Free on board (FOB) shipping clarifies predicaments like this by defining exactly when ownership of transported goods changes from one party to another. We’ll go over FOB basics, its variations, and the benefits your small business can enjoy from using it.
FOB is an International Commercial Term (Incoterm), a predefined commercial term meant to reduce confusion between sellers and buyers about ownership transfer points and responsibility for shipping costs.
Otherwise, if a shipment is damaged or lost in transit, contentious, and expensive, legal wrangling could ensue to determine financial responsibility.
FOB benefits include:
The two major FOB types are FOB shipping point and FOB destination, which we’ll discuss in depth below.
Incoterm FOB definitions specify when product ownership and freight costs transfer from seller to buyer. Source: www.shippo.co.uk.
FOB originally referred to overseas shipments by boat, but its use in the U.S. more generally applies to all forms of delivery transport, including truck, rail, and air.
FOB not only identifies who’s responsible at which points for shipping costs and liabilities, but it also impacts your total costs and accounting practices for each shipment.
FOB shipping point means you choose your delivery method, which can lower costs, or you can avoid liability, even though you’ll likely pay more, with FOB destination. The point at which the goods’ ownership transfers and related shipping costs also affect your cost of goods sold (COGS).
Two differences distinguish FOB shipping point from FOB destination: which party pays for shipping and the point ownership of goods transfers from seller to buyer.
Let’s say you’re in Dallas and purchase a bulk order of widgets from a San Francisco wholesaler. An “FOB San Francisco” shipment means you’re responsible for shipping them from San Francisco to Dallas and own the goods when the shipping company picks them up.
An “FOB Dallas” shipment means the wholesaler will cover shipping costs and owns the goods until you receive them.
Determining the ownership transfer point is critical when shipping goods. Source: www.mheducation.com.
Other FOB options include:
Each option has pros and cons, depending on your specific situation, as we’ll discuss in the next section.
When I was a book publisher, we printed our four-color books in China. Our printer was responsible for shipping books from China to San Diego, but then we had a choice: FOB shipping point or FOB destination to get them to our book distributor’s warehouse in Little Rock, Arkansas.
FOB shipping point might let us find rates cheaper than our printer charged. We were a small shop in Texas, however, so we weren’t in Southern California to deal with U.S. customs and had no expertise in that area.
We also didn’t want to be liable if something happened to our books while they were en route to Arkansas. So, even though it was more expensive, we went with FOB destination.
We always needed, however, one pallet of books shipped to our offices for direct sales and marketing purposes. The FOB destination terms included the stipulation that the printer delivered to one address and having them split the order in San Diego was a significant extra expense for us.
Instead, it was more cost-effective to ship all the books to Little Rock and have our distributor send a pallet of books to us from there.
If you’re buying products in bulk shipped to your business or warehouse, you’re already using the FOB options your wholesale distributors have chosen. As a small business owner, you want to make your own decisions, and with FOB shipping point, it’s a matter of finding the right balance between reward and risk.
FOB shipping point rewards boil down to one thing: control. You decide who ships your goods based on price or other factors, you own the goods when they’re on their way to you, and you can schedule shipments to one or more warehouses to meet your inventory management needs.
If you use inventory management software, track each FOB delivery online to keep a close eye on it from departure to arrival.
The risks relate to your tolerance for liability. Can you handle the logistics of shipping as well — or better — than your supplier? Are there in-transit security issues you don’t want to be responsible for?
Do you have enough slack built into your inventory control processes to tolerate a lost or delayed shipment? If you know the risks and aren’t willing to bear them, FOB shipping point may not be your best option.
Don’t get me wrong: Choosing your own logistics or transport company for shipping will likely be cheaper and get your goods safely to you. But, like every other vendor you use, do the research necessary — different shipping options, costs, terms, and suppliers — to make an informed choice.
FOB illustrates the tension between control and liability. Sure, you want to keep costs low by making your own shipping arrangements, but can you afford the liability if something goes wrong? Know your FOB options, so you can make the best decision based on each situation.
Click one of our representatives below to chat on WhatsApp or send us an email to info@robezfreightliner.com
