If West Coast Meats Co. receives an order from Nevada Grocers, who bears the cost if a refrigerated truck breaks down en route in the Nevada desert?
This isn't just a hypothetical scenario—it's a crucial question that hinges on the shipping agreement between the two businesses. If the terms were set as FOB shipping point, Nevada Grocers would shoulder the freight charge for the compromised meat. On the other hand, if the terms were FOB destinations, the financial responsibility would fall on West Coast Meats Co.
Below, we’ll explore the key differences between FOB destination vs. FOB shipping point so that you can optimize your supply chain management and shipping strategy.
Introduction to FOB Terms
Definitions are critical to understanding the implications of FOB shipping point vs. FOB destination (or FOB destination vs. FOB origin—see how slippery the terms can get already?).
- FOB – This acronym represents “Free On Board.” It is a critical shipping term that refers to what’s free to the receiver—at what point they take ownership of the goods and the cost of shipping them.
- Shipping point – This is the start of the shipping journey when the goods are handed off to a carrier. Depending on the shipping method, it could take place at the original owner’s business location, at a port, or anywhere they officially transfer the packages to the carrier. Also called “origin” or simply “point.”
- Destination – This marks the end of the shipping journey, sometimes referred to as the board destination or buyer’s destination, when the package arrives at the buyer’s loading dock, home, PO box, or other transfer point.
- Shipper – This refers to the original owner of the goods—the individual or business that sets them off on their shipping adventure; often called seller or owner.
- Receiver – This is the buyer or party receiving the shipped goods.
Understanding FOB Shipping Point
FOB shipping point, or FOB point, means a shipment of goods changes legal ownership and transportation cost responsibility at the board shipping point. So, what does FOB shipping point mean for each party?
Receiver Role
The receiver is responsible as soon as the goods enter the shipping journey. When the packages are handed off to the free carrier, the receiver takes on:
- The transportation cost of shipping the goods
- Legal possession of the goods
- Risk of any damage or loss incurred during the shipment
Shipper Role
Once the packages leave their hands, the shipper is no longer responsible for the goods or anything that happens to them along their route to the receiver.
Diving into FOB Destination
As you can likely guess, FOB destination (or F.O.B. destination—some folks like their punctuation) is the reverse of FOB shipping point.
Shipper Role
The shipper maintains responsibility for their goods until the receiver signs for them at the end of the shipping journey. They:
- Pay the cost of shipping the goods to their buyers' destination
- Retain legal possession of the goods throughout the goods transfer
- Are responsible for making good on any damage or loss incurred during shipping
Receiver Role
The receiver can sit back and relax until the packages arrive at their door. They don’t take ownership or responsibility for anything until the delivery is complete.
This method allows for the buyer to inspect the packages and goods in person and, before signing to accept them, confirm that they are:
- Not damaged
- Present in full quantity
- As described in the sales contract
Origin of FOB Shipping Methods
Though we looked at a domestic shipment by truck in the opening of this article, FOB is a concept officially tied to international shipping and global oceanic travel. It’s been used for decades under international commercial law to help standardize rules and regulations governing the transport of goods across borders.
FOB shipping point and FOB destination, and several variations of these arrangements, are defined international commercial terms (Incoterms) under the International Chamber of Commerce (ICC).
Although associated with maritime shipments, the terms have become commonplace for the domestic transport of goods by other methods as well.
Key Differences Between FOB Shipping Point and FOB Destination
It seems like a pretty simple choice—if you’re a buyer, try to get the seller to spring for FOB destination, and if you’re a seller, argue for FOB shipping point. However, there are pros and cons of each arrangement, and the implications affect multiple departments within each business.
Cost
If you’re sending a single box from Savannah to Syracuse using FedEx or UPS, you can pay a single freight charge that covers door-to-door service. But at a small business level or even larger organizations, transportation costs involve multiple line items under the “shipping cost” umbrella.
Consider:
- Freight charges for each leg of a journey: ocean, air, rail, truck
- Loading and unloading fees at each switch
- Insurance
- Taxes
- Import and export duties, customs, tariffs, and fees
- Fuel surcharges
- Special handling charges
Under FOB shipping point, the receiver pays for these costs; under FOB destination, the shipper pays for them. But it’s important to note that who pays can also affect the amount owed, since the carrier contracts, logistics optimization, and scale of each company can differ dramatically.
Accounting
Shipping method also affects the calculation of a business’s net income. For the buyer, the shipping cost of FOB shipping point packages must be recorded in the general ledger at the time of transfer from seller to carrier. Typically, this falls under inventory cost, and as such, it can’t be immediately recognized as expensed.
Under FOB destination, the buyer records the inventory cost only when the goods actually arrive, allowing for a later accounting entry.
The reverse is true for the shipper—they record the sale of goods on the date of transfer, so the accounting entry will be earlier with FOB shipping point, or later with FOB destination.
Ownership and Risk
The time of ownership transfer of the goods dictates the placement of risk.
If you’re moving packages across countries, the journey includes a long list of Things That Can Go Wrong. Shippers using FOB destination and receivers using FOB shipping point accept the risk of:
- Damage incurred during loading and unloading
- Packages lost during transit or temporary storage
- Detainment at customs at either a systems, port, or product level
- Damage based on erroneous grouping or stacking
- Product deterioration or loss of saleable value due to shipping delays
- Damage from environmental conditions or exposure
- Theft
- Damage due to container or temporary storage failures
Other FOB Options to Consider
Getting a handle on the principles of FOB shipping point and FOB destination is a vital starting point, but it’s not the end-all-be-all of shipping choices. There are variations that mix and match the features of each, including:
- FOB shipping point, freight prepaid – The ownership is transferred at the shipping point, so the receiver suffers the risk of damage or loss during transit, but the shipper either prepays or compensates the receiver for the shipping costs.
- FOB shipping point, freight prepaid and charged back – The receiver assumes ownership and risk at the shipping point, and the shipper pays the upfront cost of shipping. However, the shipper will recoup the shipping cost from the receiver by way of invoicing.
- FOB destination, freight collect – The shipper retains ownership and risk of loss up until the goods reach their destination, but the receiver covers the cost of shipping.
- FOB destination, freight collect and allowed – The shipper owns the goods (and the risk thereto) until they reach their destination. They also pay upfront for the shipping and make those arrangements. However, they will invoice the receiver for the shipping charges so the receiver ultimately covers those costs.
Shuffling various features like this allows both parties to take advantage of the least expensive or most efficient shipping contracts, and make the right choice for their inventory and accounting needs. Plus, it provides a range of negotiation points to help balance cost and risk across both parties.
Making the Right Choice: Tips for Sellers and Buyers
Are you taking advantage of every edge that can reduce your costs and improve your efficiency?
Shipping—whether global or domestic—isn’t as straightforward as it might seem. FOB shipping point vs. FOB destination is just one of many decisions you’re faced with in shipping or receiving goods. By finding every opportunity to negotiate better contracts and identify system weaknesses, you can make the most of every service you pay for. And you don’t have to do it alone.
Lojistic is a platform that crunches the numbers and ties up loose ends for businesses of all sizes. Our software tracks your shipping orders, initiates and pursues refunds that you’re owed, finds invoice errors, and creates actionable shipping reports out of real-time data to help you reduce your overall transport cost.
With excellent carrier and insurance relationships, we can help you negotiate better shipping rates. Plus, we’ll point out where you’re overpaying for extra charges, missing out on faster shipping options, and using valuable time on manual processes that could be easily automated.
How much would you pay for this level of actionable business intelligence? With Lojistic, you don’t have to pay anything—setting up an account is 100% FREE. Make the right call within a complete set of data that helps you see the value and cost of each method. Check out our demo today to see how it works.
Sources:
Nickolas, S. FOB Shipping Point vs. FOB Destination: What's the Difference? Investopedia. 30 November 2022. https://www.investopedia.com/ask/answers/052515/what-distinction-between-free-board-fob-shipping-point-and-destination.asp. Accessed 04 September 2023.
Banton, C. Free on Board (FOB) Explained: Who's Liable for What in Shipping? Investopedia. 25 March 2023. https://www.investopedia.com/terms/f/fob.asp. Accessed 04 September 2023.
Author
Bryan Van Suchtelen
Bryan Van Suchtelen
Corporate Director of Parcel Rate Services
Prior to joining Lojistic in 2015, Bryan enjoyed a 26-year career with UPS where his roles included Pricing, Field Sales and Director-level Sales Management of some of UPS’s largest customers.
At Lojistic, Bryan leverages his wealth of experience/expertise to identify and execute supply chain cost management solutions for parcel shippers of all sizes. Bryan has helped his customers reduce their shipping spend by tens of millions of dollars.