Have you ever come across shipping something internationally or domestically? If so then, you must have heard the term FOB. It is associated with the ownership of goods during the transportation in shipping them from the sellers to the buyers.
In this article, we will shed light on what does FOB stand for, its importance in shipping, its uses, and other information you need to know.
What Does FOB Stand For?
What is FOB? FOB is a term that means “Freight On Board” or “Free On Board.” It is a shipping term used in retail that describes the responsibility and ownership of goods transferring from seller to buyer. It helps the purchasers or sellers in determining ownership, risks, and transportation costs of the shipment.
When the goods are transported, there are many crucial points like risks of damage and loss and payment of the shipping, which need to be sorted out. Therefore, by specifying the shipping of goods as FOB Origin or Destination, companies describe where and when they bear the risks and costs. Now, let’s explore FOB Origin and FOB Destination briefly. These are two types of FOB.
What Are the Main Types of FOB?
Here, we have compiled a comprehensive detail on main types of FOB.
FOB Origin
The buyer is responsible for the goods as soon as it leaves the seller’s location. Further, the buyer is liable for all the costs and risks associated with the transportation.
FOB Destination
In this type, the supplier deals with the costs and risks of shipping goods. The seller pays all the costs and bears the risks related to transportation.
The term FOB is used widely for both domestic and international shipping industry. In both cases, the FOB influences insurance, shipping costs, and inventory management.
Comparison Between FOB Origin and FOB Destination
You should know the different between the FOB Orogin and FOB Destination while knowing what does FOB stand for.
| FOB Origin | FOB Destination |
|---|---|
| Buyer handles all the transportation costs | Seller is responsible for the shipment expenditure |
| Risks involving the loss and damage of the goods transfer to the buyer | Seller bears the loss and damage of the goods |
| Buyer handles all the shipping arrangements from the seller’s location | Seller handles it until it reaches the buyer’s destination |
| Buyer pays the insurance of the goods | Seller pays the insurance of the goods |
| Buyer is liable to customs and clearance of the goods | Seller pays liable to customs and clearance of the goods |
| Used for domestic shipment | Used for international shipment |
Advantages and Disadvantages of FOB
Here, we have described the advantages and disadvantages of FOB.
Advantages of FOB Origin
- Advantageous for the buyers to manage cost-effective shipping.
- Have control over the delivery operation.
- Allows them to resolve the risks and manage the logistics more effectively.
- Seller benefits by getting simplified pricing and faces fewer damage issues.
- Reduces the complexity of the freight handling process and leads to more focus on core business.
Disadvantages of FOB Origin
- Here, the buyers bear all the costs and risk issues related to shipping.
- This could result in higher costs if the goods are damaged or lost.
- If the shipment is of a large distance, it may cost them high rates and this may impact the sales volume.
- Resolving the issues may be time-consuming for the buyers.
Advantages of FOB Destination
- Sellers can improve their customer care and satisfaction by handling all the costs and hassle of shipping.
- Helps them to deliver quality goods by inspecting the goods before it reaches the buyer’s destination.
Disadvantages of FOB Destination
- As the seller bears all the shipping costs and risks, it may be costly for them.
- If the goods are compromised or go missing, the sellers are responsible for the loss. It can affect their reputation and profitability.
- The addition of freight charges increases the costs of the goods which can lead to less profit margin. It can cause trouble for the sellers as the buyers optimize for low-price alternatives.
Uses of FOB in Shipping
Now that you are familiar with what does FOB stand for, let’s have a look at its uses in freight documentation. The term FOB is widely used in documentation of freight shipping processes such as:
1. FOB (Origin) Freight Prepaid
Here the buyer takes responsibility for the goods when they are picked to deliver. He also pays the freight payment.
2. FOB (Origin) Freight Collect
Here the buyer is responsible for the goods at the point of origin but the seller pays the costs of freight.
3. FOB (Endpoint) Freight Collect
Here the seller has the ownership of the goods till they reach the buyer’s destination. He pays the freight costs.
4. FOB (Endpoint) Freight Prepaid
Here the seller is responsible for the goods until delivery. He also pays the freight expenses.
The terms “origin” and “destination” here relate to the goods’ shipping point. It indicates who holds ownership of each stage. The freight handling process needs to address any issue with the goods transportation to the owner.
Difference Between Freight Collect & Freight Prepaid
These terms tell you either the seller or buyer is responsible for the shipping expenses. For example, if a document states “Freight Collect,” the receiver is responsible for paying the “Freight Charges”, it shows the receiver of the goods will pay the freight charges.
On the contrary, “Freight Prepaid”, means the shipper is responsible for the costs and risks of the shipping.
What is the Importance of FOB?
There are many reasons for the significance of “Free On Board” in shipping. Let’s brief them:
- Determines the ownership of goods at different points to solve the issues regarding any defect or loss.
- Helpful to know who will pay the costs of the goods.
- Beneficial to prevent any arguments in the shipping procedure.
When the shipping distance is long, and the risks of damage and loss of the goods are higher, proper documentation of the goods is necessary. It is crucial to understand the ownership of the goods to avoid any confusion and solve the issues regarding them.
Whether it is domestic or international shipping, proper investigation is required for the transportation of goods.
Conclusion
It is necessary for you to know what does FOB stand for in maintaining the risks and costs in dealing with shipments. Knowing the liability for the costs of the goods at different points will help you manage better dealing. It gives you a seamless process of shipment especially if it is on a larger scale.
Understanding Free On Board is necessary for businesses that involve domestic and international shipments. The FOB Origin and Destination both have different responsibilities, costs and risks for buyers and sellers. Therefore, knowing these terms can help both parties develop trust and longer relationships by minimizing potential disputes.
