What Is FOB Shipping? (Plus Its Effects and Other Terms)

By Indeed Editorial Team

Published 14 November 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Some of the most important aspects of a retail business are the management of its inventory and the analysis of costs associated with shipping. There are many options available to a business, depending on its size and scale of operation. Understanding how to manage shipping and inventory effectively can assist you in helping a business run a more efficient operation, leading to greater customer satisfaction and profits. In this article, we answer the question 'What is FOB shipping?', outline what the FOB origin and destination are, discuss how FOB impacts small businesses and review some important terms.

Related: What Is Merchandising? (Plus Types and Benefits)

What is FOB shipping?

The answer to the question 'What is FOB shipping?' is that it's a term used to identify who's liable for transported goods at a specific point in the supply chain. A business and a customer agree on free-on-board (FOB) specifics in formal documentation so they can identify which party is liable for any risk, insurance or transportation costs associated with the goods until they reach their destination. This formal documentation outlines the specific time and date when the goods are to arrive at the buyer's specified location.

Depending on the FOB agreement, whichever party assumes liability pays any further fees for the secure arrival of the goods. FOB doesn't identify who the owner of the goods is, only who's responsible for them. When shipping internationally, countries can have different laws and taxation systems regarding the sale and importation of goods. It's up to the two parties coordinating the transaction to determine which laws and regulations they use in their dealings.

Related: What's an Order Management System? (Functions and Benefits)

FOB origin and FOB destination

There are multiple FOB factors that help the parties involved in a transaction to identify liability. Each party can sign an agreement as to who the liable party is regarding the costs and risks of transportation, such as compensation for lost or damaged goods. The following are some ways two parties can address liability:

FOB destination

This means that the seller handles all goods, including damages and losses until they reach the customer at their specified destination. A business can write 'FOB destination' on the invoice so each party understands their liability. For example, if a small jewellery manufacturer is shipping from Adelaide to a customer in Sydney and they've printed 'FOB Sydney' on their invoice, they're responsible for the security of the goods until the customer has them in their possession. Some seller responsibilities involved in FOB destination include the following:

  • The choice of which route the goods arrive through

  • Preservation of the quality of the goods throughout travel

  • Overall control of the goods and the title of ownership

  • Charges for freight and insurance

Related: What Does a Logistics Coordinator Do? (Duties and Skills)

FOB origin

This means that the buyer is assuming all the risk for the goods once the seller has shipped them. Therefore, all responsibility and liability end the moment the seller puts the goods into a shipping container or a mailbox. For example, when a company operating out of Melbourne is shipping goods to somebody living in Perth, the business might include the term 'FOB origin' or 'FOB Melbourne' on the customer's invoice so that both parties are aware of their liability. In the case of FOB origin, the buyer assumes a variety of risk factors, which include the following:

  • Transportation risks, such as lost or stolen goods

  • Damage to goods

  • Charges and tax for freighting the goods

  • Insurance claims

Related: Freight Forwarder Skills and How You Can Improve Them

Variation in FOB origin and destination

While the standard practice for transporting goods is to assign liability over the goods to the buyer or the seller, the parties can negotiate the specific terms of responsibility depending on the contract. For example, if a customer is purchasing a product from a first-time seller, they might be hesitant about agreeing to FOB origin and instead negotiate to accept this liability after a particular point in the supply chain. If buying internationally, they might accept FOB origin once the package arrives in Australia but insist on FOB destination while it's still in the seller's own country.

Some other methods by which the two parties involved in a transaction might negotiate the terms of shipping can include the following:

  • Prepaid: The seller pays for freight charges in advance of the sale, which might lead to an overall increase in the price of the goods. For example, a business selling vitamin supplements from Australia to France might include these charges within the sale because of the cost of sending freight.

  • Freight collect: In this situation, a buyer chooses to pay all transportation costs directly to the courier involved in shipping their goods. Liability is with the buyer from the moment the seller sends the package.

  • Freight prepaid and allowed: This is where the seller pays for all the costs of transportation. They can include this amount in the overall price of the sale.

  • Collect and add: The buyer pays for all transportation costs and can then deduct them from the invoice after the sale. This can involve either a repayment later or the removal of the amount from the total price owing.

  • Prepaid and add: This involves the seller paying for all freighting costs. Then the buyer pays back the amount.

Related: What Is an Invoice? (With Components and a Template)

The impact of FOB on small businesses

One of the most important things a business can do is to manage an effective method of supply for their goods to their customers. Understanding the costs involved with logistics and maintaining supply means being able to factor in FOB to estimate the accurate cost of all aspects of freight. FOB is also a key part of a business being able to gain insurance for the goods that it ships. With FOB origin, a buyer can acquire their own insurance for the goods they purchase.

Regarding FOB destination, the buyer depends on the seller to fulfil the correct insurance obligations to protect the goods while in transit. Depending on which country you purchase the goods from, you may end up paying more tax on sales or transportation for those goods you're selling or receiving. For example, a company selling clothing to New Zealand can incur taxes for transport under New Zealand law, while purchasing from Malaysia might incur taxes according to Malaysian freight regulations.

Related: What Is Line Haul? 5 Advantages of Line Haul Transportation

Other important terms in shipping

While FOB origin and FOB destination are the two most important features of transport and liability, there are a variety of other important terms that are necessary for a business to know. These terms are more specific factors relating to FOB origin and FOB destination and are points that a business and a customer can negotiate on. The following are some of these terms:

  • Free carrier (or FCA): This is when a buyer requires the seller to deliver their goods to a specific place where they have a base of operations. For example, the buyer might have a warehouse at an airport or a train station where they collect goods.

  • Delivered ex ship (or DES): This requires a seller to take goods to a specific location, such as an airport or dockyard. The buyer can then pick up the goods from the place of their choosing.

  • Free alongside ship (or FAS): This term is specific to freighting by ship, where a seller sends their goods by one ship that can pull up close alongside another so that dock employees can move the goods from one ship to another.

  • Ex works (or EXW): This is a specific mix of FOB origin and FOB destination, where a seller prepares their goods for freight and the buyer pays for the actual transportation of the goods. This often links to international purchases, for example, where the costs of shipping can be greater.

Explore more articles