The market for supply chain management has reached across the globe, and as relationships between nations continue to grow in terms of trade and commerce, few supply chains can exist within one country or part of the world. With international trading of goods and resources comes issues related to compliance and insurance, and supply chain companies need to understand where they stand.
When it comes to supply chain management there is a term companies need to understand: freight on board (FOB). Failure to understand this term can lead to many discrepancies when it comes to shipping products abroad. If the responsible party does not accept liability when something like damage occurs, then a claim could be filed.
What is FOB?
FOB is an international commercial law term published by the International Chamber of Commerce (ICC). It indicates the point at which costs and risks of shipped goods move from the seller to the buyer. The term is used to outline the time when the seller is no longer responsible for the shipped goods and when the buyer is responsible for paying costs related to transportation.
Why It’s Important to Know Origin from Destination
FOB shipping point (or origin) and FOB destination are two different things in the world of supply chain management. The differences are significant because they determine when a sale of goods occur, when the purchase of goods and related liability occur, and whether the supplier or buyer pays shipping costs.
If the seller of goods quotes a price that is FOB origin, the sale takes place when the goods are placed on a common carrier by the seller. When the goods are being transported to the buyer, they are then owned by the buyer, who becomes responsible. If a seller of those goods quotes a price that is destination, the sale takes place when they are unloaded, technically, at the buyer’s destination. This illustrates that the seller then owns those goods while they are on the truck or ship, making the seller responsible for the costs of shipping.
It is important to understand the difference because this can also show up in liability claims by one party to another. With business insurance in place, the seller or the buyer can be financially protected from claims of negligence or discrepancies in what was agreed upon at the time of a deal. Having business insurance will provide the financials needed to bring in legal counsel as well as pay out penalties if need be.
However, ideally companies in the supply chain world do not want to get to this point. Staying educated on everything from insurance to who pays who and who is responsible for what when it comes to shipping will alleviate any stress upfront.