Depending on where the cargo is traveling, they will usually send you some documentation, and ask you to sign an agreement stating that you wish for the forwarder to handle your shipment. For small products that will inevitably be shipped by air, or small suppliers with little experience working with international buyers, you may receive quotations in EXW Incoterms. However, the vast majority of the quotes you will receive from sellers in China will be under FOB Incoterms. If you look at a quotation, you will usually see the unit price, FOB as the Incoterm, and a Chinese city, the shipping point.
When shipping goods to a customer, FOB shipping point or FOB destination may be two primary options to choose from. FOB shipping point holds the seller liable for the goods until the goods begin their transport to the customer, while FOB destination holds the seller liable for the goods until they have reached the customer. In this case, the seller completes the sale in its records once the goods arrive at the receiving dock.
Freight on Board (FOB) Shipping
If goods do not reach the buyer or are damaged upon arrival, it is the seller’s responsibility and the buyer is entitled to reimbursement or a reshipment from the seller. All costs included in a shipment, including insurance and custom taxare accounted for by the seller in a FOB Destination. Indicating “FOB port” means that the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays the cost of marine freight transport, insurance, unloading, and transportation from the arrival port to the final destination.
In this circumstance, the billing staff must be notified of the changed delivery conditions so they do not charge freight to the consumer. Under FOB shipping point arrangements, the buyer is responsible for filing an insurance claim in the event of shipment loss or damage since the buyer holds ownership of the goods at the time. The International Chamber of Commerce (ICC) publishes 11 Incoterms (international commercial terms) that outline the roles of both sellers and purchasers in global shipments. The ICC reviews and updates these terms once every decade; the next update is in 2030. How effective products move from the vendor to the customer depends on how well both sides understand free on board (FOB).
Does FOB only refer to maritime shipping?
Buyers can calculate the total costs of a FOB agreement by combining the FOB price from the seller and requesting a quotation from their freight forwarding company for the logistics. FOB Incoterms are also the most cost-effective option, as it allows the buyer to shop for the best possible shipping rate. While the transfer of risk occurs when the goods are safely loaded onto the shipping vessel, the buyer’s forwarder is responsible for the entire transportation process.
If you are new to purchasing FOB from China, it will be beneficial for you to understand the overall shipping process and what to expect when you begin communicating with Chinese suppliers in your next production. The FOB Incoterms® rule is only applied to goods transported by sea or inland waterway. Although FOB shipping point and FOB destination are among the most common terms, there are other agreements that vary from these two. International shipments typically use “FOB” as defined by the Incoterms standards, where it always stands for “Free On Board”.
FOB shipping vs. FOB destination
When it comes to the FOB shipping point option, the seller assumes the transport costs and fees until the goods reach the port of origin. Shipping terms affect the buyer’s inventory cost because inventory costs include all costs to prepare the inventory for sale. This accounting treatment is important because adding costs to inventory means the buyer does not immediately expense the costs and this delay in recognizing the cost as an expense affects net income.
- Fuel charges, insurance, customs tax, and all other shipping fees are also under the buyer’s financial responsibility.
- The term FOB is also used in modern domestic shipping within North America to describe the point at which a seller is no longer responsible for shipping costs.
- The two types of FOB shipping are termed FOB Shipping Point and FOB Destination.
- FOB is an acronym that means “free on board,” so FOB destination means free on board destination.
- Because inventory counts can affect budgeting and income, i.e., the seller can only claim the goods as “sold” after they’ve transferred title and responsibility to the buyer, this is an important distinction.
For example, assume Company ABC in the United States buys electronic devices from its supplier in China, and the company signs a FOB shipping point agreement. If the designated carrier damages the package during delivery, Company ABC assumes full responsibility and cannot ask the supplier to reimburse the company for the losses or damages. The supplier is only responsible for bringing the electronic devices to the carrier. The significant difference is that CIF places the cost of shipping and insurance on the seller, unlike a FOB agreement where these are the buyer’s responsibilities.
Key Differences
Incoterms define the international shipping rules that delegate responsibility of buyers and sellers. However, the buyer subtracts the shipping charges from the supplier’s bill rather than footing the bill out of pocket. In this arrangement the vendor still owns the items while they are in transit. Depending on the agreement with your supplier, your goods may be considered delivered at any point between the port of destination and your final delivery address. The qualifiers of FOB shipping point and destination are sometimes used to reduce or extend the responsibility of the supplier in an FOB shipping agreement. The buyers are always responsible for the freight costs to ship products under FOB Incoterms.
With FOB destination, ownership of goods is transferred to the buyer at the buyer’s loading dock. We recommend buyers consider FOB Incoterms when they wish to use a China Freight Forwarder to organize their shipments. We suggest this because FOB will offer low unit pricing for the cargo sold while also allowing the seller to take partial responsibility for the freight for as long as it remains within their country. Businesses record their inventory costs as a liability or shareholder equity until the inventory is sold, whereupon it becomes reported as the cost of goods sold. The cost of goods sold is one of the largest expenses on a company’s balance sheet, therefore choosing a FOB Shipping Point vs FOB Destination has specific implications on inventory costs.
