“The line between disorder and order lies in logistics…” —Sun Tzu
When you boil it down, shipping is ultimately a series of exchanges. Goods — as well as ownership and responsibility — must be transferred from one party to another using an orderly and efficient process.
To officially transfer responsibility between sellers and buyers, companies rely on agreements known by the acronym FOB. In fact, FOB is one of the most important terms to know in commercial law.
But what exactly does FOB mean and why is it so crucial to the success of a supply chain?
Let’s take a closer look.
An FOB agreement designates whether a seller or a buyer is responsible for items during shipping — and when their responsibility ends. Depending on the context, FOB can either mean free on board or freight on board.
In North America, FOB can refer to either maritime or land shipments.
Generally speaking, there are four types of FOB agreements used in North America, which we describe next.
But first, let's get some terminology straight. Very simply, there are two parts of each type of FOB agreement. The first part designates whether the buyer assumes liability for the shipment at the point of origin or at the destination. The second part designates whether the seller prepays the freight charge or if the buyer pays on delivery.
In an FOB origin, freight prepaid agreement — also called an FOB shipping point agreement — the buyer assumes responsibility for goods the moment a carrier picks them up and leaves the seller’s shipping dock.
Legally, this also means that the buyer assumes full responsibility for all freight claims (in the event goods are damaged during transit). The seller prepays the freight charges.
For an FOB origin, freight collect delivery, the buyer has full legal responsibility for all of the items from the moment the carrier picks them up until they reach the buyer’s chosen destination.
In this arrangement, the buyer assumes responsibility for all freight charges and pays on delivery. However, the seller chooses the shipping company that will be responsible for getting the items safely from point A to point B.
In an FOB destination, freight prepaid arrangement, the seller assumes total responsibility for damage or loss until the point of transfer at the customer’s receiving dock. Once the transfer is complete, the seller is no longer liable in the event the products get damaged.
The seller prepays and is then fully responsible for any and all additional freight charges that arise under this arrangement.
For this type of transaction, the seller chooses the shipping company and retains full control of the items until they reach the customer.
However, the buyer is on the hook for the freight costs that accrue during transport and pays when the items reach their destination.
In situations where the seller retains ownership of goods until they reach the customer, it’s common for the seller to offer uniform delivered pricing (UDP), which covers all transportation costs for the transaction for a set fee.
UDP may be offered as single-zone pricing, also called postage stamp pricing, where all customers pay the same price regardless of their geographical distance from the seller. It can also be offered in a multi-zone pricing model, where customers pay different amounts depending on the proximity of the buyer's geographical zone to the seller’s dispatch point.
At this point, you’re likely wondering what FOB agreements have to do with trucking. After all, FOB agreements primarily involve the buyer and the seller. So why should trucking companies focus their attention on them?
FOB agreements are critically important to trucking companies. In large part, it's because the agreements determine who is responsible for payment and insurance at different points during the transfer. This is critical to note when collecting invoice payments and can have a massive impact on profitability, cash flow, and customer satisfaction.
For example, imagine a truck leaves a shipping dock with a delivery. The driver needs to know where the payment will come from. This could become an issue in an FOB origin, freight collect situation if a customer refuses to pay for the goods at the time of delivery, potentially causing the driver to refuse to deliver the items. In such a scenario, the driver may instead decide to return the items to the seller. That isn’t a good outcome for any of the parties.
As another example, a buyer may try to charge a seller for further transportation beyond the unloading point. Again, it comes down to what’s specified in the FOB agreement. The trucking company needs to be completely aware of when their own shipping commitment ends. That way, they can avoid performing extra services or leaving a customer stranded at the unloading dock.
As you can see, there are several important legal issues that can arise during shipping. For this reason, a driver should never depart from a shipping dock without a clear understanding of the FOB situation at hand. Otherwise, bad things can happen, ranging from disagreements to futile efforts and irate customers.
There are also some important accounting considerations to factor in when planning FOB arrangements.
For example, in an FOB origin shipment, the buyer may record an inventory increase on their financial statements the moment the goods are put on a truck or ship for transport. In this case, the seller records a sale when the freighter loads the goods on the truck. They also mark a decrease in inventory on their financial statements at the same time.
In an FOB destination delivery, however, these accounting adjustments take place when the items arrive at their destination.
This may seem like a minor consideration. But it’s important for record keeping purposes and for insurance claims. Insurance companies will want to know the exact time a sale was made when they processes a claim. Those who can’t provide this information may find their claims denied.
As you might suspect, a variety of problems can arise when using manual, paper-based record keeping systems for shipping agreements. Someone may lose, alter, or steal paper documents, resulting in legal disputes and delayed invoicing and insurance claims.
For this reason, companies would be wise to use digital applications to record FOB transactions.
By using a digital application for this type of transaction, companies can instantly — and securely — log and share FOB transfer information. This can save a ton of time and eliminate disputes and finger-pointing if items are damaged during transport.
Trucking companies can use Vector to create high-quality, customized forms that allow you to digitize workflows and implement seamless and automatic processing, while delighting your customers.
Using a custom digital solution can also give companies more power to adjust FOB contracts when called for, like for example, when they are negotiating with supply chain partners.
Your customers will appreciate the flexibility and security of using a binding, digital contract. After all, it's much more convenient than an old-fashioned paper transaction.
This post was written by Justin Reynolds. Justin is a freelance writer who enjoys telling stories about how technology, science, and creativity can help workers be more productive. In his spare time, he likes seeing or playing live music, hiking, and traveling.