Table of Contents
- What Does Fob Mean?
- Fob Origin; Verified History and Etymology
- A Step-by-Step Guide on How Fob Shipping Works
- How to Use Fob Terms in Shipping Documents in 2020
- How to Optimally Factor in Inventory Cost
- Effective Management of Inventory Costs
- Advantages of Freight on Board
- Frequently Asked Questions
What Does Fob Mean?; Quick Break-Down of the Acronym
Before a full dive into what fob entails, it’s necessary to answer this valid question: What does FOB mean? Fob acronym stands for Free on board or freight on board. It indicates when ownership or liability is conveyed from the consignor to the consignee.
Freight on board terms of sale identifies the party (buyer or seller) liable to pay costs incurred during shipment. It also specifies the same time ownership is transferred to the buyer. The freight hauler (which is the middle man) is not held accountable for damaged goods.
Free on board terms can either be “Fob Origin” or “FOB Destination.”
The designation “Fob Origin” means a buyer assumes the goods’ title and responsibility for other costs incurred immediately after the goods are shipped. Under this contract, a sale is complete at the point of shipment.
On the flip side, “FOB destination” implies that a shipper will incur necessary charges and retain ownership until the consignee accepts the shipment. In this case, the liability rests solely on the consignor.
- Free on board is alternatively called freight on board. However, the latter is mainly used unofficially.
- It’s used to determine the party liable for damaged or lost goods.
- The term is now more intricate to accommodate the new complexities in international shipping.
Fob Origin; Verified History and Etymology
The history of the term dates back to when goods were “passed over the rail by hand.” Now, the usage has evolved to accommodate all means of transportation. Although the definition and meaning haven’t really changed, different countries have introduced peculiar contracts over the years.
One major advantage is that it indicates the party holding legal title to the goods while in transit. In a situation where the freights get destroyed, the legitimate owner can take necessary actions, and the insurance policy kicks in to save the day. It’s important to note the terms of each contract.
Suppliers should use standard negotiable “buyer-specific” contracts. This ensures potential problems or misunderstandings are avoided.
A Step-by-Step Guide on How Fob Shipping Works
A brief illustration of fob shipping meaning will shed more light on this.
- Red dragonfly is a top shoe company that sells to a retailer.
- Red dragonfly ships $500,000 worth of shoes to the retailer with the term “fob Origin.”
- Consequently, the retailer is liable for any damage to the freights in transit. Hence, the need to purchase insurance to secure the goods.
- Conversely, if the contract were “fob destination,” Red dragonfly would be liable.
How to Use Fob Terms in Shipping Documents in 2020
Freight on board is used in shipment documents in four major ways. They are:
- Fob (destination), freight collect
- Fob (origin), freight collect
- Fob (destination) freight prepaid
- Fob (origin) freight prepaid
For a clear understanding of these designations, it’s important to learn the differences.
Freight collect means a buyer is responsible for the cost of the freight. Freight prepaid indicates that a seller has settled the payment for the freight.
As stated above, the place of sale and place of destination indicates when the consignee assumes the title to the freight.
- Place of Origin vs. Place of Destination: the use of place of origin depicts that the buyer assumes the freight’s title and risks as soon as it’s shipped. On the flip side, the place of destination indicates that the seller can only successfully convey ownership when the freight is delivered.
- Freight Collect vs. Freight Prepaid: Freight collect makes the consignee responsible for all freight charges. While freight prepaid means the shipper or seller is responsible for payment of bills.
The parties responsible for paying bills are also obliged to take necessary steps if any goods get lost or damaged.
It’s important to note each contract’s details to detect any peculiarities, especially with the dates. Some buyers propose longer terms for the payments even though this hampers the regular fob price.
Having an in-depth knowledge of what each fob terms entail aids unadulterated clarity about the parties liable for unforeseen risks.
How to Optimally Factor in Inventory Cost
The terms of a fob shipping affect a buyer’s inventory cost. The reason for this level of influence is simple. It’s because the inventory charge is the total cost required to prep the inventory for sale.
For example, if the SEO community purchases tools worth $200 000 based on fob shipping point terms. The SEO community’s inventory cost will include the $200,000 cost price and the cost of insuring the tools against damages in transit.
In like manner, other costs like securing a workshop, equipping the workshop, and getting tools setup will be included in the inventory cost.
The truth is, this process takes a toll on the net income. How? The very act of not expensing the costs off the bat affects the net income.
Effective Management of Inventory Costs
Frequent ordering of inventories is a fast way to skyrocket the inventory cost of a company.
The accumulation of the charges of shipment and insurance will land a company in dire straits.
There’s a high chance of incurring costs through labor and overall management of a company. The best way to cut down on bills is to order inventories in bulk.
Best Example of Fob (2020)
Here’s a perfect example of factoring inventory cost into the fob. Suppose the Red dragonfly company quoted $367.63 to ship shoes to a retailer based on the shipping point condition. The shoes were taken to the port on the 6th of July and scheduled to get delivered on the 12th of July.
Red Dragon will record a sale on the 6th of July and track the sale as an account receivable with a discount in inventory.
On the other end, the retailer would record the transaction with an increase in inventory as of July 6th when the shoes were transported. The baseline is, the consignee will factor the cost of transportation into his/her inventory cost.
Advantages of Freight on Board
It is a widely used international trade contract. The advantages are responsible for this popularity. From inception, it was a form of relief to both consignees and consignors. It’s Important to note that the advantages are classified into two:
What Are the Advantages to Sellers?
- Responsibility: When the fob shipping point is clearly stated in the contract, damaged or lost goods become the buyer’s responsibility.
- Ease of Business: Another pro is that the seller has one less problem to worry about. Immediately the consignee assumes the ownership of goods, the obligation shifts to the buyer. It’s indeed a relief not to be responsible for detailed information like delivery routes and export rates.
What Are the Advantages to Buyers?
- Complete Control: The consignee gets to take charge of all the delivery procedures without any external influence. This includes negotiating the best delivery deal. It leaves a consignor with numerous alternatives while picking the most suitable delivery charges.
- Delivery Location: Not all buyers have a centralized location. The issue of several addresses might pose a great problem for the seller. Getting actively involved in the delivery process means there wouldn’t be a need to send out a series of delivery addresses.
- Prevents Extra Expenses: The consignor gets to avoid extra charges.
- Privacy: The buyer can handle all delivery related issues privately.
Frequently Asked Questions
Who Pays the Freight on Fob?
The payment of the freight is hinged on the shipping terms. For the Fob shipping point, the supplier waives all obligations immediately; the goods are shipped. The buyer is obliged to settle all freight costs necessary for the delivery of the goods.
On the other hand, for Fob destinations, the supplier foots the bills to get the goods to its destination.
Which Is Better, Cif, or Fob?
Fob and Cif both international shipping contracts that govern freight transportation between a supplier and a consignee. Even though they are related, there are some distinguishing factors.
The former is a better choice because it offers to relieve the supplier of all responsibilities upon transportation of the goods.
Conversely, under CIF, the seller assumes all responsibilities until the goods are delivered to the buyer.
How Is the Fob Value Calculated
The value is the sum of Ex-factory prices and other costs. The meaning of “other cost” is the total costs incurred during the shipment of the goods.
Other costs include the domestic cost of transportation, the cost of warehousing and storing goods, service fees, brokerage charges, port care, and other similar expenses.
The Ex-factory charges include the labor fees, overhead cost, the charges on raw materials, and total profit.
How Does Fob Impact Small Businesses?
A business that deals with the transportation of freights need in-depth knowledge about this. Free on board affects the amount of taxes you’ll pay, especially if you live in a state that demands sales tax payment on shipment costs.
Although freight shipment assigns more risks to the buyer, it can cut off the buyer’s sales taxes.
What Is the Pmv Value in the Shipping Bill?
PMV stands for present market value and is also known as the current market value of a commodity. The PMV includes charges like transport, octroi, etc. It appears on shipping bills and is often found beside the freight on board value.
The Relieving Truth About Free on Board (2020)
It’s a term in transnational commerce that indicates when responsibilities and risks for shipping goods transfer from the shipper to the consignee. It has alleviated arduous situations over time.
However, it’s sacrosanct for the parties to understand the legal implications of FOB contracts. Is FOB a soothing relief? Leave a comment below.