Outlining the Pros and Cons of FOB Shipments
Shipping of commodities – especially internationally, doesn’t always go off without a hitch. Moving freight from international ports often requires multiple handling, different methods of transport, and 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 FOB protection, which we’ll outline in the information below.
What is 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 including 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 will be 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. The origin can be negotiated 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 goods are “owned” by the buyer 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 FOB, the buyer has more flexibility and control of the terms, the cost, freight shipping 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, FOB might not be the option best suited 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 complete 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 LTX is a smart idea.