What is FOB Shipping?
If you regularly import garments or textiles for your apparel business – or any other cargo for that matter – chances are you have come across the term FOB shipping.
Whether you are aware of it or not, it is a phrase you need to clearly understand. Reason being there is a probability you may be losing significant sums of money every time you’re shipping items.
FOB is an acronym that stands for Freight on Board, or more popularly known as Free on Board.
It is a term used to specify when liability and ownership of goods passes from a seller to a buyer during shipping. When used together with a specified physical location, the designation indicates who between the seller and buyer is responsible for freight charges and at what point exactly this responsibility passes from the seller to the buyer.
Let’s use an example to drive this point home.
In international shipping, “FOB [name of port of origin]” – e.g. FOB [Guangzhou] – means that the Chinese seller/consignor is responsible for carrying the consignment from their premises to the port of shipment (in this case Guangzhou) and sorting out the loading charges.
Once the goods are over the ship’s rail (we’ll tell you why the rail in a minute), the seller passes risk to the buyer/consignee. The buyer then assumes responsibility of such costs as insurance, ocean freight, unloading, and transporting the consignment from the arrival port (destination) to the final destination – i.e. the consolidation facility: your factory or warehouse, for example.
Understanding FOB Shipping
FOB is a term from the maritime shipping world that has been in use since the 1930s. It was coined by the ICC (International Chamber of Commerce) to help clarify and outline both the consignor and consignee’s obligation, risks and costs.
Originally, order responsibility used to change from the seller to the buyer soon as the shipment crossed the vessel’s rail, although in modern lingo this technically means soon as the container is aboard. When the consignment reached this point, it would be declared free on board.
In the unfortunate event that the ship sank, the loss would be on the buyer since s/he had already taken ownership of the goods.
Anyway, FOB is what is known as an incoterm, one of several trade terms used in international and domestic trade contracts to define the rules of engagement between the buyer and seller. They are revised every decade or so, with the most recent version being Incoterms 2010 which was released in January 2011.
Incoterms are classified into two categories: General Transport and Sea and Inland Waterway Transport, but our interest is in the latter category which comprises FOB (Free on Board), in addition to three others:
- CIF (Cost, Insurance and Freight)
- FAS (Free Alongside Ship)
- CFR (Cost and Freight)
The focus for us today will only be on free on board, the one type of shipping you need to be using as a fashion business owner.
Perhaps it is worth pointing out that FOB shipping is likely to come into play for those times when you are shipping bulk cargo – as opposed to a small package you probably would fetch on Amazon or Etsy, or dropshipping it from Alibaba. Think large consignments exceeding 440 lbs (200 kg), or thereabout.
What’s also worth pointing out is that FOB is a term often misused in the shipping industry. Many people use it to refer to inland movement of goods, but in actual sense, it means transportation of goods through inland or ocean waterways.
Type of FOB Shipping
FOB shipping contracts come in two forms:
As alluded to earlier, FOB Origin, also known as FOB Shipping Point, signifies the order changes hands from the seller to the buyer. The seller takes care of transportation to the port, in addition to loading costs, as well as clearing the goods for export. When a contract is FOB Origin, it is also the seller’s responsibility to oversee loading of goods onto the ship.
Delivery of goods is considered complete once the shipment is loaded onto the vessel. From there, the responsibility shifts to the buyer who will be liable for all charges from then on, as well as the risk of loss and damage.
FOB Origin may also be indicated as the name of the city – for instance, FOB Denver, FOB London and so on.
Shipment contracts labeled “FOB Destination” imply that the seller takes responsibility up to the point the consignment is delivered to the buyer’s doorstep.
This contract places more responsibility on the seller as they are required to arrange for and pay for the transportation to the buyer, not to mention being liable for any damage while the goods are en route. While this is more advantageous to the buyer in terms of convenience, these costs eventually trickle down to the buyer, as you would expect.
These are the two major types of free on board shipping, but you may find it indicated in four different ways in shipping documents.
- FOB [place of origin], Freight Collect
- FOB [place of origin], Freight Prepaid
- FOB [place of destination], Freight Collect
- FOB [place of destination], Freight Prepaid
Nothing changes much here from the initial explanation. Place of Origin contract remains the seller’s responsibility up to the time the consignment is loaded onto the ship, upon which the buyer assumes title of the goods. Similarly, Place of Destination means the seller assumes responsibility until the goods are in full custody of the buyer.
Now, in the above cases, “Freight Collect” for both designations (place of origin and place of destination) means that the buyer is responsible for the freight charges, which they will clear when goods are delivered. “Freight Prepaid”, for its part, means just that: freight charges have been taken care of already (by the seller).
Based on the above information, you can be able to deduce what exactly happens in the case that the goods are damaged somewhere along the way.
But in case it’s a little hazy, let’s serve it in black and white.
Often, when goods are obviously damaged, some docks receiving them decline delivery of such items – instead of accepting the same and tagging a damage notation for any claims that might be filed in future against the carrier.
Technically, though, a consignment labeled FOB Origin is the responsibility of the buyer at the time of shipping. Which means the buyer would be refusing delivery of [damaged] goods which s/he legally owns and bears the risk for.
The conundrum for the consignee is that the seller has no legal reason to accept back the damaged goods – not to mention the cost of return shipment would result in extra charges for the buyer.
The best way out of this for the consignee would be 1. To carry insurance on the shipment or 2. To take the more expensive FOB Destination contract which would see the seller assume risk for everything.
Then again, what could possibly go wrong, with clothing and garment, right?
Why FOB is a Great Idea for Shipping
Most clothing businesses that source their materials from overseas or ship their products across borders would be wise to employ FOB shipping as a term of sale. The overall reason for this boils down to two things: they enjoy greater control over the shipment, while keeping a lid on the freight costs.
Considering FOB allows you to select your own freight carrier, you not only gain more control over your shipment, but also enjoy additional benefits such as the luxury to choose the route taken – not to mention the transit time.
There is also a benefit that comes with being able to work with one company from origin to destination. The convenience aside, there is also the central point of contact should you need anything clarified or in the event of a hiccup along the way.
The added bonus is that a single carrier is more likely to work with your best interests in mind, since their sole mission is to get your shipment to its destination safe and sound – something you probably won’t enjoy with multiple entities handling in between.
Perhaps a juxtaposition would be in order to show the magnitude of this.
When you use an alternative shipping method like CIF (Cost, Insurance and Freight) – which is quite popular itself – you give up any control you have over your shipment, while shouldering most of the risk. The supplier takes charge of every shipment aspect until the cargo arrives at the destination port.
To put this another way, the supplier has the upper hand in choosing their own carrier AND to specify the transit times. Should a delay occur, you – the consignee – have no recourse.
To compound on the facts that you have little control over the consignment and that multiple companies can be contracted at different stages of the transportation process, obtaining any information about the status of the shipment can be a challenge. Besides, the seller is the carrier’s client, not you, the buyer, so there is no obligation by the carrier to meet your needs.
It is true that CIF wins the convenience battle, especially for new importers or those bringing in small quantities, because you do not have to put up with the headache of unfamiliar shipping and freight details.
However, leaving the seller and his carrier to their own devices might see them conspire to mark up the costs levied by the carrier in order to make some extra bit of profit, which, by the way, is not unheard of. The result is that this needlessly raises the amount you end up paying to import your garments, textile or other products.
What’s more, FOB shipping absolves you of the need to handle customs and fees soon as your shipment touches the shores – something that cannot be said of the other shipping options such as, apparently, what is supposed to be a more convenient solution in CIF.
The Downsides of FOB Shipping
As a buyer, you stand to gain more from FOB shipping compared to the seller, but this is not to mean it is all peaches and cream.
By going through FOB, you are not in direct contact with each vendor at the origin, meaning there is a chance you might end up spending a bit more on the local charges.
Of course, there is always the option to look for your own agent to sort out all the origin procedures, which might save you a few bucks here and there – but this is not a cast iron guarantee.
As well, we cannot overlook the case of damaged goods which, if not insured or under a FOB Destination contract, might see you incur a loss that is not of your own making at all. And in the event you choose to return the goods for exchange, the cost will be entirely on you.
That’s a bummer.
As a buyer, any shipping method that grants you control of the shipping terms is ideal. And this is what FOB shipping does: it gives you greater control over the shipping process compared to alternative shipping methods. Not only that, you enjoy better control over related shipping costs – for the most part – and ultimately, the overall cost of the goods.
For most apparel business owners, this is the sensible option.
However, we would point out that it is always good to first understand the concept of FOB shipping, or any other shipping method for that matter. But we do hope this guide provides a nice information layer to build upon.