In the U.S., the initials FOB stand for “Freight On Board”. “FOB…” is used here to establish which party, the buyer or seller, pays the shipping costs. FOB terms are typically either “FOB Shipping Point“, which means the buyer must pay the shipping, or “FOB Destination“, which means the seller must pay the shipping costs. The “FOB” terms of a given shipment of goods must be agreed to by the buyer and seller, either through a pre-negotiated contract, or through the seller’s acceptance of the terms spelled out in the buyer’s purchase order (PO).
If someone had told me even six months ago I’d be writing an essay about FOB terms I wouldn’t have believed them. It seems like the most boring topic imaginable. So what has led me to this boring topic? Have I finally run out of things to write about?
No. Over the summer, while working on other RxTrace essays, I got to thinking about what determines the exact momemt when a legitimate buyer of drugs in the legitimate supply chain becomes the actual owner of the units that the seller ships to them. And that question led me to the FOB terms, because in addition to establishing who pays for the shipping, the FOB terms also establish when the transfer of ownership occurs. This will be a very important question once a shipment falls under the coverage of a pedigree law like the one in California. All of a sudden, the topic of FOB terms isn’t so boring.
“FOB Shipping Point” means that the buyer takes possession of the drugs on the sellers shipping dock. “FOB Destination” means that the buyer takes possession on their receiving dock. The reason this will be very important in the future under most U.S. pedigree laws is that the pedigree must be updated to reflect every change of ownership.
“FOB SHIPPING POINT” WILL BE TOO COSTLY FOR THE BUYER
Today, I’m told that most shipment of pharmaceuticals in the legitimate supply chain fall under terms that specify “FOB Shipping Point”, but there’s a problem with that. If the buyer takes possession of the drugs before they leave the seller’s shipping dock, there will be no opportunity for the buyer to analyze the seller’s pedigree(s) prior to taking possession. That will be dangerous, even when buying from a fully legitimate and trusted source. That’s because if there is some error in, or related to, the pedigrees, it won’t be discovered until after the buyer takes possession. Theoretically, once the buyer takes possession of something, they can legitimately be invoiced for it.
But under a pedigree law, the buyer will not be able to further sell or dispense a package of a drug unless that buyer possesses a valid and complete pedigree for that specific package. Taking possession of a shipment of drugs before the buyer can confirm that they have received valid and complete pedigrees for the exact product (that is, the exact package serial numbers) that they received could mean that the buyer would be stuck with unsellable product for the period of time it takes the seller to correct the error. Or worse, if the error cannot be corrected for some reason, or if the seller is uncooperative, the buyer could end up being obligated to pay an invoice for product that cannot be sold or dispensed. That is, the drug would be worthless.
OH COME ON, HOW LIKELY IS THAT TO EVER HAPPEN?
Large wholesalers in the U.S. buy large quantities of pharmaceuticals from many hundreds of manufacturers–some big, and some small. Today, errors happen more times than anyone would wish, but imagine how many errors will occur once every individual package of drugs must have a unique serial number on it, and an accurate and complete pedigree must match every one of them. Errors are going to be even more common, at least initially, and the typical resolution when working under a pedigree law will take much more time than the typical resolution does today. In almost all cases, it will be the seller who will have to take actions to resolve these errors. While the buyer is waiting for that resolution, the drugs will have to sit in their “quarantine” area.
Whomever owns the product while this, sometimes lengthy, resolution process is taking place will determine who ends up paying the carrying cost for it. When the seller is paying that cost, it seems reasonable to expect that the resolution will be given a higher priority than if the buyer is paying for it. The buyer should do everything in their power to avoid being forced to pay an invoice for drugs that did not arrive with a valid and complete pedigree suitable for re-selling or dispensing them. Therefore, the buyer should always demand terms of “FOB Destination”.
BUT IS “FOB DESTINATION” ENOUGH?
At this point, I have to remind you that I am not a lawyer so don’t take my word for it. Check with your corporate legal department to see if this line of thinking has any merit. But it seems to me that “FOB Destination” may not be enough. That’s because once it hits your receiving dock, “FOB Destination” appears to mean that you now own it, pedigree or not. Even if you still haven’t received proper and complete pedigrees for the merchandise, the transfer of ownership will probably still occur.
So under a pedigree law, do we need an entirely new FOB designation? How about “FOB Destination And Reception of Valid Pedigree(s)“? On the other hand, this should probably be established as part of future Distribution Services Agreements (DSA’s)–the pre-negotiated contracts between a buyer and seller–and not left up to the boilerplate FOB terms identified on the PO.
Either way, you’d better plan to clearly spell out and agree on the FOB terms before you buy. It’s not just to determine who pays for the shipping anymore, and it’s no longer a boring topic to some of us.
2 thoughts on “Pedigree Will Change FOB Terms”
Dirk – Very good points.
The specific definition of ownership will be critical in the rulemaking in California as well as any bill considered at the federal level.
A set of follow on issues involves the use of 3PL’s and contract manufacturers and specifically when title changes.
Once you really get into implementation, more questions seem to emerge constantly.
Comments are closed.