What is FIFO? First In, First Out Method in Inventory Management

What is FIFO? As an essential part of efficient inventory management, the First In, First Out (FIFO) system guarantees that a business’s oldest stock is used or sold before the freshest stock. Companies can benefit from logistics platforms that provide efficient inventory tracking and distribution management to maintain a smooth FIFO system.

This strategy is vital for companies that deal with perishable commodities or products with short shelf lives.  Statista's research shows that FIFO systems reduce waste by 25%, underscoring its importance in reducing product spoiling and depreciation.

But what is FIFO, and how can businesses use it to their advantage? In this article, we’re giving you the basics on FIFO and how it works in everyday inventory management. Whether you run a small retail store, a warehouse, or a large-scale logistics operation, understanding FIFO can help you reduce waste, optimise storage, and improve cash flow.

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What is FIFO?

FIFO, or First In, First Out, is a widely used inventory management method that requires staff to sell or dispatch older stock before newer stock. This system helps businesses maintain product quality, reduce waste and optimise storage efficiency by keeping inventory flowing.

Understanding the FIFO inventory method helps businesses improve stock control and reduce waste for a smoother flow of goods.

How FIFO Works

Now that you know what FIFO is, the next question is how it functions in everyday inventory management. 

The core principle of FIFO is simple: items that enter inventory first should be the first to leave. This is particularly important for industries dealing with perishable or time-sensitive goods, where expired or outdated stock can lead to financial losses and compliance issues.

Supermarkets, for example, use FIFO by shelving newer products behind older ones on shelves, encouraging customers to purchase items with the earliest expiration dates first.

FIFO can be useful in certain businesses. Using FIFO in pharmaceuticals helps maintain medication efficacy and regulatory compliance. Retail and fashion businesses are also able to prevent outdated stock buildup with FIFO. Businesses in the manufacturing industry can use FIFO to optimise raw material usage and maintain product quality.

To understand what the FIFO inventory method is, imagine a business that rents out office furniture for corporate events. When chairs, tables, and desks return from a rental, they are cleaned and placed back into storage. 

Using FIFO, staff send out the furniture that has been in storage the longest for the next booking first, guaranteeing even more wear and tear across all assets. This prevents newer items from being overused while older ones remain idle, extending the lifespan of the entire inventory.

FIFO differs from LIFO (Last In, First Out). In LIFO, the newest inventory is used or sold first instead of the older inventory. While LIFO can sometimes be beneficial for businesses facing rising costs, it can also lead to potential waste as it leaves older stock sitting unused. 

FIFO, on the other hand, helps businesses maintain a more organised inventory system, ensuring that products or assets are consistently cycled through rather than left to degrade over time.

The Role of FIFO in Preventing Stock Waste

Understanding FIFO and how it works in inventory is key to efficient stock control. It is widely applied in warehouses, retail stores, and logistics operations to keep stock moving efficiently and prevent declining sales.

Warehouse teams implement FIFO by arranging stock so older inventory is easily accessible and dispatched first. Pallet racking systems and designated picking areas help facilitate smooth stock movement. 

Logistics and distribution centres also rely on FIFO to make sure perishable or time-sensitive goods reach customers in optimal condition, with transport schedules and warehouse layouts designed to prioritise older stock.

Businesses use various stock rotation techniques to maintain FIFO effectively. Staff can determine which goods should be used first with the use of labelling and expiry tracking.  Efficient rotation is encouraged by appropriate shelving and storage configurations, such as positioning older items at the front or on top..

Software like Couriers & Freight’s tracking system can further support FIFO by monitoring stock movement in real-time and generating reports to identify slow-moving stock before it expires. 

Benefits of FIFO for Businesses

The FIFO inventory method offers several key advantages for businesses:

• Minimising Waste and Preventing Losses
  FIFO ensures that older stock is used or sold first, reducing spoilage and preventing losses from expired or obsolete products. This helps businesses maintain product quality and avoid unnecessary waste.
• Improving Cash Flow and Profitability
  Selling older inventory first keeps goods moving consistently, reducing the risk of holding onto slow-moving stock. This also allows businesses to sell products at their optimal value, rather than resorting to heavy discounts or disposal due to expiration.
• Enhancing Warehouse Efficiency
  A structured FIFO system keeps inventory organised, preventing clutter and making it easier to track stock levels. This streamlines operations, reduces holding costs, and ensures better compliance with industry regulations through accurate record-keeping.
• Ensuring Proper Stock Rotation for Perishable Goods
  For businesses handling perishable or time-sensitive inventory, FIFO guarantees that products are shipped in the right order. This prevents the sale of outdated goods, enhances customer satisfaction, and upholds quality standards.

Challenges with FIFO

While FIFO is a widely used and effective inventory management strategy, businesses can encounter several challenges when implementing it. 

One common issue is maintaining proper stock rotation. This is especially obvious in warehousing, where tracking inventory manually can lead to errors. A solution to this is using automated inventory management systems that track product movement and ensure the oldest stock is dispatched first.

Another challenge is human error, as employees may inadvertently place newer stock in front of older items. Clear labelling, staff training, and well-organised storage layouts can help prevent such mistakes. 

Businesses operating in limited storage spaces may struggle to apply FIFO effectively. By following FIFO, companies can optimise their shelving systems and regularly audit stock levels to improve efficiency.

Implementing FIFO for Better Inventory Management

The key to optimising the benefits of FIFO is proper implementation, suitable tools, and continual staff training.

Businesses can increase profitability, decrease losses from old or expired stock, and streamline operations by understanding and successfully implementing FIFO. Using FIFO guarantees a more sustainable approach to stock management and a smoother inventory movement, regardless of how big or small a business is.

Implement FIFO for a Leaner Supply Chain

Reduce waste and keep your stock moving seamlessly. Couriers & Freight’s platform helps you apply FIFO quickly and efficiently.

Get a Quote Now