Free On Board
Free On Board (FOB) is a shipping term that defines when risk, liability, and shipping responsibility transfer from seller to buyer. Under Incoterms, FOB applies only to ocean or inland waterway transport, with risk transferring once goods are loaded on the vessel at the named port of shipment. In North American domestic trade, FOB also marks FOB Origin or FOB Destination to assign freight costs and transit risk.
FOB terms in the purchase order determine when inbound material can be recognized as inventory. With FOB Origin, the buyer's team books goods into in-transit inventory as soon as the carrier leaves the supplier's dock, then moves them to raw-material stock at receipt. This supports lot tracking but puts shortage exposure and freight-claim ownership on the buyer. With FOB Destination, the supplier keeps transit risk until the truck arrives, so receiving teams avoid final inventory recognition until the dock check is complete; that reduces buyer risk but can delay production availability if receiving is congested. Planners use the FOB point to set material availability dates, treating FOB Origin receipts as available after transit time and FOB Destination receipts against the supplier's delivery commitment. For raw-material traceability, FOB does not control lots, but it determines which party investigates discrepancies when a heat number, drum, or pallet is missing or damaged.
- FOB wording conflict in contracts: A purchase order stating 'FOB Origin' while vendor confirmation says 'freight prepaid' creates disputes over transit-loss ownership. The buyer assumes claim responsibility while the supplier believes freight is covered, leading to delays and charge-back battles.
- Incorrect inventory booking at the receiving dock: Booking FOB Destination material into raw inventory before physical receipt inflates cycle counts and ATP/shortage logic. This masks inbound delays and triggers line stoppages when the truck is late.
- Misusing FOB for containerized or non-ocean moves: Using FOB loosely for truckload or air shipments under Incoterms creates freight-charge confusion and misassigned claims. Export responsibility handoff becomes unclear when transport mode does not match the Incoterm rule.
Does FOB transfer ownership automatically?
No. FOB determines risk and responsibility transfer, but ownership/title transfer is governed by the sales contract and applicable law, not by Incoterms alone.
Who files the cargo claim under FOB Origin?
Typically the buyer, because the buyer assumes risk once the goods are handed to the carrier at the origin point, subject to the carrier contract and insurance terms.
What is the operational difference between FOB Origin and FOB Destination in an MRP system?
FOB Origin usually supports earlier in-transit recognition and buyer-side transit risk management; FOB Destination delays risk transfer until arrival and usually keeps the supplier accountable for transit damage or loss.