buyer or seller purchases shipping insurance, the shipping company makes no guarantee to cover loss or damage that may occur during the shipping process, and the buyer and seller agree to accept the risks involved and to not hold the shipping company responsible for those costs.
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How is “FOB” used in shipping documents?
Shipping documents usually lay out the FOB terms agreed to by the buyer and seller. A few variations of FOB terms include:
- FOB Origin, or FOB Shipping Point: The buyer accepts title and responsibility for the parcels being shipped, releasing the seller from liability once the goods are shipped.
- FOB Destination: The seller agrees to maintain liability and responsibility for replacement cost of loss or damage that may occur during shipping, until the items are delivered to the buyer.
- FOB Origin, Freight Collected: The buyer pays for freight charges and accepts liability for the shipment.
- FOB Origin, Freight Prepaid: The seller pays for freight charges, but the buyer assumes responsibility for the shipment as soon as it’s shipped.
Understanding these terms becomes important when the inevitable loss or damage occurs and knowing who agreed to cover costs with their insurance.
This should save time and additional costs by avoiding disputes over responsibility and liability.
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Other shipping terms to know
Additional shipping terms indicate specific actions to be accounted for when choosing a shipping company and certain services offered.
- FAS: “Free Alongside ” indicates that the seller ships goods on a vessel that comes alongside another ship so that the shipment can be transferred using on-board equipment such as cranes and booms.
- FCA: “Free Carrier” specifies that the seller must deliver the goods to a shipping facility that the buyer operates, such as a shipping port, railway, or airport.
- EXW: “Ex Works” terms require the seller to prepare the shipment at its location and that the buyer must arrange pickup and shipping the goods from the seller’s location.
- DES: Delivered Ex Ship terms require the seller to deliver shipment to a shipping port where the buyer takes delivery on arrival.
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Keeping things moving
Agreeing upon clear terms for which party is responsible for paying freight, providing insurance, covering loss or damage, and for specific methods of shipping, delivery, and pickup is an essential contract to ensure that the complicated work of shipping and handling goes as smoothly as possible.
This allows for greater accuracy in maintaining inventory, and forecasting shipping costs for both buyers and sellers of goods on domestic and international scales.
As the world is well aware now, keeping the supply chain moving efficiently impacts every aspect of the global economy.