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GLOSSARY TERM

FOB Shipping Point vs. Destination

FOB Shipping Point vs. Destination: What You Need to Know

Free on Board (FOB) is an Incoterm that dictates the responsibilities of sellers and buyers during the transport of goods, generally through the sea, ocean, and inland waterways.  

Key concepts

FOB shipping point

FOB shipping point, also known as FOB origin, is a variant of the FOB Incoterm. It states that the seller’s responsibility over the cargo ends once it is loaded onto the vessel at the port of origin. From that point, the consignee (buyer) is responsible for the goods until they reach the final delivery point. 

FOB destination

FOB destination mandates that the seller bear the responsibility for the goods until they reach the buyer’s chosen delivery point.

Detailed explanation

FOB shipping point

  • Transfer of ownership: Ownership transfers from the seller to the buyer once the goods are loaded onto the vessel at the origin port.

FOB destination

  • Transfer of ownership: Ownership of the goods transfers from the seller to the buyer once the goods reach the buyer’s chosen destination.

Examples

FOB shipping point

A manufacturer based in Sweden agrees to export industrial machinery to a distributor in Norway. They quote a price of 500,000 SEK and FOB shipping point terms. That means that the seller’s responsibility ends once the machinery is loaded at the port of Stockholm, Sweden. From this point, if the machinery is damaged or lost, the importer cannot ask the manufacturer to reimburse them as ownership and liability have been transferred.

FOB destination

In the same scenario, let’s say the buyer and seller agreed to FOB destination terms. Suppose the machinery never arrives at the buyer’s premises. Since the manufacturer still has ownership, they take full responsibility and must either reship the machinery or reimburse the buyer.

Implications for business

Logistics and transportation

  • FOB origin: The buyer is responsible for arranging the main carriage, managing shipping schedules, and handling any logistics challenges that arise during transit.

Risk management

  • FOB origin: The buyer must consider insuring the main carriage since the risk of loss passes to them.

Accounting and financial reporting

  • FOB origin: Revenue is recognized when goods are loaded onto the main carriage. At that point, the seller decreases their inventory and tracks the sale as an account receivable. The buyer increases their inventory and tracks it as an account payable.

Customer relations

  • FOB origin: Buyers have more control over the shipping process, which can benefit those with established logistics capabilities. However, the increased responsibility for risk could lead to dissatisfaction.

Advantages

FOB shipping point

For sellers

  • Early revenue recognition and improved cash flow

For buyers

  • More control over the shipping process

FOB destination

For sellers

  • Greater oversight of the delivery process, enabling quality control

For buyers

  • Only being liable for the cargo upon delivery to a chosen destination

Disadvantages

FOB shipping point

For sellers

  • Limited control over goods during transit, possibly leading to client dissatisfaction

For buyers

  • Bearing a majority of the transport risks

FOB destination

For sellers

  • Bears a majority of the risk, assuming all liability till the final delivery point

For buyers

  • Delayed ownership transfer