When and Why You Should Use the FIFO Method in Your Warehouse

If there’s one thing that’s true in warehousing, it’s that you need a strategy. The FIFO procedure is one way you can manage your warehouse. Learn more about this method and how to implement FIFO in your warehouse.

Key Takeaways:

• First In, First Out (FIFO) is a warehousing and distribution method that involves shipping out your oldest stock first when orders come in. 
• This method is best used for products with limited shelf lives, such as batteries, cosmetics, and pharmaceuticals. 
• FIFO contrasts with First Expired, First Out (FEFO) and Last In, First Out (LIFO) distribution practices.
• Third-party logistics providers (3PLs) can offer warehousing and shipping solutions for your business, including determining if FIFO is your best distribution option.

Read on to learn about FIFO procedures in warehousing and how they can help your business succeed.

What is FIFO?

In terms of warehouse management, FIFO stands for First In, First Out. Essentially, when a customer places an order, the oldest stock of that product is shipped out first. The newest inventory stays until the oldest is shipped out to stores or consumers.

This distribution strategy is particularly effective for products that have an extended, but fixed, shelf life. Examples of such products include:

• Batteries 
• Makeup 
• Nutraceuticals
• Vitamin supplements 

In the most simple terms, FIFO warehousing compares to the method you might use to keep your refrigerator at home organized. When you’re running low on milk, you likely buy a new gallon and place it behind the almost empty gallon. You wait until the old milk is gone before moving the new milk to the front.

FIFO can be a cost-effective method to manage warehouse inventory. It allows retailers and ecommerce businesses to get products to stores and customers quickly, while making sure they aren’t holding onto old inventory.

How Do FIFO Procedures Compare to Other Warehousing Methods?

The FIFO method is often compared to FEFO and LIFO methods of warehousing. 

What is FEFO?

FEFO stands for First Expiring, First Out. With this method, the inventory that expires first is sent out to stores or directly to consumers first. This might be the strategy for you if your products expire quickly. Many certified food grade warehouses rely on FEFO procedures to keep inventory fresh.

Fast-moving consumer goods are great candidates for FEFO warehousing methods. Warehouses storing pharmaceutical products and medicines might take advantage of this procedure to quickly distribute inventory.

What is LIFO?

LIFO stands for Last In, First Out. In this case, the products that are moved into the warehouse most recently are shipped out first. This means the new stock takes precedence over the old stock.

From a commodity standpoint, this method is only an option for products that don’t expire. Bricks, sand and coal might all be warehoused with LIFO procedures. These products don’t expire and in many cases, the new batch is placed on top of the old batch in the warehouse.

From an accounting standpoint, businesses sometimes use LIFO to calculate their cost of goods sold (COGS) for financial records. Doing so can make a business appear more profitable than it actually is using the more accurate FIFO method under certain circumstances. In fact, LIFO as an accounting practice is prohibited in the European Union, Japan, and several other major economic powers. 

FIFO vs FEFO vs LIFO

The warehousing procedure you choose depends on the products you’re distributing and, to a lesser extent, your preferred accounting practices. With products that have a limited lifespan, FIFO might be the best option. Products move quickly through the warehouse and inventory costs are reduced. 

FEFO is also a solid method for expiring products. LIFO only applies to stable goods that don’t apply to any timeline. 

For ease of reference, the following table breaks down the essential aspects of these methods and examples of goods to which they can be most successfully applied.

Selecting a method for warehousing depends on the products you’ll be storing. Before settling on FIFO, it’s worth taking the advantages and disadvantages of this method into account.

Pros and Cons of Choosing FIFO Procedures

Pros

There are many benefits of choosing a FIFO procedure for your warehouse, including the five I’ve outlined here. 

1. Avoid Spoiled and Expired Products: When you ship out the oldest stock first, you increase the chance that the item will leave the warehouse before it reaches its expiration date. 
2. Reduce obsolete inventory: Obsolete inventory refers to products that are outdated and no longer useful to consumers. When products are moving in and out of the warehouse quickly, you can reduce the chances of an item losing its value due to obsolescence. 
3. Make Quality Control Easy: Shipping products in the order you get them makes it easy to track deliveries. If a product is bad, you know what supplier brought it in and when it was received.
4. Minimize the Impact of Inflation: FIFO can reduce the impact of inflation on suppliers, retailers and ecommerce businesses if the older inventory cost less than that which was most recently purchased. 
5. Keep Current Inventory Value: As items purchased are pulled from shelves, the inventory system includes the most recently purchased inventory. This helps make sure that the inventory value and cost of goods sold reflects current market prices.

You might find that FIFO gives a more accurate indicator of the value of your warehouse stock. 

Cons

Even though there are many benefits of choosing a FIFO system to manage your warehouse, you might find a few cons depending on your situation. These include:

• Reworking your Warehouse Space: When implementing FIFO procedures, you’ll need to make the oldest products most accessible, while reducing materials handling to make the system most efficient. This might require rearranging how goods are stored in the warehouse.
• Inflexibility in Some Situations: Some products, like food and pharmaceuticals, expire very quickly and require FEFO warehousing. On the other hand, goods like bricks or building materials might benefit from LIFO procedures for accounting purposes.
• Requiring Advanced Inventory Tracking: The amount of products entering and exiting the warehouse, along with the accessibility of stock and the layout, means that you might need to upgrade your tracking methods when implementing FIFO.
• Difficulty Scaling: Thousands of SKUs at different locations can mean constant updates to your numbers. The larger your inventory, the more difficult tracking it can be.

It is important to weigh the pros and cons when considering choosing a warehousing method. FIFO procedures come with both advantages and disadvantages. Overall, if you’re warehousing goods with an expiration date, FIFO standard operating procedure might be for you.

How to Implement FIFO in a Warehouse

In most cases, when you’re warehousing products with a limited shelf life, you need a FIFO-specific warehouse management system (WMS) that involves specific procedures during the put away and picking process. Implementing these procedures in your warehouse can be a savvy business move.

Dating Your Product

One step in implementing FIFO procedures is determining the age of your products. There are several ways you can do this. Consider the following when aging the product in your warehouse:

• Expiration Dates: Looking at these dates is one way you can find the age of your products. Using the dates marked on the products can make it easy to see which products entered the warehouse first and should leave first. 
• Lot Control: Grouping products that arrive at the same time together in your warehouse is a form of lot control that makes it easy to determine the dates on which it arrived. You can further simplify lot control by using dated lot labels. 
• Sequential Pallet Licensing: You can also implement FIFO procedures by using sequential pallet licensing. This involves using sequentially dated plates to identify pallets. 

Overall, creating a FIFO warehouse layout that makes operations more efficient will go a long way toward turning over items faster. The above tips can help you date and age your products so you can easily implement FIFO procedures.

Related: How Pallet In Pallet Out Can Improve Your Inventory Flow

Implementing FIFO Procedures

There are a few other considerations to make when implementing FIFO procedures. Things you can do to make the process easier include:

• Label Items Efficiently: Using a clear labeling process like sequential pallet licensing can help you identify the oldest items in the warehouse so you know what to ship out first. 
• Make Older Items Most Accessible: When implementing FIFO procedures, it is important that the older items remain the most accessible. Make considerations in the put-away process to ensure this.
• Stack the Pallets Appropriately: Make sure new pallets are not stacked on old pallets. Should older pallets be stored under new pallets, more material movement is required for FIFO procedures. Stacking pallets appropriately makes the fulfillment process easier.

There are a number of different options available to you, including FIFO, FEFO and LIFO. Leveraging the best strategy for your warehouse can help you reduce costs through efficiency. 

Let Fulfillment and Distribution Help With FIFO Warehousing

One of the easiest ways to implement any new warehousing strategy, including FIFO, is by working with a third-party warehouse that stores and ships goods on your behalf. In fact, you may find it beneficial to outsource all of your logistics needs to a 3PL so you can focus on customer satisfaction, marketing strategies, and other business goals. That’s where we come in. 

Fulfillment and Distribution can also handle the next step in the supply chain by shipping the freight for you to retailers. With a 99.5% on-time rate and real-time visibility on shipments, we can give you the confidence that your products will be moved quickly.

Our list of logistics services includes:

• Full 3PL warehousing
• Kitting
• Expiring product fulfillment
• And more

Call 866-989-3082 or contact us online today to find out how our knowledge, experience, and resources can offer your business the solutions it needs.