FOB stands for “Free On Board.” It is a term used to specifically identify which party – supplier or purchaser – will be responsible for freight charges, as well as liable for product damage at certain points of the transportation process.
While FOB officially stands for “Free On Board,” there is widespread interpretation of the acronym to stand for “Freight on Board” (see Corporate Finance Institute reference).
There are 4 categories for FOB:
- FOB Origin (Freight Collect): Shipper pays shipping, buyer assumes responsibility for goods at point of origin
- FOB Destination (Freight Prepaid): Buyer pays shipping, buyer assumes responsibility for goods at point of origin
- FOB Destination (Freight Collect): Buyer pays shipping, shipper assumes responsibility during transit
- FOB Destination (Freight Prepaid): Shipper pays shipping, shipper assumes responsibility during transit
Examples of FOB in practice: Let’s use the scenario that you are purchasing 100 kg of cocoa from a supplier called Cacao Wow Inc., located in Peru. You, the purchaser, run a chocolate store in Nashville, TN called Chocolate Lovers Inc.
- FOB Origin (Freight Collect): Shipper pays for shipping, buyer assumes responsibility for goods at point of origin
- Cacao Wow will pay to ship the 100 kg of cocoa from Peru to Chocolate Lovers Inc.
- Cacao Wow is responsible for the cocoa up to the point that a shipping company picks up the product. At that point, the shipping company, and you, are responsible for any damage to the product. If the product is damaged, you would work with the shipping company for reimbursement.
- FOB Destination (Freight Prepaid): Buyer pays shipping, buyer assumes responsibility for goods at point of origin
- Cacao Wow will ship the product to Chocolate Lovers Inc., but Chocolate Lovers is responsible for the cost of shipping the product from Cacao Wow to Chocolate Lovers Inc.Chocolate Lovers Inc. is still responsible for any damage to the cocoa in transit.
- FOB Destination (Freight Collect): Buyer pays shipping, shipper assumes responsibility during transit
- Cacao Wow pays for shipping and handles all transactions to ship the product. Chocolate Lovers Inc. is still responsible for any damage to the cocoa in transit.
- FOB Destination (Freight Prepaid): Shipper pays shipping, shipper assumes responsibility during transit
- Cacao Wow pays for all shipping and handles all transportation needs.
- Cacao Wow is responsible for any damage to cocoa during the entire shipping process.
Próximamente versión en español
Entry added: February 13, 2023
Verified on: September 14, 2023
Authored by
Scott Ball, VP of Global Sales & Marketing, Fisher Manufacturing
Supply Chain Professional
References
“Free On Board (FOB) Explained: Who’s Liable for What in Shipping?” Investopedia, Caroline Banton, updated September 14, 2022 (accessed December 13, 2022)
“Freight On Board,” Corporate Finance Institute, CFI Team, updated December 1, 2022 (accessed December 13, 2022)
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