Is FOB Price really the best incoterms?
In freight and logistics as a whole, you will hear a lot of acronyms and terms thrown around. As far as incoterms goes, FOB Price is one you will hear the most. But what is FOB Price and how do I use it?
What is the FOB price meaning?
FOB price is a commonly used term in international trade that refers to the price of goods at the point of shipment. It is an important concept for buyers and sellers as it determines the cost of goods and the responsibilities of both parties during transportation.
FOB Definition:
FOB stands for Free on Board, which means that the seller is responsible for the goods up to the point of loading them onto the shipping vessel. Once the goods are on the ship, ownership and responsibility transfer to the buyer. The FOB price, therefore, includes the cost of goods, packing, and loading onto the shipping vessel.
The FOB price is often used in contracts between buyers and sellers as a way to determine the total cost of goods. It is important to note that FOB price does not include the cost of shipping, insurance, or other charges associated with transporting the goods to the final destination. These costs are the responsibility of the buyer and should be negotiated separately.
Why is FOB Price so common?
FOB Price or FOB Terms, is one of the most common ways that suppliers quote the price of their goods. There are a couple reasons for this, but the main one is responsibility. It assures they don’t have responsibility to store or care for the goods any longer than they have too. Terms such as EXW, it is the buyer’s responsibility to arrange to have the goods picked up at the sellers loading dock. The longer the goods sit in their warehouse, the more chance they could get damages, stolen, or abandoned. All of which can be costly for the supplier.
Suppliers generally aren’t in the storage business. Their main goal is to pump goods through their factory. If buyer’s don’t arrange for pickup in a timely manor, the goods can really get in the way.
If they quote FOB Price on the other hand, they can rid themselves of the burden. And it’s easy for them. The extra cost to add FOB is generally a fixed cost. They don’t have to spend a lot of time calculating this extra cost. At the same time, it also adds value to the buyer as one less step they have to arrange.
Factors that effect price:
The FOB price is affected by several factors, including the cost of raw materials, labor, and manufacturing. It can also be influenced by market conditions, such as supply and demand, and currency fluctuations.
Buyers and sellers need to negotiate the terms of the contract before finalizing the sale. The FOB price is just one component of the overall cost of goods (Called “Landed Cost”), and buyers need to factor in additional costs, such as shipping and insurance, when evaluating the total cost of the transaction.
It is important to note that FOB price only applies to goods that are being shipped by sea. For other forms of transportation, such as air or land, different terms are used to determine the price of goods and the responsibilities of both parties.
Risk:
One important consideration when negotiating FOB price is the risk associated with the goods during transportation to the ship. The seller is responsible for ensuring that the goods are delivered in good condition and should take necessary steps to protect the goods during that leg of the transportation. If the goods are damaged or lost during transportation, the seller may be liable for any damages or losses incurred by the buyer.
But it is then up to the Buyer to take it from there. There are still a lot of legs left in their product’s journey. Buyers should have a good freight forwarder handle the rest of the journey, including buying cargo insurance.
Payment timing:
Another consideration is the timing of payment. In some cases, the buyer may be required to make a partial or full payment before the goods are shipped. In other cases, payment may be made upon delivery. The terms of payment should be clearly outlined in the contract to avoid any confusion or disputes.
Price considerations:
It is also important to consider the impact of FOB price on the overall competitiveness of the goods. If the price is too high, buyers may choose to source the goods from alternative suppliers or seek alternative transportation methods. Sellers should consider the market conditions and the pricing strategies of their competitors to ensure that their price is competitive and attractive to buyers.
But on the flip side, the FOB part of a quote is generally pretty fixed from supplier to supplier. Assuming a similar region and distance to the port itself. It’s more important for a Buyer to make sure any quote they are comparing too, also has the same terms. For an apples-to-apples comparison.
Conclusion:
FOB price is a critical concept in international trade that determines the price of goods at the point of shipment. It is an essential component of contracts between buyers and sellers and should be negotiated carefully to ensure that both parties are meeting their obligations and achieving a fair deal. By considering factors such as risk, payment terms, and competitiveness, buyers and sellers can negotiate a mutually beneficial price and achieve a successful transaction.
Be sure to check out our other articles on Logistics to get a much clearer picture of FOB pricing and how it can affect your Importing.