What are the benefits and challenges of using FIFO or LIFO methods in SOP?

1 FIFO method

The FIFO method means that the oldest stock is allocated and shipped first, while the newest stock is kept for later orders. This method ensures that the inventory turnover rate is high, which means that the stock is sold quickly and does not become obsolete or expired. It also reduces the risk of stockouts, as the most recent orders are more likely to have available stock. However, the FIFO method also has some drawbacks, such as higher storage costs, as the newer stock may take up more space and require more handling. It also may not suit the customer preferences or expectations, as some customers may want the latest or freshest products.

2 LIFO method

The LIFO method means that the newest stock is allocated and shipped first, while the oldest stock is kept for later orders. This method can lower the storage costs, as the older stock may be more compact and easier to store. It can also satisfy the customer demand for the newest or freshest products, which may give a competitive edge or higher satisfaction. However, the LIFO method also has some challenges, such as lower inventory turnover rate, which means that the stock may stay longer in the warehouse and become outdated or spoiled. It also increases the risk of stockouts, as the older orders may not have enough stock to fulfill them.

3 Choosing between FIFO and LIFO

There is no definitive answer to which method is better for SOP, as it depends on various factors such as the type of product, the industry, the customer behavior, the market conditions, and the accounting standards. Some products, such as perishable goods, electronics, or fashion items, may be more suitable for FIFO, as they have a shorter shelf life or a faster obsolescence rate. Other products, such as durable goods, commodities, or generic items, may be more suitable for LIFO, as they have a longer shelf life or a slower obsolescence rate. The industry norms and best practices may also influence the choice of method, as some industries may favor one method over the other. For example, grocery stores may use FIFO, while construction companies may use LIFO. The customer behavior and expectations may also affect the decision, as some customers may value the freshness or novelty of the product more than others. The market conditions and trends may also play a role, as some markets may have more stable or fluctuating demand or supply. Finally, the accounting standards and regulations may also have an impact, as some countries or regions may require or prohibit the use of one method over the other. For example, the US generally accepts both methods, while the EU generally prefers FIFO.

4 Implementing FIFO or LIFO in SOP

Once the choice of method is made, it is important to implement it effectively and consistently in SOP. This requires a reliable and accurate inventory management system that can track and record the stock movements and transactions. It also requires a clear and consistent SOP policy and procedure that can guide and monitor the staff and the customers on how to reserve and allocate stock. It also requires a regular and timely inventory audit and review that can verify and adjust the stock levels and values. By implementing FIFO or LIFO in SOP, the business can optimize its inventory performance and customer service.

5 Evaluating FIFO or LIFO in SOP

Finally, it is essential to evaluate the results and outcomes of using FIFO or LIFO in SOP. This involves measuring and analyzing various metrics and indicators that can reflect the efficiency and effectiveness of the method. Some of these metrics include inventory turnover rate, inventory holding cost, inventory accuracy, customer satisfaction, order fulfillment rate, order lead time, and gross margin. By evaluating these metrics, the business can identify the strengths and weaknesses of the method, and make adjustments or improvements as needed. It can also compare and benchmark its performance with the industry standards or competitors, and identify the opportunities or threats in the market.