Understanding the True Meaning of F.O.B.People ask me the meaning of the term F.O.B. more so than any other freight verbiage. Many people do not even know what it stands for. In fact, recently I was at a prominent shipper in the Northeast and a high-level purchasing person actually called it fob (rhyming with "bob"). At that moment, I knew I needed to draw up an article to further explain how this often-misused term actually is defined.
For starters, F.O.B. stands for Free On Board and indicates the price for goods including delivery at the seller's expense to a specified point. In the purchasing world, F.O.B. is also used with an identified physical location to determine a) the responsibility for the payment of the freight charges and b) the point at which title for the shipment passes from the seller to the buyer.
In other words, F.O.B. is a purchasing term that is used between suppliers and customers. Every vendor and customer should have the F.O.B. requirements specified.
F.O.B. terms identify: 1) who's paying for the freight and 2) who owns it at which point.
Below are four different ways in which F.O.B. terms are used in a purchasing agreement:
1) F.O.B. Origin, Freight Collect 2) F.O.B. Origin, Freight Prepaid 3) F.O.B. Destination, Freight Collect 4) F.O.B. Destination, Freight Prepaid
Explanation Of Each F.O.B. Term
F.O.B. Origin, Freight Collect: The "origin" part means that the buyer assumes title of the goods the moment the freight carrier picks up and signs the bill of lading at the origin pick-up location. The buyer also assumes risk of transportation, and therefore is responsible for filing claims in the case of loss or damage. The "freight collect" part means the buyer is responsible for the freight charges.
F.O.B. Origin, Freight Prepaid: The "origin" part means the same as above, but the "freight prepaid" part means the seller is responsible for the freight charges.
F.O.B. Destination, Freight Collect: The "destination" part means the seller retains title and control of the goods until they are delivered. The seller selects the carrier and is responsible for the risk of transportation and filing claims in case of loss or damage. The "freight collect" part means the buyer is responsible for the freight charges.
F.O.B. Destination, Freight Prepaid: The "destination" part means the same as above and the "freight prepaid" part means the seller is responsible for the freight charges.
How This Affects Your Company
This can affect you in some serious ways if you are not careful. I was recently at a distributor who receives a lot of freight from various vendors. He has a policy on his dock that his receiving guys should refuse an order if it has the slightest sign of damage. He does not want to file a claim or deal with the process of ordering replacement parts for potential damages. So, he just tells his dock people to refuse the shipment at the receiving dock.
Concerned about what this distributor was liable for, the first thing I wanted to find out was what the F.O.B. terms are with his vendors. The vendor who he refused the most shipments from had the terms "F.O.B. Origin, Freight Prepaid." This meant that although his vendor was paying the freight, the distributor owned the freight, and the responsibility of loss or damage, as soon as the carrier picked it up. So, by refusing the freight, he was returning something that he actually owned at this point.
There are a few reasons why it is not smart to refuse a shipment when it is F.O.B. origin. First of all, in this case his vendor has no reason (besides being a nice guy) to accept those goods back. The distributor owned them as soon as the trucking company picked them up. So by returning a shipment, this distributor was just raising the risk for more possible damages by going back through the carrier system to the vendor. Technically, when an order gets delivered back to the vendor, they could refuse it because they no longer own it at that point.
Luckily for this distributor, his vendor is very nice. The vendor accepts the returned items, files the claims on behalf of the distributor and is quick to replace orders. This distributor could get shafted at some point if the vendor decides not to be nice.
How To Handle F.O.B. Issues
In this case, the distributor should be accepting these partially damaged shipments (since he technically owns them) and have an inspector come in to check them out. If replacement is possible, the distributor should order the parts and have them replaced. All this should be covered by the carrier via a claim settlement.
The other option in this case is to change the terms to "F.O.B. Destination, Freight Prepaid." If it is "F.O.B. Destination," then the distributor could refuse the shipment because they do not own it until it is delivered properly.
The bottom line is that it is important to pay attention to these F.O.B. terms. There are a lot of suppliers and vendors that try to do the right thing by their customer, regardless of what the F.O.B. terms are. But that doesn't mean you should ignore what your F.O.B. terms are with your vendors and customers.
If you are a shipper, make sure the F.O.B. terms are what you want them to be. You may want them to be "F.O.B. Origin" so your customers own the goods when they leave your door. Or you may want to own them until they are delivered intact. In fact, that is a good selling point to your customers if that is the way you want to do it.
The same is true with companies that receive a lot of goods. Make sure the F.O.B. terms suit your needs.
About the Author:
George Muha is a freight consultant, author and speaker on the topic of freight best practices and savings tips. You can find our tips at his site www.freightsavingstips.com