Whether you opt for shipping your goods through air freight or sea freight, you will be dealing with a lot of paperwork.
But for an online store that deals with a lot of shipments, your shipping label is pivotal in categorising and identifying which package is which.
Now, if you have studied shipping labels quite a bit, you may have seen FOB mentioned on it, and wondered what it is, right? If you are fairly new to the world of shipping, FOB meaning, and freight on board definition may elude you.
You may find yourself asking the question: what is FOB shipping?
Well, this particular piece of information your shipping label can tell you a lot more about your shipment than you think. We will discuss quite a bit about it, but let us start with learning what FOB means.
Meaning of FOB
Freight on Board Shipping or Free on Board (F.O.B) refers to the exact point in a supply chain process where a buyer or seller is specified as the party liable for the shipment(s) that are being transported.
After all, the seller will be the one responsible for any goods being stolen or damaged during shipping. While the FOB stands for two terminologies, and the meaning of Freight on Board and Free on Board are the same, the former is a less official term.
What’s more, FOB is likely to be mentioned in the purchase order so that any specifications related to ownership, transportation costs and risks are clearly defined. FOB shipping terms are crucial in determining the transfer of ownership and reliability for a shipment.
By specifying whether a shipment is FOB origin or FOB destination, companies can clearly define when they are accepting the responsibilities associated with certain goods.
As such FOB terminology impacts the prices as well as the approach towards the transportation of goods.
Moreover, it also impacts other related elements such as insurance, legal disputes and customs duties.
FOB Origin vs FOB Destination
Now that you know the FOB meaning, let us now understand the difference between FOB origin and FOB destination meaning - the two types that you will deal with as an online store.
To begin with, any FOB conditions are mentioned quite clearly in the purchase order drawn between the vendor and buyer.
The type of FOB shipping will define which party will assume responsibility for the shipment at various parts of the journey.
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FOB Origin |
FOB Destination |
|
|
Definition |
Buyer will assume responsibility of the shipment as soon as it leaves the seller’s location |
Seller will maintain responsibility of the shipment till it reaches the buyer’s destination |
|
Transportation Costs |
The buyer will handle the cost of transporting shipment from sellers location to the destination |
The seller will handle the cost of transporting shipment until it reaches the buyer’s destination |
|
Shipping Arrangements |
The buyer will handle all the shipping and handling-related arrangements once it leaves the origin location |
The seller will handle all the shipping and handling related arrangements till it reaches destination |
|
Risk of Loss or Damage |
Risk of loss or damage to the shipment will be transferred to buyer once it is shipped from origin location |
Risk of loss or damage will remain with the seller till it reaches the buyer’s destination |
|
Insurance |
The buyer arranges for the insurance |
The seller arranges for the insurance |
|
Customs and Import Duties |
The buyer will be responsible for paying any customs and import duties |
The seller will be responsible for paying all the customs and import duties |
|
Usage |
Mostly used for domestic shipments or when buyer can control shipping preferences |
Mostly used for international shipments or when the seller is offering a more inclusive service |
One aspect that you may have already understood from the table above is that FOB origin entails the buyer being responsible for most of the shipping process, whereas the FOB destination entails the seller being responsible for most parts of the process.
While both approaches of freight on board means having to deal with a fair share of pros and cons, it is more important to understand which is more applicable and beneficial for your business.
These terms of FOB might sound pretty straightforward, but you have to be careful about using the right one in your documents for legal compliance.
Depending on the governmental regulations you follow, the importance of these terms will change but it is important to remember that they refer to legal facts.
How is FOB Used in Shipping Documents?
Since you now know what does freight on board mean, and the kind of importance mentioning FOB origin or FOB destination on your shipping documents holds, it would bode well to take a look at its usage in shipping documents. There are four ways in which FOB terms can be mentioned in terms of freight shipping.
They are:
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FOB [origin location], Freight Collect
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FOB [origin location], Freight Prepaid
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FOB [destination location], Freight Collect
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FOB [destination location], Freight Prepaid
Since you already know the differences between FOB Origin and FOB destination, let us now look at the definition and differences associated with Freight Collect vs. Freight Prepaid - the terms of FOB.
Freight Collect, is yet another one of the FOB delivery terms that refers to a situation wherein the buyer or the person who is receiving the shipment takes care of all of the freight charges and costs.
Along with the costs, they also assume responsibility for any risks, claim filing in case of losses or damages.
On the flip side, freight prepaid refers to the situation where the shipper will assume all of the freight charges as well as the risks and responsibilities associated with it. This is more often associated with priority shipping and related processes.
Importance of FOB
Now that you know what the definition of FOB entails and how it is used in shipping documents, let us understand why it is so important.
Broadly speaking, shipping FOB is important for several reasons, however, the most important of them all is that the shippers should be aware of the FOB terminology and designation in case of a loss or damage situation.
For instance, if you are dealing with a shipment designated as FOB origin. Now in a situation where this shipment contains damaged goods, it is the buyer’s prerogative whether to accept or reject those goods.
On the other hand, the seller is not obliged to accept the return but the buyer will be returning a shipment that they legally own.
With that in mind, you can imagine how your F.O.B. terms not properly being managed or designated may affect your bottom line.
It is good to have a clear idea of FOB shipping meaning and how to structure your purchase orders and billing documents to avoid a messy scenario between the two parties.
Disadvantages of FOB Origin and FOB Destination
By now, we already know FOB meaning and that the party accountable for all your shipment related risks and costs depends on the type of FOB decided in the purchase order.
Even then, there are a bunch of disadvantages associated with both the approaches - some affect the buyers, and the others affect the sellers.
Let us look at some of the primary disadvantages of each approach.
FOB Origin
FOB Origin can be quite cost-effective for buyers since they have complete control over the freight forwarders and costs.
Even then, it is important to keep in mind that the buyers will also assume responsibility for all the damages, risks, and destruction during transit of the shipments making the approach more expensive for them, especially if it is an international courier.
Another major disadvantage is also the buyer will have to arrange and manage transportation which can be quite a cumbersome responsibility.
Plus, this approach also presents quite a few risks for sellers. Since the additional costs and expenses related to shipping can increase the overall final cost for buyers, sellers’ offers can seem less lucrative leading to lower sales volume.
FOB Destination
With FOB Destination, the seller has to bear the liability of shipping your courier which can be quite a bit, and simultaneously affect their reputation and credibility negatively.
Sellers are also responsible for freight charges which can negatively impact the final price for buyers and impact the seller’s bottomline.
Another significant disadvantage is that sellers with this FOB price that rely on this approach will not be able to record the sale in their books till it is delivered to the buyer. This can impact their cash flow management and accounting processes adversely.
Common Misconceptions About FOB Shipping
While FOB acronym itself, and the FOB terms/incoterms are pretty comprehensive and can tell you almost everything you need to know about a shipment, it does not cover every single thing. With that in mind, here are a few misconceptions that you should stop believing right away:
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FOB Covers All Expenses
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FOB Origin is beneficial for the seller
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FOB Destination means that all the costs will be paid by seller
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FOB determines the legal jurisdiction
To bust these myths, FOB requires the responsible party to bear any additional costs related to freight and insurance, and it definitely does not define the legal jurisdiction in case of disputes.
Moreover, FOB Origin transfers a lot of responsibilities to the buyer but does not release sellers from the risks associated with a shipping issue.
On the other hand, FOB Destination does not guarantee that all the costs will be paid for the seller, as buyers may still contribute to freight or insurance costs.
Concluding Remarks
FOB definition is an important element when you are creating a purchase order so that the responsibilities can be directed towards the right party.
Whether you go for an FOB Origin approach or an FOB Destination approach, you will have your hands full with all the other decisions that go into shipping your goods, once you define freight on board.
PACK & SEND can help you with all the assistance you need for your shipping process to go efficiently.Get a Quote and let us discuss your requirements in detail.