If you’ve been in the supply chain business for very long, then you’ll have seen the term “FOB” on various invoices. While some people in the supply chain and warehousing industries might feel comfortable with their knowledge about what FOB means for them and their business, there are a lot of people who are confused by it. It becomes even more complicated when there are additional terms attached to it, such as “freight collect” and “freight prepaid.” Each of these terms means something slightly different but could have huge ramifications for your business and your customers. If you are confused by FOB, our warehouse consultants have put together this simple guide to help you understand what it is and why you should care about it.
Answers to Frequently Asked Questions About FOB
What Does FOB Mean?
FOB stands for “freight on board” or “free on board.” The two terms are used interchangeably, so don’t let that confuse you if you see it spelled out instead of abbreviated as FOB.
International versus Shipping the United States
While the abbreviation means the same thing, there are differences in what FOB implies in international shipping and what it means for shipments within the United States. Within the United States, FOB indicates at which point the seller is no longer responsible for the cost of shipping the items. They might cover the costs up to a certain point, after which a third party shipping company will take over and deliver the items the rest of the way at the buyer’s expense. In the international shipping industry, FOB is used to indicate where the risk and costs of delivering goods change from being the seller’s responsibility to the buyer’s responsibility.
Where Did the Term Come From?
The term actually originated hundreds of years ago when sailing ships were the primary means of transporting freight around the world. The rail of the ship was used to designate when the freight left the responsibility of the shipper and became the responsibility of the recipient. It’s been in common use since 1936 and is used as a shipping term around the world.
What Do These Additional Terms Mean?
The term might stand for “free on board” but there is nothing actually free about it. Someone is still paying for the shipment of the cargo. However, what FOB does is let all the parties involved understand who is paying for it and how they are paying for it. This is typically designated by an additional term that comes after FOB.
In international shipping, you’ll see FOB followed by the name of a port. This port is where the responsibility and risk of the shipping transfer from the seller to the buyer. For instance, if you purchase something from China and it’s shipped FOB Seattle, then the seller is assuming the responsibility of shipping the item until it reaches Seattle. After that, you’ll assume the risk and responsibility of making sure the items make it the rest of the way.
In North American shipping, this means the responsibility of getting the goods shipped ends once the seller gets them onto the truck. The buyers will pay the costs of shipping the item from the point of origin.
In North American shipping, this means the responsibility of shipping the goods remains with the seller until it reaches the final destination. The sellers will pay for the shipping of the items to the final destination.
Why You Should Care About FOB
It might seem like a little thing on your purchase order or invoice, but the terms and conditions that are implied in these simple terms can have a big impact on your business. First and foremost, it means your business could have a legal responsibility for the goods that you are shipping. Depending on how your FOB terms are worded, if something happens along the way, you could be responsible for the risk and costs associated with the shipment. So if you are responsible, you’ll likely want to take out insurance on the shipment just in case something goes wrong along the way. Otherwise, you could be eating the costs of damaged merchandise and lost sales.
Knowing what you are responsible for and being prepared can help you mitigate the damage in a worst-case scenario. Additionally, not understanding the costs associated with FOB terms could dramatically raise the cost of your goods and decrease your bottom line. So knowing what you are paying for and what the seller is paying for will help you manage those costs now and in the future, since the cost of insuring FOB origin shipments will need to be factored into your selling price.
Who Can Help You Manage FOB
There are a number of third-party shipping companies who specialize in FOB shipments. If your seller is only responsible for the merchandise up to a certain point, then you’ll need to work with a company who can help you bring those items the rest of the way. Look for companies who have handled these arrangements in the past and are used to the process.
How to Lower the Costs of FOB Shipments
If you are covering the costs of a lot of shipments, it’s going to eat away at your profits. Insuring and paying for shipping costs isn’t cheap. There are a couple of ways you can try to lower these expenses:
- Reduce the number of shipments. Ordering larger quantities can help you avoid paying insurance and shipping costs repeatedly.
- Renegotiate your terms. If you are ordering a lot of merchandise from a company, then they may be willing to give you a break and assume some of the shipping costs up to a certain point. It’s worth talking to them or shopping around.
Confused About a Supply Chain Term?
Our warehouse consultants are here to help! Get in touch with our team and we’ll take the mystery out of whatever term you’ve been puzzling over. Simply give us a call or contact us through our website and let us know what term you’d like to know more about. We may feature your request in a future blog!