Dealing with international shipping can get complicated. Different jurisdictions require various documents and permits. Likewise, there are multiple guidelines for multiple types of shipments. International shipping concepts, for the most part, aren’t difficult to master. However, it is the permutations that can get tricky. Importers and exporters need to have a working knowledge of standard eCommerce shipping and freighting terms to avoid confusion and costly mistakes. One of the industry terminology retailers must familiarize themselves with is Free On Board or FOB.
The complex nature of international shipping led to the standardization of the most commonly used shipping processes and terms. The International Chamber of Commerce created the International Commercial Terms or Incoterms to simplify the trade process. This article explores one crucial shipping concept – Free On Board or FOB.
What is Free On Board?
Free on Board or FOB is one of the most common Incoterm that retailers should know. It is one of the most common incoterms, and almost all shipments have a FOB designation. There are plenty of risks associated with international shipping. As such, FOB documents are essential in determining which party is liable for the good in transit. Aside from liability in instances of damage, FOBs also indicate who is responsible for the expenses involved with the shipment.
Although used interchangeably, it is vital to note that the term Free on Board is not the same as Freight on Board. Freight on Board is not a recognized domestic or international code.
What is FOB Shipping?
Free on Board Shipping point or FOB Shipping assigns the liability and the payment for a shipment to the buyer. The transfer of responsibility occurs as soon as the inventory arrives at the shipping point and gets loaded into the vehicle. After the transfer, the buyer logs the transaction as a sale and notes the increase in their inventory.
The buyer pays for all shipping costs with FOB shipping. Aside from the transport expense, they are also liable for any damages that may occur during shipping. In this agreement, buyers are responsible for filing claims on damaged freight since they hold the title and ownership of the inventory.
For instance, when Retailer A signs a FOB shipment agreement with International Manufacturer B for inventory, the inventory ownership transfers once the shipment reaches the delivery vehicle. In most international transactions, the differentiation is usually at a port. If one piece of inventory breaks during transport, Retailer A is responsible for the damages even if the parcels haven’t reached their storage facility.
What is FOB Destination?
Consequently, FOB Destination assigns the responsibility for most of the shipping process to the seller. The buyer only takes ownership once the packages arrive at their warehousing facility. FOB destination agreements also indicate the destination point.
Buyers who purchase high-value items prefer FOB Destination agreements. A FOB Destination provides a buyer the assurance that their investment is protected regardless of occurrences during transit. More often than not, buyers inspect high-value goods upon delivery. It is only when a buyer accepts a shipment and confirms receipt that the liability passes from the seller.
To illustrate, Retailer A, located in Los Angeles, purchases luxury inventory from Overseas Seller B. Because of the high-value nature of the shipment, both parties agree to sign a FOB Los Angeles agreement. The product incurs damages during the flight from the country of origin to LAX. With the arrangement, Overseas Seller B has to decide with Retailer A on whether the seller would send replacement products or reimburse the payment entirely.
Free On Board Shipping versus Free On Board Destination
Both FOB Shipping and FOB Destination reference the stage during international shipping in which the title of ownership gets transferred from the seller to the buyer. It is an important distinction, especially in such cases when damage occurs during transit. The main difference lies with the timing of the ownership transfer.
- Free On Board Variations
As mentioned earlier, understanding the main concepts of Free on Board is simple. However, there are permutations to the agreements that retailers know.
- FOB Shipping, Freight Collect
The buyer assumes all liability for the goods transported. They also are responsible for the shipping costs.
- FOB Shipping, Freight Prepaid
The seller includes the shipping fees in the buyer’s total invoice. The buyer doesn’t have to pay for shipping once the inventory arrives at the destination as it already gets prepaid. The ownership of the goods transfers to the buyer at the point of origin.
- FOB destination point, Freight Collect
The buyer is responsible for the shipping fee payment. However, the seller maintains ownership and liability until the buyer accepts and signs for the parcels at the destination point.
- FOB Destination, Freight Prepaid & Charged Back
The seller pays for the shipping fees and remains liable for the products until they are delivered. The shipping fees are deducted from the buyer’s invoice once it reaches its destination.
- FOB Destination, Freight Collect, and Allowed
The shipper includes the shipping fees on the buyer’s invoice. The buyer pays for the invoice in full. The shipper remains liable for the shipment until the products are delivered.
Why is it Important to Understand the Difference?
Dealing with international trade can get complicated. Retailers must educate themselves on the intricacies of worldwide shipping. Inventory costs, after all, are expensive. More than the product value, there is plenty of expense associated with international deliveries and the cost of delay.
Understanding terminology, mainly when liability is involved, protects both buyers and sellers from incurring significant losses.
The Role of Third-Party Logistics Partners
International shipping can get tricky, especially for the uninitiated. For those new to eCommerce and online retail, the amount of information and the resources required to operate on a global level can get overwhelming. Most credible Third Party Logistics partners are well-versed in Incoterms. They offer the support most online retailers need to be successful at sourcing inventory from overseas manufacturers.
Are you interested in taking your eCommerce operation to the next level? ZhenHub has the answer to most of your international shipping woes. Visit our website to learn more about our tech-based logistics solutions, and contact us today to get a quote and see what we can do for your business.