FOB defined

      Origins and meanings of the term "freight on board." (Sawing and Drying Forum) March 23, 2003

Question
What does FOB mean?

Forum Responses
(From WOODWEB's Sawing and Drying Forum)
F.O.B. to my understanding is freight on board. In other words, you pay for the material or you get paid for it as soon as it is put on the truck.



FOB is Free on Board and means that the charges become yours at the origination. The seller will load it on the truck and then it's yours.


Freight On Board is correct. Usually the seller will designate whether it is F.O.B. at his store/plant or if it is F.O.B. your destination. This determines who is liable for the freight risks/costs. F.O.B. to your door is always better. It shifts the responsibilities/costs to the seller.


To me, FOB at the mill is almost always better.


You have to be careful here. In international trade parlance, saying just "FOB" means the sender pays the shipping to destination, or at least to the destination port. This is the original use of the term.

If the phrase is "FOB Timbuktu," then the sender pays the shipping to Timbuktu.

The shipper can say "FOB our yard," which is a misuse of the term, but it would mean that they don't pay shipping cost at all.



The term in the lumber industry originated when some mills began to ship via rail. They would F.O.B. a rail car at the closest rail siding. This means the mill (the seller) would get it loaded onto the rail car and pay for all charges (shipping and handling) related to getting it loaded. Once loaded, the receiver would be responsible for all freight charges, insurance, damage, etc. Sometimes they would F.O.B. the siding, which means they would only pay to get it to the siding and not loaded onto a rail car, ship, truck, etc.

In essence, the seller would put the lumber on the rail car or ship for free, so to speak, or "free on board." Hence, the abbreviation of F.O.B. It does in fact mean "Free On Board" and not "freight…" The term can be expressed as f.o.b. or F.O.B.

The dictionary says "goods placed on board a carrier at the point of shipment." Therefore, "f.o.b. mill" means that you will load the lumber on a truck or other carrier at the mill without cost to the buyer. "F.O.B. My Favorite City" means that the seller will deliver the goods to a carrier at My Favorite City (which often is a port city).

It is probably a misuse of the term to say "F.O.B. My Furniture Plant" as you would not be putting the goods on a carrier at "My Furniture Plant." A better expression would be "No delivery cost" or "Free Shipping." Nevertheless, I have seen such f.o.b. stipulations.

Gene Wengert, forum technical advisor



From the original questioner:
I think I understand. I recently received a price quote request from a buyer and it said f.o.b the supplier. I guess this would mean I'm responsible for loading it at my yard and it's their responsibility for shipping to them.


If you want to sell lumber direct from the mill, the contract you sign with the buyer must have the right terminology. If you want the buyer to pay all costs of shipping the international terminology is EX-WORKS. Do no use anything else or you could be in for a bill.


I am not sure what you mean. Should EX-WORKS (what does this mean?) be on the contract, without any other reference or words to modify what it means? Should FOB-(whatever) be left off? Or added? Would you be able to site a resource for your information?


EX-WORKS is a shipping term used internationally. Use it instead of F.O.B. if you would like your customer to collect your goods from your depot. You can arrange trucking.


Yep, Gene, that is the way I learned it, also. My father send out a trainload a month all hand loaded into boxcars. He had his own siding in Northeast Portland, Oregon. He had a broker in Indiana that he worked through, in the early 50s. Thanks for the memories of the FOB issue.


FOB point of origin (the seller) - the seller loads material and is paid for it at this point. The buyer supplies the shipping and cost. FOB destination, seller is responsible for method of shipping and cost, and the seller receives payment at the final destination. I myself am still a little unsure about the proper terminology used to describe the shipping procedure. Therefore, this is still somewhat new to me as well. As far as my resources, I am learning from some of the old timers from the old ground hog mills. I have learned that they are not always right. But you can't get an answer if you don't ask.


The comments below were added after this Forum discussion was archived as a Knowledge Base article (add your comment).

Comment from contributor A:
Following are the popular international Inco Terms:
"Ex Works", place the goods at the disposal of the buyer.
"FOB" means place the goods on a truck or deliver to a ship, name the place of loading.
"C+F" means you pay the freight and deliver to the customer or the port of import, name the delivery point.
"CIF" means you pay the freight and the insurance to a destination or a port of import, name the delivery port.
FOB=free on board
FOT=free on truck
FOR=free on rail
C+F=cost and freight
CIF=cost,insurance and freight
As a general rule, do not get involved in importing or customs clearing. Avoid "ex ship", "ex quay", "delivered at frontier", "delivered duty paid."



Comment from contributor B:
I understand there is a difference in how shipping terms are interpreted, depending on which country you come from. "FOB" is a good example of a term with more than one meaning. This is why the International Chamber of Commerce published a definitive list of terms and definitions, to be used by everybody anywhere. The key is to always write "Incoterms 2000" after the 3 shipping letters, for example: "FOB Southamptom UK (Incoterms 2000)." (The last set of definitions was published in year 2000, and may get tweaked every 10 years or so.) In this way, there should be no confusion, as the terms have an unambiguous meaning.


Comment from contributor P:
FOB or "free on board", not "freight OB", has nothing to do with shipping charges. FOB dest means that title/ownership passes to the purchaser, recipient, etc, upon delivery. FOB origin means that title changes when loaded prior to shipping. These terms only apply to title issues such as risk for loss or damage. The charges for shipping can only be defined by the terms prepaid or collect.


Comment from contributor D:
The definition of F.O.B. is Freight on Board. This is simply the point at which one party or the other becomes responsible for the freight. If the FOB point is "factory" or "origin", any damage or other issue with the carrier would be the responsibility of the recipient. If the FOB point is "jobsite" or "destination", the shipper would be responsible for any problems until the freight was delivered.

As the recipient you almost always want the FOB point to be destination, so you don't have to deal with a freight claim or other problem. As the shipper you always want the FOB to be origin, so you don't have to deal with the problems. This is usually a sticking point in the negotiation process of a transaction.

The second component of this topic is "Freight Terms". There can be many ways in which the Freight Charges are satisfied.

FFA - Full Freight Allowed - the shipper pays.
Freight Collect - the recipient pays.
PPA - Pre Pay and ADD - The shipper pays the freight and adds the charges to your invoice.

The bottom line is, while related, FOB and Freight Terms are two different things.



Comment from contributor C:
The definition of F.O.B. is incorrect in your Knowledge base. For the correct definition of this and all other INCO terms you can go to the International Chamber of Commerce's web site.

The Chamber of Commerce's definition of F.O.B. is specifically used for Ocean going vessels. If it is used in any other context other then Ocean vessels it is wrong. Legally, when a ship is being loaded, that is when this term goes into effect.

It is used to determine when the ownership of the freight transfers from the seller to the buyer. When the freight has passed over the rail of the ship to be placed on the deck of the vessel is when ownership transfers.

There are a few court cases that have been settled and a few still pending because of these terms. If something happened to that shipment as it was being lowered to the deck. As an example; If something happened as the lowered a shipment on to the deck and half the shipment falls and hits the deck, and the other half falls and its the docks? Who is responsible for the freight? Those are the cases that are pending.

All inco term definitions can be found on at the International Chamber of Commerce's web site.



Comment from contributor E:
More importantly, FOB refers to when you actually take ownership. It also implies that if the freight is stolen or damaged the owner is responsible so once the product leaves the source the seller is not responsible for its quality upon delivery.



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