LIFO and FIFO are well known inventory valuation methods in accounting. In the accounting world, FIFO (first in, first out) and LIFO (last in first out) are costing methods used to value the cost of goods sold and ending inventory. With FIFO, the oldest inventory items are recorded as sold first, and with LIFO, the newest inventory items are recorded as sold first. These are methods of inventory accounting and have to do with how your inventory is assumed to be tracked and recorded as sold. The cost-flow assumptions do not necessarily match the actual physical flow of goods; they are merely used to assign costs to inventory units.
But in warehousing, FIFO and LIFO have to do with how inventory actually moves through your warehouse. Warehouse inventory management is an important part of your logistics, and it’s all about optimization and making sure your products are in the right place at the right time. So when do you use LIFO and when do you use FIFO?
FIFO Inventory Management
Using the first in, first out method ensures that the first stock that comes into your warehouse is the first out. If you have perishable goods (food, medicine, cosmetics) or products that could become passé (fashion) or obsolete (technology), FIFO is definitely the way to go. To illustrate FIFO, picture the dairy cases in most supermarkets: the milk is stocked from the back, pushing the oldest products to the front so that the oldest milk cartons are the first sold. With the proper execution of a FIFO system, you will always achieve good stock rotation.
Regardless of which accounting convention is chosen, FIFO describes the actual flow of inventory in most companies. Few companies sell newer items before selling older stock they are holding.
LIFO Inventory Management
The last in, first out method of inventory management is the exact opposite of FIFO. With LIFO, the most recent stock that comes into your warehouse is sent out first. The new inventory takes priority over old stock and is used up first. If you are storing homogenous items which do not expire or perish, LIFO could be a good option. LIFO rack systems include:
- Push Back (individual lanes are LIFO, but see how push back rack systems can be FIFO here)
While we can’t help you with your accounting, we can help you determine the best material handling systems for optimizing your facility. We understand the impact of operational costs on any size business and we’re committed to helping our customers increase profitability through lower material expenditures and cost efficient design solutions. For more information, contact us here, or call 800-230-8846 to speak with a material handling expert now.