Inventory management is a crucial aspect of any business that deals with physical goods. One of the most effective methods for managing inventory is the FIFO (First-In, First-Out) method. FIFO is an inventory valuation and management method where the oldest inventory items are used or sold first. This principle ensures that the oldest products are utilised or sold before newer ones, helping to maintain the freshness and relevance of inventory.

Poor inventory management can have severe consequences, including financial losses, decreased customer satisfaction, delays in order fulfilment, and competitive disadvantages. By adopting effective inventory management strategies like FIFO, businesses can avoid these pitfalls and enhance their operational efficiency.

In this blog post, we’ll explore the details of the FIFO method, covering its benefits, providing real-world examples, and offering a step-by-step guide on how to implement it efficiently. We will also look at how FIFO can work in conjunction with other inventory management techniques to optimise inventory control.

What is FIFO?

FIFO, or First-In, First-Out, is an inventory management technique where the oldest inventory items are sold or used first. This method is particularly beneficial for businesses dealing with perishable goods, as it ensures that older products are sold before they spoil or become obsolete.

The FIFO method is straightforward: items are recorded and managed based on the order in which they arrive. The primary goal is to reduce waste and spoilage by moving older stock first. This method also simplifies the tracking of inventory costs, as the cost of goods sold is based on the oldest inventory prices, making financial reporting and cost accounting more accurate.

Benefits of using FIFO in warehouse management

●     Ensures product freshness: FIFO is essential for businesses dealing with perishable goods. By ensuring that the oldest stock is used first, companies can maintain the freshness of their products, which is crucial for customer satisfaction and safety.

●     Reduces waste and spoilage: By selling or using older inventory items first, FIFO helps in minimising waste and spoilage. This is particularly important for perishable goods, where delayed usage can lead to significant losses.

●     Improves inventory turnover rates: FIFO encourages a steady flow of inventory, leading to higher turnover rates. This not only keeps the inventory fresh but also improves cash flow, as products are sold more quickly.

●     Enhances accuracy in financial reporting and cost accounting: FIFO simplifies the process of tracking the cost of goods sold and inventory valuation. Since the oldest costs are used first, it aligns well with actual sales prices, providing a more accurate reflection of profit margins and financial health.

The most common businesses that benefit from the FIFO method

Supermarkets

Supermarkets use FIFO to manage perishable goods like fruits, vegetables, and dairy products. This method ensures that older items are sold first, reducing spoilage and keeping products fresh for customers.

Pharmaceutical Companies

Pharmaceutical companies utilise FIFO to manage their stock of medications. By selling older batches first, they minimise the risk of distributing expired drugs, ensuring compliance with health regulations and reducing waste.

E-commerce Businesses

E-commerce businesses dealing with products like electronics, fashion, or seasonal items use FIFO to manage inventory. This helps them clear older stock before it becomes outdated, maintaining a relevant product line.

Food and Beverage Manufacturers

These companies often deal with ingredients and products that have expiration dates. Using FIFO ensures that older ingredients are used first, maintaining the quality of the final products and reducing waste.

Cosmetic and Skincare Brands

Companies in the beauty industry use FIFO to manage products with shorter shelf lives, such as skincare and makeup items. This helps prevent products from expiring, ensuring customers receive fresh items.

Retail Clothing Stores

Clothing retailers use FIFO to manage seasonal inventory, ensuring older stock is sold before new collections arrive. This aids in managing sales and reduces the need for heavy discounts on unsold items.

How to use FIFO efficiently in your warehouse: step-by-step

1. Preparation

To implement FIFO, start by assessing your current inventory and identifying items that will transition to the FIFO method. This involves understanding your stock levels, product shelf life, and storage conditions. Clean and organise the warehouse to facilitate easy access to older stock, ensuring that items are easy to locate and move.

2. Setup

Create a layout plan that supports FIFO, such as using racking systems and designated zones for older and newer stock. Clear labelling and signage are crucial to distinguish between older and newer stock, making it easy for staff to follow the FIFO process. For perishable items, implement shelf-life management tools to track expiration dates and prioritise older stock.

3. Technology & tools

Utilise software solutions such as warehouse management systems (WMS) that support FIFO. These systems can automate the tracking of inventory and ensure accurate implementation of FIFO. Use barcode scanners and RFID technology for precise tracking of stock movement. Inventory management software provides real-time data and analytics, helping you monitor stock levels and turnover rates.

4. Best practices

Regularly train staff on FIFO procedures to ensure they understand the importance and execution of the method. Conduct periodic audits to ensure FIFO compliance and address any deviations. Maintain detailed records of stock movements, including dates of receipt and sale, to monitor FIFO adherence. Best practices for labelling and organising stock include using clear, easy-to-read labels and implementing colour-coding systems for different batches.

5. Measuring success

Track key performance indicators (KPIs) such as inventory turnover ratio and order accuracy rate to measure the success of FIFO implementation. Use tools for monitoring and analysing FIFO effectiveness, such as inventory management software that provides insights into stock levels and movement patterns. Regularly review and update FIFO procedures based on performance data to ensure continuous improvement.

Related inventory management techniques

FIFO can be effectively used in conjunction with other inventory management strategies to optimise inventory control. Some complementary methods include:

●     LIFO (Last-In, First-Out): Useful for specific industries but less common in perishable goods management. LIFO can be combined with FIFO for non-perishable items where newer stock needs to be prioritised.

●     JIT (Just-In-Time): Reduces inventory holding costs by receiving goods only as they are needed. Combining FIFO with JIT can help maintain a lean inventory while ensuring older stock is used first.

●     FEFO (First Expired, First Out): Prioritises items with the earliest expiration dates. This method is particularly useful for perishable goods and can be integrated with FIFO to ensure both freshness and minimal waste.

●     ABC Analysis: A method for categorising inventory based on importance, with 'A' items being the most valuable. Combining ABC analysis with FIFO ensures that high-value items are managed efficiently.

●     Cycle Counting: A continuous inventory auditing process that can be used alongside FIFO to maintain accurate inventory records.

How StoreFeeder can save you the work

StoreFeeder is a powerful tool designed to streamline and optimise your inventory management processes, particularly with the FIFO method. By automating key aspects of inventory tracking and management, StoreFeeder ensures that the oldest stock is used or sold first, maintaining product freshness and reducing waste.

For example, an eCommerce business selling perishable goods can use StoreFeeder to automatically manage expiration dates and ensure that older items are prioritised for sale, reducing the risk of spoilage. This automation not only improves inventory turnover rates but also enhances the accuracy of financial reporting by providing real-time data on stock levels and movement, ultimately saving time and reducing manual errors.

Implementing the strategies and tips provided by StoreFeeder can lead to significant improvements in productivity and cost savings. By leveraging StoreFeeder’s advanced features, such as real-time analytics, and seamless integration with various sales channels, businesses can achieve greater operational efficiency and better customer satisfaction. The intuitive interface and robust functionality of StoreFeeder make it easier to maintain optimal inventory levels, reduce holding costs, and ensure timely order fulfilment.

To see how StoreFeeder can transform your warehouse operations, evaluate your current processes and consider adopting these recommended practices and technologies. Enhance your eCommerce operations and experience the benefits firsthand by booking a demo today, or sign up for a free trial to see the benefits of StoreFeeder WMS.

Conclusion and next steps

By integrating these methods with FIFO, businesses can achieve optimal inventory control. For example, combining FIFO with JIT for non-perishable items ensures that inventory is kept lean while older stock is prioritised. Similarly, integrating FIFO with ABC analysis helps manage high-value items more effectively, ensuring they are always available and fresh.

In conclusion, the FIFO method is a powerful tool for managing inventory, especially for businesses dealing with perishable goods. Its benefits in ensuring product freshness, reducing waste, and improving financial accuracy make it an essential strategy for modern inventory management. By understanding and implementing FIFO, businesses can enhance their operational efficiency and achieve better inventory control, ultimately leading to increased profitability and customer satisfaction.