What Is FOB Shipping? Everything You Need to Know
FOB sending impacts buyers and sellers with various costs and responsibilities. Learn everything you must know here!
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If you’re a small business owner looking to save on sending costs or a logistics manager trying to optimize your supply chain, understanding FOB sending can be a game-changer.
So, it’s time to get familiar with the term “free on board” (FOB).
In a nutshell, free on board (FOB) sending refers to the moment in the supply chain when ownership of the goods transfers from the seller to the buyer, and liability for the goods being transported shifts from one party to the other.
This moment can happen at different times depending on the sending agreement.
Purchase orders, contracts, and other sending documents specify FOB terms between buyers and sellers.
Because FOB terms vary based on the party’s agreement, they can impact inventory and demand management, sending insurance costs, and other order fulfillment metrics.
It may sound complex, but don’t worry — this post is here to explain everythingyou must know about FOB sending
From determining who pays for freight and customs to clarifying the delivery time and place, we’ll cover whatyou must learn to navigate FOB sending confidently.
- Understanding FOB terms is important for a smooth supply chain and accurate accounting.
- FOB origin means the buyer takes ownership of the goods as soon as they’re sent while FOB destination means the seller keeps ownership and liability until the goods reach the buyer at the final destination.
- Legal definitions of FOB may differ between countries, so it’s important to specify the terms in your sending documents.
A quick word on FOB
For starters, never use the term “freight on board" interchangeably with FOB sending
You may hear these terms used as if they mean the same things, but this is a common misconception.
As a sending acronym, FOB stands for “free on board.” Period.
In reality, "freight on board" isn’t an industry-recognized term, defined by the Uniform Commercial Code (UCC), or mentioned in any version of Incoterms.
Communications in the sending industry use even more acronyms — from supply chain KPIs to OTIF metrics and more.
As a business considering FOB sending practices, it’s important to understand FOB terms for smooth transactions and accurate accounting.
So, let’s explore this essential aspect of the supply chain.
FOB origin vs FOB destination
FOB origin and FOB destination are essential FOB terms buyers and sellers should understand.
- FOB origin means the buyer takes ownership of the goods as soon as the seller sends them. The seller’s responsibility immediately ends once they hand the items over to the shipping courier
- FOB destination means the opposite. The seller retains ownership of the goods throughout the sending journey until the product reaches the final destination and it’s in the buyer’s hands.
Now, you might wonder about the legal specifics of these terms.
That’s important to consider because the legal definitions of FOB can differ between countries.
In fact, the International Chamber of Commerce (ICC) published a set of international trade terms called the International Commercial Terms (Incoterms) to help clarify things.
Incoterms are the most common set of international trade terms, but it’s still important for buyers and sellers to indicate which governing laws they’re using for each order
FOB origin explained
FOB origin, or FOB sending point, means the seller’s responsibility ends when they place the goods with a shipment courier.
The buyer assumes ownership and liability for transporting the goods from the point of origin to the buyer’s location.
In other words, the sale is completed at the seller’s dock.
In this type of agreement, the buyer usually bears the order costs — but not always find details below).
FOB destination explained
FOB destination is the complete opposite of FOB origin.
With FOB destination, the seller retains ownership of the goods and is responsible for them during the entire sending process until the goods are delivered to the buyer’s specified location.
The transfer of ownership and the buyer’s responsibility only take effect when the goods have been delivered to the buyer.
So, the seller bears the transportation costs and has to handle any issues that may pop up during order
Who pays for sending on FOB?
Knowing who pays for sending costs and what your sending contract includes can help your business make informed decisions about FOB sending and avoid unexpected expenses for your inbound logistic operations.
When it comes to FOB, the person responsible for the cost of sending depends on the specific terms of the arrangement, so it’s important to know the different FOB terms you might find in sending documents.
- FOB origin, freight collect means the buyer pays the sending costs and assumes ownership at the point of origin.
- FOB destination, freight collect means the buyer pays the sending costs, but the seller retains ownership until the goods arrive at the destination.
- FOB origin, freight prepaid means the seller pays the sending costs, but the buyer owns and assumes liability for the products at the point of origin.
- FOB destination, freight prepaid means the seller covers all sending costs and retains ownership and liability until the goods arrive at the destination.
Other options exist beyond “freight prepaid” and “freight collect.”
For example, “freight prepaid and add” arrangements mean the seller pays for freight sending costs upfront but the buyer covers the costs later.
The cost of sending goods under FOB can include specific expenses, such as:
- Transportation to the port of order
- Loading onto the sending vessel
- Freight transport
- Transport to the final destination
It’s important to note that FOB sending can get more complicated depending on the specific arrangement between the buyer and seller.
Still, understanding the basics can help your business manage its sending more efficiently.
An example of FOB sending
Let’s say you own an eCommerce business called Widget World, and you want to buy a case of 1,000 widgets from a supplier overseas called Super Widgets, Inc.
Super Widgets, Inc. agrees to ship the goods based on “FOB origin, freight prepaid” terms.
In this case, Super Widgets as the seller is responsible for the freight charges needed to transport the goods from their location to your receiving dock at Widget World.
But once the order leaves Super Widgets, Inc., your business assumes responsibility for the case of widgets.
Widget World takes over ownership and liability for the widgets the moment they’re loaded onto the sending vessel.
Plus, even though you had a “freight collect” agreement, you (the owner) might be responsible for any additional costs associated with sending.
This includes customs clearance fees and taxes at port entry.
FOB in accounting
FOB sending affects accounting practices in a significant way.
In accounting terms, FOB determines when the buyer and seller record the sale in their ledgers.
If a seller sends an order through FOB origin, the sale concludes as soon as the transport vehicle carrying the goods leaves the loading dock.
The seller needs to note this change in their accounting system.
On the flip side, the buyer should note in their own accounting system that they have new inventory on the way.
The order is now considered an asset on the buyer’s books — even though the order hasn’t arrived yet.
Whichever party pays for sending will have to enter those costs in the ledger, too.
Buyers and sellers account for them differently, and it’s not unusual for the sale contract to treat the sale differently from the ledger.
CIF vs. FOB
You may come upon cost, insurance, and freight (CIF) and FOB in dealing with international sending contracts.
Here’s a brief explanation of both Incoterms and how they differ:
The biggest distinction between FOB and CIF is who pays for the main transportation of the goods (the carriage): the buyer or the shipper.
- In an FOB transaction, both the sending costs and liability for the goods transfer to the buyer upon export.
- In a CIF transaction, liability passes to the buyer after the goods are placed on the ship at the port of export, while the seller’s liability stops at the port of destination.
In other words, carriage costs are the buyer’s responsibility with FOB and the seller’s responsibility with CIF.
So, which should you use? It depends on your situation.
Experienced exporters may prefer CIF because it allows them to deal directly with carriers and gives them more negotiation power.
But generally, businesses choose to use FOB terms because the buyer controls the freight costs.
Circuit for Teams can optimize your sending process
Understanding FOB means knowing who’s responsible for sending costs and when that responsibility transfers from the seller to the buyer.
FOB origin (or FOB sending point) and FOB destination are the two main types of FOB arrangements.
Knowing which arrangement is in place can help your business plan and budget for sending costs more effectively.
But what about optimizing your delivery operations once you’ve figured out your sending terms?
That’s where Circuit for Teams comes in.
Circuit for Teams route management software takes the stress out of planning efficient driver routes.
Plus, features like optional proof of delivery, dynamic stop status icons, and map or satellite find make it even easier to streamline delivery operations and increase the chances of successful delivery.
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