LIFO vs FIFO: the method to manage your stock

in Business Hacks

by
Sophia Eribo (ser)

Which system will fit your inventory and warehouse?

"Too much of a good thing can be wonderful."

Mae West

Great logistics help your company to edge out the competition. It's all about making sure your products are in the right place at the right time so your company is the one customers flock to. Warehouses may not seem like the most important or glamorous places, but warehouse management is the backbone of logistics. And, you may not have given it much thought, but how stock moves through your warehouse is key.

Hot on the heels of some really great blog posts about warehouse management and inventory management written by Sam and Tino, I just wanted to (hopefully) clear up an age-old rivalry in the world of stock management. Well, it's not really the epic battle I'm describing, but it is a question that comes up.

FIFO and LIFO are well-known when it comes to accounting, but they can also be used for inventory management. But first it's important to understand what they are.

FIFO - First In, First Out

This is as deceptively simple as it sounds. Following this method, the first lot of stock that comes into your warehouse should be the first that goes out - that is, sent into stores or sent directly to customers.

LIFO - Last In, First Out

Conversely, this method means that the most recent stock to come into your warehouse should be sent out first. The new stuff is used up first, taking priority over old stock.

So, FIFO and LIFO are two opposite methods of moving stock through your warehouse.

Benefits of FIFO

"First in first out" is a great strategy if your products have a shelf life. That can be perishable goods like food, products that have a cycle like fashion, or products that could become obsolete like anything to do with technology. With these, you definitely want to move whatever comes into your warehouse first. If it sits on shelves while you sell newer things, you can (and probably will) lose money as it expires, goes out of fashion or is no longer the latest model. Think about it with something as simple as milk. When you take the milk from your warehouse and put it in the store, you want the first lot of milk at the front of the refrigerator. There's no use putting the freshest milk in front - it will cover up the first lot of milk, customers will buy it and the milk behind will go sour.

Benefits of LIFO

Understanding why "last in first out" is good option is a little less obvious. The main benefits of using this method are connected to accounting, but it's worth giving these mention here - especially if your products are goods you manufacture. Using LIFO allows you to match your most recent costs against your revenue. When the costs of manufacturing your product are rising, this is a great approach. If this is the case, your most recent products cost you the most to make. If you sell the ones made more cheaply first, you underestimate the cost of production and overestimate your profits because you're working with old information rather than what's happening right now. So, using LIFO, you will have more reliable and better quality information on your earnings.

This directly leads to another benefit - tax. If you have better reporting of your profit (less overestimating), you will pay less tax. And that's something business owners are always happy to hear!

You will also be less affected by any fall in the market price for the goods you manufacture, because you will be selling your products that cost the most to make first. Therefore, you'll have less write-downs.

When it comes to LIFO and warehouse management, this method is really only used for homogenous goods - like coal, sand, stone or bricks. When one batch comes into the warehouse, it sits on top of the old batch and the newest is the first to be used. This method also comes in handy when you don't have enough space in your warehouse to really rotate the batches - if space is tight and your products don't have a shelf-life, why give yourself the extra hassle?

And the winner is...

There really is no right or wrong answer. It depends on what your products are. For perishable goods or products with a life cycle or life span, it always has to be FIFO - or you'll lose money.

For other products, you might need to get together with your accountant or whoever takes care of the finances to work out if LIFO is the best way to move stock in and out of your warehouse.

Whichever one you choose, make sure the stock layout in your warehouse reflects this so it's quicker and easier to keep things flowing. If you’re using LIFO, you’ll want “Push-Back” or “Drive-In” shelving and pallet racking.  This allows you to put the newest product at the front, pushing back the older product on the shelves.  When you need to retrieve product, the latest is right there on the end of the shelf, ready to be removed.

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