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Shipping of commodities – especially internationally, doesn’t always go off without a hitch. Moving freight from international ports often requires multiple handling and various methods of transport. In most cases, several stops before it reaches your point of delivery. With so many hands handling your commodities, and potential for damage, many responsible buyers opt to purchase FOB shipping protection.
While there are several layers of freight insurance that a shipper can purchase, many opt for Free On Board (FOB) protection from the named port of origin. There are several advantages and disadvantages of using this form of shipping protection, which we’ll outline in the information below.
What is Free On Board (FOB)?
Acronyms are quite popular in the supply chain, and FOB is one of the misunderstood. FOB refers to Free on Board but can also be called Freight on Board. There are two unique parts to the FOB terms. This includes determining the origin or destination and whether it’s a pre-paid or collect policy.
FOB Origin
The FOB Origin basically means that the buyer will assume the title of the commodities at the point of origin. Essentially, once the shipper loads the product onto the freight carrier, in the container, or on the mode of transportation, the buyer will be responsible for the condition of the goods. This is the most popular option as buyers will take the full responsibility for the goods once they depart the port of origin.
FOB Destination
Under the FOB Destination terms, the buyer assumes responsibility and ownership of freight (also known as the title of goods) at the point of destination. In this classification, the shipper owns the products or goods during all phase of transport.
FOB Freight Collect
When a buyer chooses the freight collect option, it means that the buyer is responsible for the charges for shipping. This is the most common form of business –, especially with international shipping.
FOB Freight Pre-Paid
With Freight Pre-Paid, the seller has paid for all of the shipment charges. This does not mean they have paid for insurance protection.
In most instances, when you hear the phrase FOB in shipping, it will refer to the Origin and Freight Collect method. Under these terms, the buyer will take possession of freight ownership and responsibility once they leave the point of origin. Negotiation of origin is on an individual basis.
How Does the FOB Process Work?
So – if you’ve determined that FOB protection is in your best interest, there is a process that is followed to ensure it complies with rules and regulations. Here is the standard process for FOB shipments under the most common Origin / Freight Collect methods.
• The Seller will work with the buyer to determine the best methods or modes of transportation.
• Once those terms from origin to destination are planned, the shipper will load the goods onto the freight vessel. At this point, the buyer owns these goods and it is their responsibility to cover their goods for insurance protection.
• When the products are loaded on the vessel, the seller clears the goods for export from their country and for import to the port of destination.
• The products are then transferred through the supply chain until they reach the point of destination.
• At the point of destination, the buyer will either pick up and sign for the products or arrange delivery from the port of destination to their facility. For buyers who chose the FOB Destination platform, ownership of the freight would transfer to them at this point. This means that the buyer would be responsible for the costs and any risk of damage to the freight.
How is FOB Beneficial?
Most buyers choose FOB because it’s arguably the most affordable or cost-effective option. Under the FOB terms, buyers do not usually pay the higher fees that CIF protection plans incur. With Free On Board, the buyer has more flexibility and control of the terms, the cost, freight planning, and more. This is mainly due to the fact that they select their freight forwarder.
What are the Concerns with FOB?
If you’re a new buyer – especially with international shipping, Free On Board might not be the best option for you. FOB places a lot of responsibility on the buyer, as they need to comprehend the complexity involved with international shipments. There are plenty of opportunities for penalties, delays, and other problems to occur if you don’t have a good handle on the overseas shipping landscape.
For those new shippers and buyers who are looking for the right advice on how to handle international shipments, consulting or depending on the experience of a proven third-party logistics provider like Redwood is a smart idea.
FAQs
The main disadvantage of FOB for the buyer is that they are responsible for any loss or damage that occurs during the transport, and they may face delays or extra charges at the destination port. The main advantage of FOB for the seller is that they have less risk and liability once the goods are loaded on the vessel.
What are the risks of FOB? ›
Risks and Disadvantages of FOB Destination
In this arrangement, the seller retains liability for the goods until they are delivered to the buyer. This means the seller bears the risk of loss, damage, or destruction during transit, which can impact their reputation and profitability.
What is the FOB method of shipping? ›
Free on board (FOB) is a trade term used to indicate whether the buyer or the seller is liable for goods that are lost, damaged, or destroyed during shipment. Free on board shipping point indicates that the buyer takes responsibility for loss or damage the moment the goods get to the shipper.
What are the disadvantages of key fobs? ›
Key fobs are small and can easily be misplaced or stolen. If a key fob falls into the wrong hands, an unauthorized person could gain access to a secure area, potentially putting confidential information, employees, or other valuable assets at risk.
What are the advantages and disadvantages of shipping transport? ›
There are risks and disadvantages of transporting goods by sea, including:
- shipping by sea can be slower than other transport modes and bad weather can add further delays.
- routes and timetables are usually inflexible.
- tracking your goods' progress is difficult.
- you have to pay port duties and taxes.
With FOB shipping point, the buyer pays for shipping costs, in addition to any damage during shipping. The buyer is the one who would file a claim for damages if needed, as the buyer holds the title and ownership of the goods.
Who is responsible for damages in FOB? ›
The Buyer is responsible for filing claims for loss or damage. FOB DESTINATION • The Seller retains title and control of goods until they are delivered and the contract of carriage has been completed. The Seller selects the carrier and is responsible for the risk of transportation.
What is the purpose of a FOB? ›
Also known as a hardware token, a key fob provides on-device, one-factor authentication to facilitate access to a system or device, such as a car, computer system, restricted area or room, mobile device, network service or other kind of keyless entry system.
Is FOB shipping cheaper? ›
Under FOB contracts, the buyer is responsible for shipping and other costs, as well as insurance as soon as the goods are loaded onto the vessel and during the voyage. FOB contracts are generally more cost-effective because buyers have more control over shipping and insurance.
What is the alternative to FOB shipping? ›
Compared to FOB, CIF comes at a higher cost for buyers: sellers invoice buyers to cover costs of shipping and insurance. As mentioned, sellers can add additional fees for the service to make a larger profit. Therefor using CIF provided by the seller ends up costing more for the buyer.
FOB stands for Free on Board, and it dictates where the responsibilities are split between the buyer and seller during the shipping process of international transactions. There are two forms of FOB: FOB Origin (or FOB Shipping Point) and FOB Destination.
What are the benefits of a key fob? ›
Here are six reasons you should consider a key fob entry system:
- Logging Time And Productivity. ...
- No More Lost Keys! ...
- Your Locks Can't Be Picked. ...
- Create Restricted Areas. ...
- Easy Administration. ...
- Remote Access. ...
- Get A Fob System For Your Business.
Yet with FOB, the buyer has much more flexibility and control to choose the carrier and negotiate shipping rates, which can help reduce costs. CIF is used when goods are shipped to a specific destination port, whereas FOB is used when goods are shipped from a specific port of origin.
What are the advantages and disadvantages of remote control? ›
Additionally, remote controls that can be manipulated by stroking their surface offer familiarity, function awareness, and ease of use without looking at buttons . On the other hand, a disadvantage of remote controls is that they can be affected by interference or security issues .
