FIFO (First In, First Out): The essential inventory management method

What is FIFO?

The FIFO principle is based on management where the first elements introduced into an inventory are the first to be used, sold or shipped. This means that in terms of inventory, the oldest items will be processed before the newest items. This system is commonly used in industries where product shelf life management is crucial, such as in food, pharmaceutical and electronics sectors.

Examples of FIFO usage

Food inventory management: Perishable products, like fresh products, must be sold before they reach their expiration date. FIFO ensures that oldest products are used or sold priority.

Accounting and inventory valuation: In accounting, FIFO is used to value inventory and determine cost of goods sold. In periods of price increases, this method can result in lower cost of goods sold and consequently higher profits.

Logistics: In logistics, using FIFO allows managing inventories to avoid obsolete or unusable products, which improves efficiency and reduces losses.

Optimize your space with our Tubular Shelving

Why is FIFO important?

FIFO presents several key advantages for companies, including:

Loss reduction: By using the FIFO method, you minimize the risk of stocking expired or obsolete products. This is particularly relevant in sectors where product shelf life is limited.

Workflow optimization: The FIFO approach ensures that inventory is used in correct order, which contributes to smoother and more efficient inventory management.

Regulatory compliance: For some industries, especially food and pharmaceutical, FIFO is often a regulatory requirement, to ensure oldest products are used first and contamination or non-compliance risks are minimized.

FIFO in accounting: how does it work?

In accounting, the FIFO method affects inventory valuation and cost of goods sold calculation. In periods of inflation, for example, older products, which were often purchased at lower prices, will be sold first. This allows the company to record lower cost of goods sold, which can translate into increased gross profit.

How to implement FIFO in your company?

Product identification: Classify your products by entry date into inventory or by manufacturing date.

Rigorous tracking: Use computerized inventory management systems to track product receipt dates and ensure correct rotation.

Staff training: Ensure your teams understand the importance of the FIFO method and are trained to apply it correctly in their daily management.

Regular audits: Perform regular controls to ensure the FIFO method is being correctly applied and your inventory is being properly managed.

Conclusion

FIFO is an indispensable tool for efficient inventory management, cost optimization and reduction of risks related to product obsolescence. Whether you're in food, pharmaceutical or any other sector requiring rigorous inventory management, understanding and applying the FIFO principle can make a real difference for your company's performance.

If you want to learn more about implementing FIFO in your company or how this method can help you optimize your processes, don't hesitate to contact us.