What is FOB shipping and why is it useful for businesses?

By Indeed Editorial Team

Published 8 July 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

The globalised trade of goods relies heavily on shipping services around the world. With the ability to move goods from the manufacturer's market across the world and to the buyer as soon as possible, a company's international trade can thrive, and they gain benefits over domestic competitors in a range of different scenarios. Manufacturers use the FOB shipping method to mitigate these concerns. In this article, we discuss what this form of shipping is, its importance to companies across the world and the different types of shipping arrangements available.

What is FOB shipping?

Free on Board (FOB) shipping is one of the international commercial terms and refers to cases in which a seller or manufacturer has responsibility for a product until it begins its transport to the buyer. After this point, responsibility for delivery transfers to the buyer of the product. Manufacturers typically set the FOB terms in relation to particular ports or locations. For example, 'FOB London' means that responsibility transfers once the product reaches the port of London. It can also be more specific. For example, responsibility might transfer when it reaches a specific dock at the port.

The port is also not always the first on the shipping journey. In the event that the product needs to stop at several ports on its route, companies tend to achieve a fair split of costs by finding one in the middle of the journey and splitting responsibility at that midpoint. Shipping on FOB terms splits the cost between the buyer and seller, balancing responsibility as effectively as possible.

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Why do companies implement FOB shipping?

The benefits of this shipping method depend on the size and nature of the company, and the type of products it sells. Below are some reasons why companies use free on board shipping:

Limits costs

The cost of shipping is a significant issue for many manufacturers and sellers. For example, a startup business paying for all of its shipping costs puts itself in a risky position as it spends a significant proportion of its budget on moving products rather than creating and marketing them. In this instance, splitting costs between a buyer and a seller is an essential part of doing business.

Balancing shipping costs between the buyer and the seller removes a significant proportion of the burden from the seller. This means that the seller has access to more funds to allocate to the development and production of new products. For a higher level of competition in the market, companies can benefit from making full use of free on board shipping wherever they find an opportunity to do so.

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Minimisation of risks

Shipping on FOB terms is an essential way of reducing the amount of risk to a supplying company. The less time a company has responsibility for a parcel or a shipment, the lower the likelihood of an incident occurring when it's in your care. This means that the amount of issues the company resolves is minimal, and executive teams can focus on important work, such as designing and developing new products, rather than conflict resolution over lost packages.

In the event that the shipping company loses a parcel on the route after the designated port, the loss of the parcel is the responsibility of the customer. This means that it's not the role of the company to establish the location of any lost deliveries, rather having the customer engage in the discussions surrounding the loss of the goods. The transition to FOB, in this case, saves the selling company a significant amount of money and protects them from the financial risk of an incomplete delivery caused by the shipping company.

Remaining informed

When you ship FOB, you retain access to a significant amount of information on the process. For example, you receive updates throughout the entire journey, ensuring that the product reaches the destination even when you're not directly responsible for the product at that stage in the transportation process. This means that you retain the potential to reassure your customers by conveying thorough and coherent information to them regarding when their package is arriving at its destination.

This process assists a company in appearing as a reliable partner throughout the process. Not all shipping companies provide consistent updates to the final customer while remaining in contact with the initial seller. Conveying this information to the customer introduces a greater degree of transparency and increases trust in you as the selling party. Building up a reputation for reliability is not a simple process, but it begins with complete honesty, which free on board shipping supports comprehensively.

Better understanding with customers

Shipping terminology and rules have the potential for confusion, especially if you don't set them out in a detailed manner. This is where the implementation of this method of shipment is beneficial for both your company and the customer. Customers might understand the terms of free on board shipping better to understand their position in the shipping process.

This means that customers have peace of mind throughout the process. Depending on the package, timely arrival means a lot to the recipient of a parcel. Using an established method such as free on board shipping means that all parties have a thorough understanding of their role in the process, and if they do not, they have the ability to search for a trusted source surrounding the shipping method in question.

How to arrange free on board shipping in 3 steps

Arranging free on board shipping is a simple task and requires clarity and transparency with the customer. Here's how to arrange FOB shipping in three steps:

1. Prepare the package

Preparing the package is an important first step in any shipping journey. A well-prepared shipping package can limit damage throughout the journey. While each further step in the process is important, preparing the package for shipment enables the rest of the process' completion.

This step includes a range of different tasks, the first of which is the secure and tight nature of packaging. A loose package can rattle and damage the product, whereas tight packaging ensures minimal movement and helps ensure the best possible condition at the end of the process. Also, make sure to include a visible label for the destination of the delivery, so you ensure it gets to the right place.

2. Inform the customer

One important step to the implementation of free on board shipping, or any shipping processes, is that both parties in a transaction have complete information. This involves an understanding of the terms of shipping. Free on board shipping is a form of contract that the recipient enters into consensually, so utilising free on board shipping only after informing the recipient is advisable. This ensures that all parties understand where they stand and their roles in the process.

An ideal time for informing the customer is at the time of ordering. This means that they engage in the order process and understand their role throughout the shipping process. Customer understanding of where they stand is an essential part of good business and ensures that customers come back time after time.

3. Organise shipping

Finally, organise the part of shipping you hold responsibility for. Many companies organise shipping throughout and transfer responsibility once the product is On Board, rather than organising half of the shipping process. This keeps customers happier and increases retention of paying customers in the long term.

After organising shipping, inform customers of the specifics of their product's shipping process. This means that they can track progress throughout and have a transparent view of their product's progress. Transparency is essential for limiting customer anxieties and increasing the potential for good reviews.

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Why are Incoterms like FOB shipping essential?

International commercial terms (Incoterms) are essential, as they're an underlying part of international law. Many countries utilise Incoterms as a template for importing and exporting goods, which helps set clear definitions of where responsibility lies for shipments. Without Incoterms, agreements on shipping can be complicated. This is because different borders around the world work with different forms of documentation. Incoterms help standardise the process and reduce confusion. Incoterms undergo review on a consistent basis. This means that the rules are consistently up to date, and adequate for the shipping and delivery trends of the modern-day.

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