Businesses across industries want to make their supply chains more efficient. From researching the newest technologies to improving relationships with suppliers, there are a number of steps you can take.
One strategy that has helped many businesses is FIFO. Used to optimize inventory management, it can help a business get the most out of its goods. But what is the meaning of FIFO, and how does it affect your inventory management processes?
What Does FIFO Stand For?
FIFO means “first in, first out” and is a method of using or selling the oldest items in stock. You can see FIFO in action in the grocery store. When stores stack their shelves, they tend to stack from the back so that the oldest items sit at the front of the shelves. This encourages consumers to pick up the items with an earlier expiration date. Businesses use similar methods throughout the supply chain to ensure the oldest goods are the first to be sent or sold.
The Role of FIFO In Logistics
The same principle is applied in the logistics industry by businesses that regularly have goods coming in and out of their warehouses. The goods that arrived first are the first ones to be shipped. It’s a simple principle, but one that many businesses have found to be hugely successful.
FIFO affects how goods are stored and the order they’re sent. It also affects how the cost of goods sold (COGS) is calculated. For example, imagine a supermarket bought 10 items from their supplier for $100, and then bought 10 more for $150. If they then sold eight units of that item while working on the principle of FIFO, the COGS would be $10 per unit, since the oldest items (the ones bought at $100) are sold first.
If the supermarket used average cost inventory methods instead of FIFO, the COGS would be calculated by taking the total cost of all 20 items and working out the average price of each unit. While this may give you a good idea of the COGS over the long term, FIFO gives you a more accurate idea of how much an item sold actually costs.
Why Is FIFO Important?
While businesses don’t have to follow FIFO practices, there are several benefits to doing so, such as:
- Meeting customer expectations: Without FIFO, there’s a higher chance that consumers might receive products close to their expiration dates. For example, people ordering prescription medications might receive medications that expire before they’re fully used.
- Reducing product spoilage: FIFO ensures that the oldest products are shipped first, meaning that it’s much less likely a product will expire in the warehouse while fresher products get sent out ahead of it.
- More accurate inventory taking: Since the order in which products are sent out is aligned with when they came in, inventory incomings and outgoings follow a very structured pattern. FIFO can make it easier to take inventory.
- Simpler planning and predicting: Because you know exactly what order things are going out in, FIFO helps you estimate when a particular item will be going out. This helps you predict how much stock you need to order each time.
Some businesses may prefer to operate under LIFO practices (last in, first out), which is the opposite of FIFO. Businesses that sell products that increase in price each year might benefit from LIFO. However, LIFO isn’t allowed under International Financial Reporting Standards (IFRS). While the United States doesn’t follow these standards, the EU, Canada, Russia and many other countries do.
How to Use FIFO in Your Supply Chain
If you want to implement FIFO in your business’s supply chain, you could consider outsourcing your warehouse management to a logistics company that’s well accustomed to FIFO practices. Beyond helping with FIFO, there are many other benefits to outsourcing your supply chain.
If you prefer to implement FIFO yourself, several changes can make the transition as smooth as possible.
1. Reorganize Your Storage System
You may need to rethink how you store your goods to ensure it’s easy to find the oldest items first. Consider how grocery stores stack their shelves from the back so customers can easily grab the oldest products from the front. If this isn’t a feasible solution in your storage facility, consider storing your goods by product type so you can quickly find the oldest product.
If your current storage facility isn’t equipped to implement a FIFO system, you may want to consider leasing or buying a warehouse that fits your business’s needs.
2. Make Older Items Easy to Identify
Being able to efficiently locate older inventory will make it much easier to keep your operations flowing smoothly. Clear signage or colored labels can make it easy to identify items by their batch, allowing your team to quickly find the correct goods. This step is key for goods that expire, such as fresh food and pharmaceuticals.
3. Audit Your Inventory Regularly
Once you’ve implemented FIFO, it’s important to carry out regular inventory audits. This will help you catch mistakes early and ensure that your inventory is being correctly stored, picked and shipped according to FIFO practices.
You may want to consider utilizing inventory management software to carry out your audits accurately and keep your inventory records up to date.
4. Train Your Employees
The previous steps will be obsolete if you don’t teach your staff how to label and store goods, select the right items for shipment, and adhere to the new auditing processes. It’s equally important that they understand why following FIFO protocols is important, as failure to do so can lead to goods staying too long and spoiling. It can also massively complicate inventory tracking.
Warehousing Solutions for Businesses of All Sizes
Whether you’re a global market chain with offices across the world or a local merchant with a single warehouse, managing your warehouse can be complicated.
At EMO Trans, we know this better than anyone. We’ve been helping businesses of every size manage their inventory since 1965, meaning we have decades of experience optimizing every aspect of supply chain logistics — and that includes FIFO inventory management. Whether you already use FIFO or want to introduce it into your business, we can help. You can rely on us for turnkey warehouse services and enjoy benefits like real-time inventory monitoring, scalability and reliable customer support. Our facilities are as large as 30,000 square feet, making them a great option for businesses of all sizes.
If your business could benefit from warehouse services and a robust warehouse management system (WMS), EMO Trans is an excellent solution. Request a quote for warehousing services today!