FOB shipping is an acronym for free onboard shipping. It is a term in the trade business where buyers and sellers negotiate the ownership of the goods while they are in transit. Depending on the FOB contract, the seller can take responsibility for goods throughout the transit process and end it when they safely reach the destination. The FOB contract also allows the buyer to take ownership of the goods when the buyer drops them off in the container yard or hands them to the shipping company or carrier. Flexibility, simplified accounting and cost control are a few advantages of FOB shipping for global businesses. Let us know more about free-on-board shipping and its benefits.
What is FOB shipping?
FOB, or free on board, is a commonly used term concerning domestic and international bound shipments in the shipping industry. It describes the shipping party responsible or liable for the shipment. In simple words, FOB in business refers to the point in the transportation cycle where the shipper legally hands over the responsibility of the shipment to the consignee. Based on the shipping party that owns the cargo, the logistics company will charge the transportation costs and explain the risks associated with shipping, such as cargo theft or damage. Beyond the FOB shipping point, the exporter or shipper is no longer responsible for the fate of the goods. FOB terms are discussed between the buyer and seller to restrict it in the contract between them so that the shipping companies or 4PL service providers know who will pay them at the destination. There are two types of FOB contracts: FOB origin and FOB destination. Let us learn more about it.
What does FOB origin mean?
A shipment can be marked as “FOB Origin” or “FOB Shipping Point”. This means both the seller and buyer have discussed that the change in ownership will occur once the seller hands over the consignment to the shipping company. The responsibility for goods on the seller’s end will cease once the goods reach the shipping company or carrier. The mode of transportation may vary from truck, road, rail, or plane. From that point, the buyer assumes the responsibility for the goods and various risks and charges associated with the shipment. Such a FOB term is highly favourable for the seller as it cancels out the risk of economic losses due to cargo damage at any point during shipping.
For example- If you are the seller, you can go for a contract enlisting FOB origin where your only task will be to drop the shipment from your warehouse to the shipping company. The benefits of 4PL logistics solutions help in allowing shippers to get rid of the tedious task of transporting goods to the shipping company and regulating transportation activities. If both shipping parties, the shipper and consignee, agree to a 3PL or 4PL service, the provider will pick up the consignment from the buyer and directly deliver it to the shipping company.
What is the FOB destination?
FOB destination, also referred to as ‘FOB delivered’, is marked on a consignment when the buyer and seller agree; the seller will be responsible for the risks and charges associated with the goods until the shipment successfully reaches its destination. The goods for shipping are containerised using appropriate container packing methods for intermodal transportation. Following this, the goods are sent for transportation. It includes the intermodal transport of goods via various modes of transportation such as planes, ships, trucks, or trains. Any late fees, such as detention and demurrage, are levied on the seller. The criteria of free on-board destination leverage the buyer and ensure that the shipment will arrive in good condition. The seller’s responsibility ceases once the seller hands the shipment to the buyer via the shipping company or carrier.
For example, if you are the buyer, going to an FOB destination may work in your favour. International or domestic shipping involves risks of cargo damage or economic losses. By making the buyer responsible for the delivery of goods till they reach the destination, the buyer can remove themselves from the shipping process.
What are the advantages of FOB shipping?
The FOB incoterms define the change in ownership during the transportation of goods and the shipping party responsible for goods. The various benefits of FOB shipping are as follows-
- For shipping companies or carriers– 3PL and 4PL service providers across the globe need to establish clear grounds about who owns the shipment at what point during transit. It helps provide clear guidelines and draft the terms and conditions associated with the cargo during its intermodal transportation. Clarifying the shipping party and their responsibilities helps avoid misunderstandings and easily settle international or domestic shipment disputes. The carrier or company can list the risks associated with cargo transport and directly contact the owner of goods since the FOB contract decides the shipping party responsible for goods.
- For FOB sellers– With FOB origin, the seller can minimise going through the challenges involved in customs clearance, cargo inspection, documentation, and paying an extra fee in case of delays or damages to the cargo. The FOB contract also allows simple accounting where sellers and buyers are not confused about the ownership and pin any economic losses on each other.
- For FOB buyers– Regarding FOB destination, the importers can benefit the most since the seller takes complete responsibility for dropping off the shipment to the buyer’s destination. The buyer’s transportation cost is significantly reduced since the buyer is not involved in shipping. FOB destination shipping also minimises the risk of non-delivery and its economic losses.
Difference between CIF and FOB shipping
- Free on-board (FOB) shipping is used to signify the person in charge of the goods, who will be liable for the goods and their costs and risks during the cargo transportation. Cost, insurance, and freight (CIF) is a shipping agreement holding the seller responsible for the risks, charges, and ownership of the goods during transit.
- In FOB shipping, the shipment responsibility can either rest on the seller throughout the entire process or can change and go to the buyer when the shipment is handed over to the shipping company or carrier by the seller. In the case of CIF shipping, the seller is responsible for the goods in transit. There is no transference of ownership during the transit.
- FOB terms apply to any mode of transport, including trucks, rails, planes and ships. In contrast, CIF limits itself to maritime shipping and only applies to transportation via sea routes.
These are a few advantages of FOB shipping that facilitate global business throughout the supply chain and establish legal and reliable grounds for trade business.
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