The FIFO (First In, First Out) method is one of the cornerstones of efficient inventory management. By applying the principle that the first products in are the first to go out, you significantly reduce the risk of expiry, better control your costs and guarantee consistent quality for your customers. In this guide, we detail the principles, benefits, calculations, practical implementation and best practices for taking full advantage of the FIFO method.
“Adopting the FIFO method means ensuring that every product finds a buyer quickly, before it becomes obsolete.” – The Iziship team
What is the FIFO method?
Before any implementation, let’s clarify the very principle of the FIFO method and why it is the benchmark in many sectors, from food to pharmaceuticals.
First In, First Out principle
The FIFO method stipulates that items purchased or manufactured first must be sold or used first. In practice, this means :
- Physically place older batches in front of picking zones.
- Identify each unit by date of entry (or batch number).
- Ensure that no goods are left behind, at the risk of going out of date.
Why adopt the FIFO method?
Integrating FIFO into your inventory management and optimization process offers numerous benefits, both operational and financial.
Quality and safety benefits
- Health safety: essential for food and pharmaceutical products, FIFO prevents the sale of out-of-date products.
- Customer satisfaction: systematic delivery of items in their prime freshness or maximum validity.
Financial benefits
- Reduce losses: by reducing obsolete unsold stock, you free up fixed capital.
Align costs: output valuation follows the actual purchase cost of the first batches, simplifying margin calculation.
Compliance and good governance
For companies subject to accounting standards (IFRS or French standards), FIFO is often recommended or imposed for inventory valuation.
How do you calculate and apply the FIFO method?
Precise calculation of inventory value according to FIFO is indispensable for your balance sheets and profitability analyses.
Inventory valuation calculation
- List batches: identify each batch with its date of entry and unit cost.
- Successive releases: for each release, assign the cost of the oldest batch still available.
- Final balance: the value of the remaining stock corresponds to the costs of the most recent batches.
Formula and calculation example
Suppose :
- Lot A: 100 units at €10 (entry on January 1)
- Lot B: 150 units at €12 (entry on January 10)
If you sell 120 units :
- 100 units sold at €10 (from lot A)
- 20 units sold at €12 (from lot B)
The remaining stock therefore comprises 130 units of lot B, valued at €12 each.
“The FIFO method simplifies cost allocation by following the flow of batches chronologically. – The Iziship team
Setting up the FIFO method in your company
Integrating FIFO requires appropriate physical and software organization.
Physical organization of the warehouse
- Linear flow: place pallets or shelves backwards/forwards according to entry date.
- Clear signage: colored labels or barcodes indicating priority.
- Optimized picking path: define lanes that enable FIFO picking without backtracking.
Computer systems and applications
A WMS or warehouse management application with FIFO module automates :
- Assigning batches to each output
- Near expiration date alerts
- Financial reporting for inventory valuation
Challenges and best practices
While FIFO is robust, its implementation can encounter obstacles.
Managing variable-life products
Some items (cosmetics, chemicals) have different life spans.
- Solution: segment by expiry category and adapt alert thresholds.
Organizational complexity
Reorganizing a warehouse can seem costly.
- Solution: phase in implementation batch by batch, involving teams from the initial training stage onwards.
Complementary methods to FIFO
For certain activities, other approaches can be coupled with FIFO :
- FEFO (First Expired, First Out): priority to expiration dates, stricter for the food industry.
In a nutshell
The FIFO method is a pillar of inventory management that combines simplicity and efficiency. By rigorously applying the “first in, first out” principle, you limit losses, optimize your cash flow and guarantee impeccable quality for your customers.
