What is Free on Board (FOB)?
Free on Board (FOB) is considered to be an international trade term that is being used on international contracts for both the buyer and the seller regardless of nationality. This is to identify the responsibilities of both the buyer and the seller during the transaction process to avoid any confusion in the shipment of goods. Since it properly specifies the risks and responsibilities when it comes to the transportation of the goods from the seller to the buyer. The term FOB is always followed by a location it is usually the origin and the destination of goods making it an essential part of the shipment In case anything happens during the delivery process the FOB will be the main reference in tracking the origin and the destination, this can often be seen on during large shipments of goods that are being transferred using large ships that travels on seas. Most of their cargo includes food, supplies, and even electronic equipment, some of which will travel for days before even reaching their expected destination point.
1. FOB Origin (Free on Board Origin)
The FOB origin takes place when the goods are loaded on the carrier-specific type of vehicle that is going to be used for delivery and in front of the seller's representative as part of the proper documentation. This means that the responsibility of delivering the goods has been transferred from the seller to the buyer such as the cost of delivering, risk, and logistics until it arrives at its final destination.
Pros for Sellers
- Limited Responsibility - One of the best and primary advantages for sellers that are under the FOB origin is that they only have limited responsibility since once the goods have been pickup and loaded on the carrier's vehicle the seller is free from the responsibility and the risk is now reduced and the responsibility now falls on the carrier.
- Choice of Carrier - Due to the advancement of technology and tracking mechanisms there are a lot of carriers that a seller can choose from depending on the type of goods, budget, and preference of the seller in terms of the delivery method. Making it very flexible for the seller without compromising the quality of the delivery method.
Cons for the Sellers
- Limited Control - Sellers might have limited control in the shipping process and the cost of the delivery of the goods to their destination, This can be expensive on the part of the seller, especially during a crisis wherein the delivery process can take longer than expected which means it can lead to more fuel usage and manpower to maintain. All of which can affect the final price of the goods in the long run.
- Limited Liability - During the delivery process the goods might be damaged or lost due to the recklessness of the carrier employee this means that the seller can lose a profit and even their credibility in the process. Despite being insured by the carrier company it can still be a loss for the seller this is the reason why the terms and conditions in the delivery contract must be reviewed carefully so that the carrier will ensure the safety and security of the goods being delivered.
Pros for the Buyer
- Control Over Shipping - Buyers have more power and control in the shipping process because they can choose their preferred carrier company, route, and mode of transportation and usually the seller is going to be the one to pay for the shipping fee. Giving the buyer more room for their profit margin without affecting the delivery of the goods that they bought.
- Quality Inspection - As buyers you have the right and the opportunity to inspect the goods as part of the quality inspection process to ensure that the buyer is getting his/her money's worth in the process, They can even get to try out first hand the goods for free as part of the quality inspection process.
Cons for the Buyer
- Assumption of the Risk and Responsibility - This is perhaps the biggest drawback for buyers because under the FOB origin when the goods are in their possession they would automatically assume all the risk and responsibilities, including the safeguarding of these goods wherein this can be very costly for them, especially during the unloading of these goods to the open market.
2. FOB Destination (Free on Board Destination)
The FOB destination states that the transfer of the risk and the responsibility occurs when the goods have arrived at the buyer's designated destination. But until then the seller will remain responsible for the delivery cost of every piece of goods until it has switched to the buyer's hands this is why the tracking of shipment is always necessary so that the delivery remains on schedule and on track according to the terms and conditions between the seller and the buyer.
Pros for the Seller
- Control over the Goods - The Seller retains control of the goods specifically on the price point and the management of the entire shipping process to ensure timely delivery, especially during the holiday seasons. This helps them maintain strict control over the shipping and delivery so that prevention of certain issues such as delays can be prevented in the process.
- Negotiating Power - Sellers have more negotiating power specifically on the shipping rates, wherein they could ask the buyer to shoulder the shipping fee for their goods, the insurance coverage, and other transportation costs that are needed in transferring the goods. They can even negotiate for a higher price of the goods during the holiday season in order to gain an additional profit margin.
Cons for the Seller
- Cost Burden - Sellers sometimes bear the risk that is associated with the shipping and delivery, this also includes the potential losses such as damage, or delays during the shipping process. All of these factors can be unpredictable despite all the preparations and backup plans for the transportation of goods.
- Complex Logistics - Due to the network of carrier companies at the seller's disposal the monitoring and tracking process can be challenging especially if the seller has to monitor a certain number of orders from their buyers. This can potentially lead to being time-consuming and delays of orders which can put the seller's credibility in jeopardy because of this complex logistics.
Pros for the Buyer
- Reduce Cost for the Buyer - According to the FOB Destination, the primary advantage can be that some buyers might have less risk when it comes to transportation and the risk can be lessened to zero. However, not all buyers can have the same pros because it usually depends on the terms and conditions between the seller and buyer may depend on the type of goods being sold and brought.
- Focus on the receipt and inspection - After receiving buyers have the privilege to inspect the goods to ensure that everything is correct and legit, They can also inspect the official receipt which can also inspect the quality and if there are any errors in the delivery service. Especially nowadays the official receipt is crucial in every transaction for warranty services.
Cons for the Buyer
- Limited Control - Buyers have limited control during the delivery process because it may have a tendency to be damaged and the shipping efficiency, especially in highly demanding seasons, They also have limited input into the carrier route and schedule of delivery making it unpredictable especially if the buyer has a tight deadline.
- Potential Higher Cost - The total cost of the goods under the FOB Destination can be higher than average since some sellers will assume more responsibility, especially on the cost which can have a significant effect on the total price and the terms and conditions of the contract between the seller and the buyer.
Obligations of Sellers and Buyers
Understanding the pros and cons of the FOB Origin and Destination is very important for both the buyer and the seller to avoid any confusion, both of their obligations and ensure that their transaction process would remain smooth and efficient.
Sellers Obligation
1. Deliver Conformity - Under the FOB Origin and Destination, the seller is responsible for the delivery of the goods in good condition according to the contract that both parties have agreed upon. This includes all the necessary requirements and documents stating that the goods are in good condition and legal
2. Transportation Arrangements - In some transactions the seller is usually the one who pays for the shipping fee this includes selecting a reputable and trustworthy carrier company while in other transactions the buyer is the one who shoulders the transportation cost. Regardless it is important to have a better understanding of the contract and the terms and conditions so that both parties will never have to argue during the transaction process.
3. Export Clearance - This is perhaps one of the most important documents when transporting any kind of goods This is to ensure that everything is legal and has accordance with the law. This also involves the export regulations certificates, licenses, and permits that are needed to operate, all of these are necessary so that the goods will not be put on hold at certain ports due to incomplete documents.
4. Risk and Cost - In every transaction, there would always be risk and cost involved in the process which is why it is best to always be prepared especially during peak season when it comes to the delivery of goods that are in high demand so expect certain delays. Regardless of whether FOB Origin or FOB destination.
Buyers Obligation
1. Cost of Transportation - both FOB origin and FOB destination, the buyer is usually in charge of shouldering the transportation cost. They usually bear all the costs but in some cases depending on the negotiations the seller usually pays for the transportation cost. Regardless the responsibility of the goods shifts to the buyer.
2. Import Duties and Taxes - The buyer is responsible for handling the tax importation of these goods, along with the clearance documents from the customs department. Depending on the destination there are different variations of tax requirements and customs regulations that need to be followed before the goods are allowed to be released.
3. Risk and Responsibility - Once the goods are in the possession of the buyer the responsibility changes this includes the risk of damaging the goods during the shipping process which is why the buyer tends only to get the best and the most trustworthy carrier this is to ensure that the goods he/she brought is safe and secured to avoid any wasteful purchase in the process.
4. Quality Inspection - Buyers will always have the right to carefully inspect the goods that they have purchased to ensure that everything is what the seller says and agreed upon. It is also important to inspect the goods to make sure that everything is up to the specifications of the buyer and nothing seems out of place especially the official receipt and the documents.
Frequently asked questions for Free on Board Origin and Free on Board Destination
1. What is the main difference between free on-board origin and free on-board destination?
Answer: The main difference is the responsibility between the buyer and seller wherein usually depends on the terms and conditions between both parties
2. What are the main advantages of using free on-board origin and free on-board destination?
Answer: The main advantages of free on-board origin would be the seller control flexibility, Limited Responsibility after loading, Risk mitigation, and cost efficiency while the main advantages of free on-board destination are that it offers buyer convenience, reduces the buyer risk, right to inspect, the easement of importation, and the lessen transportation management.
3. What are the primary drawbacks of using free on-board origin and free on-board destination?
There are certain drawbacks for both free on-board origin and free on-board destination
Answer:
Free on-board origin
- Limited Buyer Control
- Assumption of the Risk
- Potential Disputes between the buyer and the seller
- Quality Control Challenges
Free on-board destination
- Seller's Limited Control
- Higher Liability of the Seller
- Complexity of the Logistics Plan
- Potential Higher Cost of Importation Process
4. What are the specific obligations of the buyer of using free on-board origin and free on-board destination?
Answer:
Specific obligations of the buyer of using free on-board origin
- Cost of Transportation
- Taxes and Duties
- Insurance
- Export Clearances
Specific obligations of the buyer of using the free on-board destination
- Inspection upon delivery
- Import documentation
- Coordination with the seller
- Quality inspection
5. Are there any disputes involved in using FOB terms?
Answer:
Disputes include the following:
- Quality and specifications disputes
- Delivery Delays
- Documentation Errors
- Disagreements between the responsibilities
- Payment Disputes
6. Can FOB terms be customized according to the preference of both the buyer and the seller?
Answer:
These can be customized for the following
- Choice of location
- Agreed Carrier Company
- Insurance Requirements
- Customs and Documentation
- Payment conditions and terms
Conclusion
The Free on Board term is an important aspect in the buying and selling aspects of any goods because it gives them an insight into both the buyer and the seller's responsibilities to each other and also the risk and even the cost that needs to be fully understood by both parties since it will relieve them any particular issues such as holding their goods by the customs department or worse being deported back from its country of origin which can lead to wasted inventory and money.
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