What is the FIFO Method and How It Works in Inventory Management

What is the FIFO Method and How It Works in Inventory Management

Table of content:

1. What is the FIFO Method and How It Works in Inventory Management
2. What is the FIFO Method?
3. How FIFO Works in a Warehouse Environment
4. Advantages of FIFO Inventory Management
5. Disadvantages of FIFO Inventory Management
6. FIFO vs FEFO: What’s the Difference?
7. Tips for Implementing FIFO Effectively
8. Implement FIFO with Storfox Inventory Management
9. Conclusion

Overview:

This blog explores the FIFO (First In, First Out) method in inventory management, explaining how it works in warehouse operations and why it’s essential for businesses that handle perishable or time-sensitive stock. It also compares FIFO with FEFO, highlights the pros and cons of using FIFO, and provides actionable tips to implement FIFO effectively using inventory management software like Storfox.

1. What is the FIFO Method and How It Works in Inventory Management

Managing inventory efficiently is the cornerstone of a profitable and streamlined warehouse operation. Among various inventory management techniques, the FIFO method—short for First In, First Out—stands out for its simplicity and effectiveness. Especially relevant in industries handling perishable goods or fast-moving consumer products, FIFO can significantly enhance operational efficiency and minimize waste.

In this guide, we explore the FIFO method in inventory management, how it works in warehouses, its pros and cons, how it compares with other methods like FEFO, and tips for successful implementation.

2. What is the FIFO Method?

FIFO, or First In, First Out, is a method of inventory management where the first stock item to enter your warehouse is the first one to be sold or used. It is widely used in sectors that handle perishable goods, seasonal inventory, or products with a fixed shelf life.

Besides its operational relevance, FIFO is also an accounting method used to determine the cost of goods sold (COGS). In accounting, FIFO assumes that older, and typically cheaper, inventory is sold first. This often results in a lower COGS and a higher reported net income during periods of rising prices.

3. How FIFO Works in a Warehouse Environment

Let’s break down how the FIFO method functions at different stages within the warehouse.

1. Inventory Receipt

When new stock arrives, it is placed behind the older inventory. This ensures that the oldest stock remains accessible and is used first. For example:

• Batch 1: 100 units of Product X at $10 each, received on January 1
• Batch 2: 150 units at $12 each, received on March 1

Inventory is shelved so Batch 1 is picked first during order fulfillment.

2. Inventory Organization

Efficient FIFO relies heavily on meticulous organization. All inventory should be labeled with the date received, unit cost, and quantity. This can be facilitated by inventory management software that uses barcodes or QR codes to track batches.

3. Order Fulfillment

When a customer places an order, the oldest inventory batch is picked first. For example:

• Customer A orders 50 units
• Fulfillment: 50 units picked from Batch 1

Subsequent orders will continue drawing from the remaining oldest stock until it’s depleted. Discover how Storfox helps streamline your warehouse with powerful automation. Explore Storfox features.

4. Inventory Replenishment

As inventory is consumed, new stock is added behind older stock to maintain FIFO flow. For instance:

• Batch 3: 150 units at $16 each received on May 1
• Placed behind Batch 2 to keep the picking sequence in order.

4. Advantages of FIFO Inventory Management

1. Reduces Inventory Waste

FIFO helps prevent items from expiring or becoming obsolete by ensuring older stock is sold first. This is particularly beneficial for industries dealing with perishable items like food, cosmetics, and pharmaceuticals.

2. Streamlines Operations

With clear inventory rotation, fulfillment becomes faster and more efficient. Staff always know which items to pick, minimizing confusion and errors.

3. Maximizes Profitability

During inflationary periods, FIFO often results in a lower COGS since older, cheaper stock is sold first. This can enhance gross margins and net income.

4. Improves Cash Flow

FIFO helps keep stock moving, reducing holding costs and freeing up warehouse space. This allows businesses to reinvest in other areas.

5. Disadvantages of FIFO Inventory Management

1. Requires Active Oversight

FIFO demands consistent labeling, monitoring, and organizing. Without proper systems or staff training, businesses risk reverting to inefficient picking patterns.

2. Not Ideal for Volatile Pricing

Industries facing fluctuating product prices may find FIFO less beneficial. Since older (cheaper) inventory is sold first, it may not reflect current replacement costs.

6. FIFO vs FEFO: What’s the Difference?

While FIFO is based on the order of inventory receipt, FEFO—First Expired, First Out—prioritizes products based on expiration dates.

Use Cases for FIFO

• Fashion retailers managing seasonal collections: FIFO helps fashion retailers sell older seasonal items first, reducing the risk of unsold outdated inventory and making room for newer collections.
• Electronics brands with fast-moving SKUs: For electronics brands, FIFO ensures older models are sold before newer versions, preventing obsolescence and helping maintain profitability.
• Consumer packaged goods (CPG) with regular rotation: In the CPG industry, FIFO ensures that products with expiration dates, like food and beverages, are sold before they expire, reducing waste and maintaining freshness.

Ready to optimize your stock rotation? Book a demo with Storfox today and explore how our inventory management tools support the FIFO method.

Use Cases for FEFO

• Food businesses with expiry-sensitive inventory: FIFO helps food businesses minimize waste by ensuring that products with earlier expiration dates are sold first, maintaining product quality and freshness.
• Pharmaceutical companies: Pharmaceutical companies rely on FIFO to manage products with expiry dates, ensuring that older stock is used first to prevent loss from expired medication.
• Cosmetics brands using natural ingredients: Cosmetics brands with natural ingredients benefit from FIFO by prioritizing the sale of older products, maintaining product quality and reducing the risk of spoilage.

The right method depends on your product type and operational priorities. Some businesses may use both methods across different product lines. Discover how Storfox helps streamline your warehouse with powerful automation. Explore Storfox features.

7. Tips for Implementing FIFO Effectively

1. Organize and Label Inventory Clearly

Ensure each batch is labeled with a received date and relevant details. Use barcode scanning systems to help staff identify the oldest stock easily.

2. Optimize Warehouse Layout

Designate dedicated zones for new and old stock. Set up your shelving and storage to allow smooth rotation where older inventory moves to the front naturally.

3. Conduct Regular Stock Audits

Perform both digital and physical audits to ensure inventory is aligned with FIFO rules. This helps catch misplaced or stagnant stock early.

4. Use Smart Inventory Management Software

Leverage inventory software like Storfox to automate batch tracking, generate real-time reports, and set stock rotation rules. The right tools help scale your operations without compromising FIFO discipline.

5. Train Your Team

Your FIFO system is only as good as the people using it. Train your warehouse staff on FIFO principles and ensure they understand the importance of rotating stock.

8. Implement FIFO with Storfox Inventory Management

FIFO can revolutionize your warehouse operations, but it needs the right tools to succeed. Storfox offers powerful inventory management features that support FIFO implementation, including:

• Batch tracking and expiry monitoring: Batch tracking allows businesses to monitor product batches, ensuring the oldest products are used first, while expiry monitoring helps prevent waste and loss from expired inventory.
• Smart barcode generation and scanning: Smart barcodes simplify the process of tracking products, enabling quick identification of product age and ensuring compliance with FIFO inventory practices.
• Warehouse space optimization tools: By organizing inventory according to FIFO principles, warehouse space optimization tools maximize storage efficiency, helping businesses manage their stock more effectively.
• Centralized visibility across multiple warehouse locations: Centralized visibility ensures businesses can monitor inventory across various locations, making it easier to enforce FIFO practices and maintain stock accuracy across the entire supply chain.

Storfox grows with your business. Whether you're managing a single warehouse or multiple fulfillment centers, our platform ensures your FIFO system operates seamlessly. Book a Demo now!

9. Conclusion

The FIFO method in inventory management isn’t just about order—it’s about profitability, efficiency, and waste reduction. Implementing FIFO effectively helps you maintain a cleaner warehouse, better cash flow, and a smarter replenishment cycle.

With Storfox as your inventory management partner, you can unlock real-time control over your stock rotation, reduce product loss, and streamline fulfillment. Embrace FIFO and take your warehouse operations to the next level.