Understanding Free On Board (FOB), Types, and Advantages

Free On Board, or FOB, is one of the trade terms related to the supply chain. FOB is a form of responsibility of the buyers or sellers towards the goods they are distributing. FOB can determine ownership, transportation cost, and transportation risks that are likely to occur.

This article discusses Free On Board in the trade and distribution sectors. To learn more about FOB, read the article below.

What Is Free On Board (FOB)?

Free on Board is a shipment term used in international and domestic transactions. FOB is an agreement between a seller and a buyer explaining the ownership and responsibility for delivering goods.

FOB also explains each other's roles and the party responsible for the goods. For example, the seller will be responsible for the goods until they reach the buyer and must pay for the shipment cost as well as the transportation-related risk.

Moreover, FOB also notes information about details on delivery, payment, shipment fee, and the party covering insurance.

Why Is Free On Board Important?

FOB is a shipping term used in international trade transactions. Then, why must you use FOB? Here are the reasons:

1. Negotiating Insurance and Delivery Fee

FOB makes it easier for you to negotiate shipping costs with the forwarder and get competitive prices. In addition, you can also negotiate insurance costs to get the right coverage.

Handling insurance costs is also easier since the buyer can overcome them. That way, if an accident occurs during shipment, you can easily address it without needing to contact the seller first.

2. Preventing Capital Flight

FOB also prevents capital flight abroad because you have taken care of shipping and insurance costs domestically.

Types of Free On Board

Free on Board is usually categorized into two main types: FOB shipping point and FOB destination. The main difference lies in the party responsible for delivery. Here is the complete information:

1. FOB Shipping Out

FOB shipping point requires the buyer to take responsibility for the shipment once it leaves the seller's location. The buyer is also responsible for the costs and risks associated with transportation once the goods have left the seller's location.

For example, you purchase 500 items from a supplier. When using FOB shipping point, you will be responsible for the goods once they have been picked up by the courier. You will also need to pay for the shipping costs.

In addition, the buyer arranges for shipment from the seller's location to the buyer's location and takes care of customs duties and insurance. This type of FOB is generally used for domestic shipments, where the buyer has control over shipping preferences.

2. FOB Destination

When you use FOB destination, the seller will be responsible for the goods until they reach the buyer’s location, the shipping cost, and the delivery-related risk.

Moreover, the seller controls the shipment to the buyer’s location, handles the customs, and pays for the insurance. This type of FOB is usually used in international delivery when the seller offers a more exclusive transaction and service.

Advantages and Disadvantages of FOB

Either the FOB shipping point or the destination has advantages and disadvantages you can consider during delivery or purchasing. Below is the complete explanation:

A. Advantages of FOB Shipping Point

FOB shipping point has advantages for sellers and buyers as follows:

The buyer controls the delivery, chooses the courier and route based on their budget, sets the delivery timeline, and predicts the cost.
The seller only focuses on the business transaction because all shipment needs are managed by the buyer.
The buyer can forecast the risk and loss to determine the insurance.
The buyer can manage the supply chain and coordinate directly with the courier regarding the shipment time.
The seller can deliver goods without worrying about the regulation since the buyer has already tackled it.

B. Disadvantages of FOB Shipping Point

The disadvantage of FOB shipping point is that buyers can only predict all risks related to shipping once the goods have left the seller's location. As a result, the costs incurred may be higher for buyers if they are shipping large cargo or the shipping time is quite long.

Furthermore, buyers are also responsible for arranging shipping, including determining the courier, handling customs, choosing insurance, and other logistical needs.

Sellers face the risk that their offers will be less competitive in the market, unlike FOB destination, where they include shipping as one of their services and make it look exclusive compared to other businesses.

C. Advantages of FOB Destination

FOB destination offers the following advantages for sellers and buyers:

The price includes the shipping fee.
Sellers can negotiate with the courier to get a competitive price or service.
Sellers are responsible for the delivery risks.
Buyers do not need to tackle the administrative task regarding the delivery because the sellers will do it.
Sellers usually have better customer service, increasing buyers’ trust.
Sellers can offer a more exclusive service, which already includes shipping costs, and improve the relationship with customers with this service.

D. Disadvantages of FOB Destination

The disadvantage is that the seller is fully responsible until the goods reach the buyer. As a result, when accidents or other risks occur, the seller may suffer material losses and damage to their business reputation.

FOB destination also imposes heavier costs on the seller, so the price received by the buyer may be higher. This can certainly affect trade competition because buyers may look for other sellers who offer more affordable prices.

That is the information about FOB that you can learn. The shipping management, especially for international or sea freight, must be set accurately and efficiently to make sure that the goods reach the destination safely.

Regarding logistics and shipment, Chandra Asri Group, through PT Chandra Shipping International and PT Marina Indah Maritim, offers a logistics solution with 9 chemical and gas vessels of 106,650 DWT. Yet, this number can grow over time.

Therefore, if you look for natural gas and crude oil distribution service, entrust it to Chandra Asri Group!