People ask me the meaning of the term f.o.b. more than anything else. Many people do not even know what it stands for.

I was recently at a prominent shipper in the Northeast U.S. and a high-level purchasing person actually called it “fob,” rhyming with “bob.” At that moment, I knew I needed to explain how this often-misused term actually is defined.

You should know that f.o.b. stands for “free on board” and indicates the price for goods including delivery at the seller’s expense to a specified point. In the purchasing world, f.o.b. is also used with an identified physical location to determine the responsibility for the payment of the freight charges and the point at which title for the shipment passes from the seller to the buyer.

In other words, f.o.b. is a purchasing term that is used between suppliers or customers. Every vendor and customer should have the F.O.B. requirements specified.

Here’s how F.O.B. terms are used. This identifies who’s paying for the freight and who owns it at which point. The terms are used in four ways in a purchasing agreement.

1. F.o.b. origin, freight collect: The “origin” part means that the buyer assumes title of the goods the moment the freight carrier picks up and signs the bill of lading at the origin pickup location. The buyer also assumes risk of transportation and therefore responsible for filing claims in the case of loss or damage. “Freight collect” means the buyer is responsible for the freight charges.

2. F.o.b. origin, freight prepaid: “Origin” refers to the same as above but the “freight prepaid” part means the seller is responsible for the freight charges.

3. F.o.b. destination, freight collect: “Destination” means seller retains title and control of the goods until they are delivered. The seller selects the carrier and is responsible for the risk of transportation and filing claims in case of loss or damage. The “freight collect” part means the buyer is responsible for the freight charges.

4. F.o.b. destination, freight prepaid: In this case, “destination” means the same as above and “freight prepaid” means the seller is responsible for the freight charges.

Now you may wonder how this affects your company.

It can affect you in some serious ways if you are not careful. I was recently with a distributor who receives a lot of freight from various vendors. He has a policy on his dock to tell his receiving staff that if an order has the slightest sign of damage to refuse the order. He does not want to file a claim or deal with the process of ordering replacement parts for potential damages. So he just tells his people to refuse the shipment at the receiving dock.

Concerned about what this distributor was liable for, the first thing I wanted to find out was what the f.o.b. terms are with his vendors. The vendor who he refused the most shipments from had the terms “F.o.b. origin, freight prepaid.” This meant that although his vendor was paying the freight, he owned the freight, and had responsibility of loss or damage as soon as the carrier picked it up. So by refusing the freight, he was returning something that he actually owned at this point.

There are a few reasons why this is it not smart to refuse a shipment when it is under these terms. First of all, in this case his vendor has no reason (besides being a nice guy) to accept those goods back. The distributor owned them as soon as the trucking company picks them up. So by returning a shipment, this distributor is just raising the risk for more possible damages by going through the carriers’ system back to the vendor.

Technically, when an order gets delivered back to a vendor, they could refuse it because they do not own it at that point.

Luckily for distributor, his vendor is very nice (maybe too nice). They except the returned items and file the claims on his behalf and are quick to replace orders. But they are just being nice and this distributor could get it shafted at some point if the vendor decides to be not nice.

In this case, the distributor should be accepting these partially damaged shipments (since they technically own them) and have an inspector come in to check them out. If there can be a replacement, the distributor should order the parts and have them replaced. All this should be covered by the carrier via a claim settlement.

The other option is to change the terms to “f.o.b. destination, freight prepaid.” That would allow the distributor to refuse the shipment because they do not own it until it is delivered properly.

The bottom line is that these terms should be paid attention to. There are a lot of suppliers and vendors that try to do the right thing by their customers, regardless what the freight terms are. But that doesn’t mean you should ignore what your terms are with your vendors and customers.

If you are a shipper, make sure the terms are the way you want them to be. You may want them to be “f.o.b. origin” so your customers own the goods when they leave your door. Or you may want to own them until they are delivered intact.

The same goes for companies who receive a lot of goods. Make sure the terms suit your needs.

George Muha is sales manager for Logistics Management Inc., a Chester, N.J.-based company that specializes in helping companies to reduce their freight cost. To contact Muha, call (908) 879-2978 or e-mail gmuha@lmiservices.com.