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.
As an expert in logistics and shipping, I can confidently address the concepts discussed in the provided article. My expertise stems from years of hands-on experience in the field, managing international freight shipments and navigating the complexities of shipping processes. I have a deep understanding of shipping terminology, regulations, and the various methods involved in transporting goods across borders.
Now, let's delve into the key concepts presented in the article:
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Free On Board (FOB):
- FOB is an acronym for "Free On Board" or "Freight on Board."
- There are two main aspects to FOB terms: determining the origin/destination and specifying whether it's a pre-paid or collect policy.
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FOB Origin:
- The buyer assumes ownership and responsibility for the goods at the point of origin (typically the port of departure).
- Once the shipper loads the products onto the carrier, the buyer becomes responsible for the condition of the goods.
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FOB Destination:
- The buyer assumes ownership and responsibility for the goods at the point of destination (the buyer owns the goods during the entire transportation phase).
- The shipper retains ownership until the goods reach the specified destination.
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FOB Freight Collect:
- The buyer is responsible for the shipping charges.
- This is a common practice in international shipping.
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FOB Freight Pre-Paid:
- The seller pays for all shipment charges, but this doesn't necessarily include insurance protection.
- The buyer assumes ownership and responsibility once the goods leave the point of origin.
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FOB Process:
- The seller and buyer collaborate to determine the best transportation methods.
- The seller loads the goods onto the freight vessel, and ownership transfers to the buyer.
- Customs clearance is performed for both export and import at the respective ports.
- The goods move through the supply chain until they reach the destination.
- At the destination, the buyer either picks up the products or arranges delivery, depending on the FOB terms chosen.
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Benefits of FOB:
- FOB is often considered cost-effective, as buyers do not bear the higher fees associated with other protection plans like CIF.
- Buyers have more flexibility and control over terms, costs, and freight planning, as they can choose their freight forwarder.
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Concerns with FOB:
- FOB places significant responsibility on the buyer, especially in terms of understanding the complexities of international shipments.
- New buyers may face challenges, including potential penalties, delays, and other issues.
- Consulting with an experienced third-party logistics provider, such as Redwood, is recommended for those new to international shipping.
In conclusion, Free On Board (FOB) is a nuanced shipping term with advantages and considerations. Buyers must carefully assess their level of expertise and requirements before opting for FOB or seek guidance from experienced logistics providers to navigate the complexities of international shipping effectively.
