85 Terms and conditions of transportation

Terms and conditions of transportation

Freight terms

It is important for Procurement to understand the freight term so that they could negotiate with suppliers before entering into an agreement:

1.  Prepaid means the shipper (supplier) pays the freight.

2.  Collect means the consignee (buyer) pay the freight.

3.  Prepaid/collect means that there is a shipper’s prepayment portion of the freight and the consignee is responsible for the balance of the payment.

4.  Third party establishes that neither the shipper nor the consignee pays the freight. The legal payment function may or may not belong to the third party. The obligation is determined from the parties indicated on the bill of lading contract. Unless the payment party is a party to the bill of lading contract, it has no responsibility for payment and no legal obligation.

5.  Prepay and add means the shipper advances the charges to the carrier and then bills the consignee an amount that approximates or equals the actual freight charges.


Terms of sale/purchase

The terms of sale or purchase are used to identify the passage of title and are usually expressed by F.O.B origin or F.O.B destination.

1.  F.O.B origin means the title to merchandise passes at the time and place of pickup.

2.  F.O.B destination means the title to the merchandise passes the time and place of delivery.


Negotiation and evaluation of freight terms and sales/purchase terms

It is important for Procurement to negotiate and evaluate the freight terms and purchase terms together with the pricing of goods. A term of Prepaid or F.O.B destination may not be the best term in all the scenarios, even though the supplier pays a bigger portion of transportation cost. For example, a supplier may offer you freight terms of prepaid but the unit price of goods may be quite high. In contrast, another supplier may offer you a lower pricing of goods but freight terms of collect. It is true for the purchase terms as well. For example, a supplier may offer you a lower pricing of goods but the purchase terms of F.O.B origin. Therefore, it is important for Procurement to weigh each option of freight terms and purchase terms together with pricing of goods. However, this also depends on the organisation’s negotiation power with suppliers and carriers. If Procurement’s organisation manages to negotiate a cheaper rate with the carriers, it will be beneficial for them to buy with F.O.B origin and then, negotiate lower pricing of goods from supplier. However, in cases where Procurement’s organisation may be a the strategic or core customer to a certain supplier, the supplier may even offer prepaid terms on top of the competitive pricing of goods.


Bill of lading

It is the key document in the goods’ movement. It contains information about the products being shipped including weight and quantity, the origin of the shipment, contract terms between the carrier and shipper, and the final destination. It is important for Procurement to know that each sea shipment must have a bill of lading, which is the contract, stating the legal liabilities of all parties and no changes to the original bill of lading can be made unless approved by the carrier’s in writing on the bill of lading. It is crucial for Procurement to work with the supplier and carrier to manage the bill of lading so that sea shipments could be cleared smoothly.


BLC 304/05 Procurement Management Copyright © 2009 by Wawasan Open University. All Rights Reserved.


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