The Meaning of FOB: an important Incoterm

At Lessgistics, we are constantly talking with businesses about Incoterms and their importance to profitability and risk management. These Incoterms are widely-used terms of sale in international and domestics commerce. They are recognized international rules which define the responsibilities and liabilities of sellers and buyers. Every several years Incoterms are updated by the International Chamber of Commerce (ICC). They were actually just updated in 2020. Incoterms typically fall into two categories: a) rules for any mode(s) of transport and b) ones specifically used for sea and inland waterway transport.

2020 Incoterms for Any Mode of Transport:

  • EXW – Ex Works (add place of delivery)
  • FCA – Free Carrier (add named placed of delivery)
  • DDP – Delivered Duty Paid (add place of destination)
  • CPT – Carrier Paid T0 (add place of destination)
  • CIP – Carrier and Insurance Paid To (add place of destination)
  • DAP – Delivered at Place (add named place of destination)
  • DPU – Delivered at Place Unloaded (add place of destination)

2020 Incoterms for Sea and Inland Waterway Transport:

  • FOB – Free on Board (add name of port loading)
  • FAS – Free Alongside Ship (add name of port loading)
  • CFR – Cost and Freight (add named port of destination)
  • CIF – Cost Insurance and Freight (add named port of destination)

For this piece we are going to focus on one of the most commonly used terms which is FOB. This blog should further clarify for those outside of the Logistics world the meaning and how you should be leveraging it in your business for future success.

FOB Defined

FOB is the acronym for Free On Board and indicates the point in the supply chain where the seller hands over ownership and the buyer accepts ownership of products purchased in a transaction. In each purchase order transaction the terms of FOB terms should be clearly spelled out. Along with FOB terms, shipping terms should also be clearly defined upfront and included in your purchase order.  No one should be unclear of your purchase or shipping terms as this opens you up to an unneeded amount of risk and substantial additional costs cutting into your bottom line.

Here is a list of commonly used FOB terms which may be useful for your company:

FOB Origin, Freight Collect:

“FOB Origin” -An International Commercial Law that states a sale is considered complete at a seller’s shipping dock

“Freight Collect” – The buyer will pay the cost of transporting the goods at the time they are received.  The buyer also assumes all risks of transportation, and therefore is responsible for filing claims in the case of loss or damage.

FOB Origin, Freight Prepaid:

“Origin” -the buyer takes ownership at the time of carrier pickup.

“Freight Prepaid” – the seller accepts responsibility for all freight charges and freight claims exposure.

FOB Destination, Freight Collect:

“FOB Destination” – the seller retains title and control of the goods until they are delivered. The seller selects the carrier and is responsible for the risk of transportation and filing claims in case of loss or damage.

“Freight collect”- the buyer is responsible for the freight charges.

FOB Destination, Freight Prepaid:

“Destination”-  A set of delivery terms that transfers the title of goods from the seller to the buyer when the goods are physically delivered to the buyer.

“Freight prepaid”-  the seller pays for all freight charges.

The Wrap

As you can see there are several ways FOB terms can be utilized. What makes sense for one business may not make sense for the other. It is important to always make sure FOB terms support your company’s objectives. These terms are flexible enough to make sure both parties are satisfied prior to the transaction being processed.

As E-Commerce and other Direct to Consumer segments are growing, negotiating these in an expert fashion are critical to ensuring future profitability and mitigating risk. Incoterms seem simplistic on the surface, but can be complicated to manage across a vendor based of varying needs. Let the experts at Lessgistics help you with a free supply chain evaluation to make sure your business is achieving its goals in commerce transactions.