The meaning of the term F.O.B. is perhaps the most misunderstood of all freight verbiage. F.O.B. stands for Free On Board, and it indicates the price for goods, including delivery at the seller’s expense, to a specified point. In the purchasing world, F.O.B. is also used with an identified physical location to determine responsibility for the payment of the freight charges and the point at which title for the shipment passes from the seller to the buyer. Every vendor and customer should have the F.O.B. requirements specified.

Understanding Terminology

F.O.B. terms are used in a four different ways depending on the purchasing agreement. Each term details who is paying for the freight and who owns it at which point:

• F.O.B. Origin, Freight Collect. The “origin” portion indicates that the buyer assumes title of the goods the moment the freight carrier picks up and signs the bill of lading at the origin pick-up location. The buyer also assumes risk of transportation and is therefore responsible for filing claims in the event of loss or damage. “Freight collect” means that the buyer is responsible for the freight charges.
• F.O.B. Origin, Freight Prepaid. “Origin” means the same as above, but “freight prepaid” indicates that the seller is responsible for the freight charges.
• F.O.B. Destination, Freight Collect. The “destination” portion means that the seller retains title and control of the goods until they are delivered. The seller selects the carrier and is responsible for the risk of transportation and filing claims in the event of loss or damage. “Freight collect” again means that the buyer is responsible for the freight charges.
• F.O.B. Destination, Freight Prepaid. “Destination” means the same as above, while the “freight prepaid” portion again indicates that the seller is responsible for the freight charges.

Problem Scenario

I recently visited a distributor who receives a lot of freight from various vendors. His dock policy is for his receiving guys to refuse an order if it has the slightest sign of damage. He does not want to file a claim or deal with the process of ordering replacement parts for potential damages, so he just tells his dock people to refuse the shipment at the receiving dock.

Concerned about what the distributor was liable for, the first thing I wanted to find out was what the F.O.B. terms were with his vendors. The vendor that he refused the most shipments from had the terms F.O.B. Origin, Freight Prepaid, which means that although his vendor was paying the freight, the distributor owned the goods-and the responsibility for loss or damage-as soon as the carrier picked it up. By refusing the shipment, he was returning something that he actually already owned.

 It is not prudent to refuse a shipment when it is F.O.B. Origin for a few reasons. In this case, the vendor has no reason to accept those returned goods. The distributor owns them as soon as the trucking company picks them up. By returning the shipment, the distributor simply increases the risk of additional damage when the goods go back through the carrier’s system to the vendor.

 Technically, when an F.O.B. Origin order gets returned, the vendor can refuse it because they do not own it anymore. Luckily for this particular distributor, his vendor is very nice (too nice, I’d venture). The vendor accepts the returned items, files the claims on the distributor’s behalf and is quick to replace the orders. However, should the vendor change its policy, the distributor could find himself in an uncomfortable situation.

In this case, to avoid potential problems, the distributor should accept the partially damaged shipments and have an inspector come in to check them out. If a replacement is feasible, the distributor should order the parts and have them replaced. All of this should be covered by the carrier via a claim settlement. Another option in this case is to change the terms to F.O.B. Destination, Freight Prepaid, which would enable the distributor to refuse the shipment because ownership does not change until the shipment is delivered properly.

State Your Terms

The bottom line is that F.O.B. terms shouldn’t be ignored. If you are a shipper, make sure the F.O.B. terms fit your preferences. You may want them to be F.O.B. Origin so your customers own the goods when they leave your door. Alternatively, you may want to own the shipment until it is delivered intact, which could even be a good selling point.  

Any views or opinions expressed in this column are those of the author and do not represent those of Ceramic Industry, its staff, Editorial Advisory Board or BNP Media.

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