FOB stands for Freight on Board or Free On-Board. It is basically a legal term that defines a point in the supply chain where the buyer or the seller of the product becomes liable for the transport of the goods. The term is meant for the risks and the costs of the goods meant for shipping from the selling party to the buyer party. The International Chamber of Commerce (ICC) defines the FOB law, and most countries around the law accept the law.
In this article, you will learn about what is FOB (free on board) and how it works for business and commercial purposes. Apart from that, you will also learn about what are the major types of FOBs and how they work in different situations. Finally, we will discuss how FOB pricing works in businesses. Hence, to learn more about FOB (free on board), read on through to the end of the article.
What Is FOB (Free On Board)?
According to Investopedia,
“Free on Board (FOB) is a shipment term that defines the point in the supply chain when a buyer or seller becomes liable for the goods being transported. Purchase orders between buyers and sellers specify the FOB terms and help determine ownership, risk, and transportation costs.”
Basically, FOB is a term that indicates when the ownership of the goods in a business transfers from the buyers to the sellers or vice versa. It impacts various aspects of the delivery of a product, including inventory, shipping, and insurance.
Depending on the situation and the need, the buyer or the seller assumes food risk for the shipping of the product. FOB Origin means that the buyer of the product assumes all the risk of the product after the seller ships it, while FOB Destination means that the seller retains all the risk of the product until it reaches the buyer.
How Does FOB Work?
FOB is a common term that businesses use for all types of shipping, both international and domestic. The shipping orders and contract of the shipping also come with the time and place of the delivery, price, payment methods, etc. It also describes when the risk of the loss shifts from the seller of the product to the buyer. Furthermore, it also gives a description of the party that bears the cost of freight and insurance.
According to Wall Street Mojo,
“Whenever goods and products are exported to a different country, there is a risk of being destroyed, damaged, or lost within international borders. The FOB defines the point until the seller owns this risk and when it is transferred to the buyer. Accordingly, in the event of loss or damage, the seller or the buyer bears the cost.”
In simple words, with the use of FOB, the supplier or the seller of a particular good ends his responsibility for shipping the goods to the buyer. In general, the seller of the goods pays for the shipping cost to a major shipping destination, while the buyer pays for the transportation of the goods from the warehouse to the buyer’s destination.
You will get the terms of the FOB in the vendor-client transaction in the purchase order. The FOB status states who is liable to take responsibility for the shipment.
What Are The Types Of FOB?
Based on the given term of the FOB, the buyer or the seller takes on the responsibility of the shipment:
FOB Origin simply means that the liability and responsibility of the shipping is with the buyer. The origin of the trade of the goods begins at the seller’s shipping dock. When the goods are safely on board, the buyers must bear the responsibility of the transportation liabilities and expenses.
FOB Origin is also sometimes known as FOB Shipping Point. The buyer is responsible for paying for FOB Origin, as he takes responsibility for the goods. On the other hand, the seller pays the shipping costs.
In FOB Destination, the transfer of the goods happens once they have reached their destination. Then the goods are shipped to the buyer’s store. In this case, the seller of the product bears all the transportation expenses and liabilities. Basically, the seller retains the ownership of the goods sold until the goods reach their final destination.
FOB Pricing – How Does It Operate?
According to Shopify.com,
“While shipping costs are determined by when the buyer takes ownership of a particular order of goods, a company’s accounting system is also impacted. If a shipment is sent to FOB Shipping Point (the seller’s warehouse), then the sale is concluded as soon as the truck pulls out of the seller’s loading dock and is noted in the accounting system as such.”
On the other hand, it is also important for buyers to note this data in their accounting system that the inventory is on its way. The inventory that is on its way is now an asset to the books of the buyer, even though the shipment did not arrive at its destination.
The costs associated with the FOB can include a variety of things. Here, various factors are taken into consideration. These are the transportation of the goods to the shipment port, loading of the goods to the shipping vessel, insurance, freight transport, unloading of the goods, and transport of the goods from the arrival port to the final destination.
What is FOB? – It stands for Free on Board. The FOB is a law that the International Chamber of Commerce defines, and it is applicable globally. It determines when buyers are responsible for the shipping expenses of a product. This law started in the era when people delivered goods on ships.
FOB Origin is the term when the buyer of the good takes responsibility for the shipping of the product after it leaves the seller. On the other hand, FOB Destination is when the seller retains the responsibility until the product reaches the buyer. Do you have any more information to add regarding the FOB law? Share your info with us in the comments section below.
A passionate writer and an avid reader, Soumava is academically inclined and loves writing on topics requiring deep research. Having 3+ years of experience, Soumava also loves writing blogs in other domains, including digital marketing, business, technology, travel, and sports.