The maritime transportation is a vital method of moving goods around. Nowadays, freighters leave and arrive at ports in thousands every year, and many of these vessels transport materials and products for companies. For such huge masses of objects, it’s essential to have some sort of rules regarding the order of purchase.
Free on board (or FOB) refers to the order at which the transition of goods from one owner to the other happens in relation to their overseas delivery. In short, who owns the goods while they are being transported via waterways? That’s a critical distinction because whoever owns them during the delivery also answers for them.
So, what is the FOB shipping point?
FOB types explained?
For most intents and purposes, there are just two major types of FOB:
- FOB shipping point
- FOB destination
FOB shipping point is the one that interests us now, although it’s still important to understand what the second one is. Often, it’s either one or the other – therefore, the advantages of one are often the disadvantages of the other.
FOB shipping point refers to the practice in which the goods are counted as sold to the buying party when these enter the shipping point – aka, the point of origin. This usually means the initial dock. The selling party goes as far as delivering them there, and the rest is up to the buyer company.
FOB destination, by comparison, is a practice of finalizing the purchase when the goods have reached the destination – in many cases, it means the dock on the other side of the water body. As a result, the maritime delivery is completely up to the seller. The responsibility and the costs are covered by them, and not the buyer.
These two only apply to maritime delivery and not to delivery by air or wheel.
Delivery agreements
The choice of one or the other is completely up to both companies. The ultimate decision is the product of negotiations and compromise. It may be so that it’s much easier for the selling party to transport the goods using their resources, connections, or their own vessels. In this case, the FOB destination is chosen.
They can be compensated for it, or it can be simply a gesture of good faith. Regardless, the part responsible for the delivery would also be answerable for all damages and losses sustained by the cargo mid-shipping. That’s why it’s often a risky endeavor that needs proper compensation.
Accounting differences
Legally speaking, these two approaches to shipping are also sufficiently dissimilar. Whether purchase technically happens before or after the shipping also affects how the goods are accounted for. Obviously, when the purchase happens, the goods need to be inventoried, and the purchase/sale needs to be registered.
The problem with it is that buyers can’t really inventory the goods until they arrive at their facility. For this reason, with the FOB shipping point approach, the purchase is registered when the goods arrive at the shipping point. However, the actual inventorying happens only after the cargo arrives to the buyer.
Much of the relevant paperwork, therefore, needs to wait until the delivery is finished. Thus, if the cargo is lost during the shipping, it may be hard to account for all the losses. That’s why many companies insist the selling party is the one to deliver the goods.
Ownership differences
As you know, the FOB shipping point implies the goods aren’t the property of whoever decided to buy them until they arrive at the docks or other initial delivery point. When they arrive there, the purchase legally happens. Depending on the practice accepted in the area where it happens (and on the contract), the money transfer might already happen in full or in part.
In fact, the question of when the money is supposed to change hands is specifically noted in the agreement, and it can be anything. It can happen when the purchase happens legally (on the shipping point). It can also happen there only in part – the other part arriving after inventorying.
But one thing here is clear – when the goods are already en route from the shipping point to the buyer’s facility, they are no longer the seller’s property. That’s why, when the cargo sustains damage or gets lost/abandoned, the new owner is the one to cover the losses.
They will usually file a claim describing all that has happened, but that’s as far as it goes. They can’t sue anyone by themselves or their delivery partners after the purchase had already taken place.
Advantages of FOB SP
Although it sounds like a counter-intuitive practice, there are actually several tangible advantages of this approach.
- Tighter controlAlthough risky and costly, supervising the delivery of your goods is usually a more reasonable approach. In fact, if you suspect the seller is not going to do a very good job delivering the goods or if you simply want to make sure your highly valuable materials make it to you safe and sound, it might be better to run the delivery yourself.Consider it an investment into the well-being of your business. Paying for a proper delivery means you have fewer risks and potential costs associated with cargo damage.
- Less hagglingNormally, the delivery job is negotiated with some measure of ferocity (unless it’s in the local rules that the selling party is the one doing it). If you’ve already decided that you don’t want to spend time negotiating and compromising, it’ll save you a lot of time. Moreover, if you want to receive the products as soon as possible, just take the job onto yourself.
- Setting your own rulesAlthough you can ask the other party to take certain precautions or relay your wishes to them, it’s ultimately up to the seller to decide what route to take, how much time to spend on delivery, and so forth. So, in order to do everything as you want it to be, you’ll need to take this job into your own hands.
Summary
Free on board shipping point could be seen as a costly alternative to an otherwise perfectly comfortable practice of having someone else deliver your groceries. However, it’s not always available, nor is it a very safe choice in some cases. FOB SP might be costly, but it’s also much more reasonable.