FIFO and LIFO method: manage your warehouse in the best possible way

As purchasing consultants, we understand that efficient warehouse management is vital for any business, especially those that import. In these companies, it is crucial to know precisely when to make purchases and to have clear control over what is in stock and what is missing.

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And it is precisely in this context that you need to be aware of the FIFO and LIFO methods, two essential tools in inventory management. These approaches define the order in which products are sold or used, directly influencing stock management.

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Definition and fundamentals of the FIFO method

The FIFO method, an acronym for ‘First In, First Out’, is an inventory management strategy that seeks to ensure that products entering the warehouse are sold or used in the same order in which they were received. This approach is essential to avoid losses associated with obsolescence and to ensure efficient stock rotation.

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The basic principle of the FIFO method states that the first products to arrive in the warehouse are also the first to be distributed or sold. This way of organising logistics is based on the premise that items have an expiry date or may lose their value over time.

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Advantages of FIFO

The FIFO method offers multiple benefits that make it a preferred option in various sectors, especially in those where expiration is a critical factor.

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Goodbye obsolescence

One of the most significant advantages of FIFO is its ability to prevent product obsolescence. By prioritising the sale of older items, the risk of them becoming stuck in inventory and becoming damaged or out of date is reduced.

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Transparency in cost analysis

This method allows for a clearer and more accurate analysis of the costs associated with products. By keeping an orderly record of incoming and outgoing goods, companies can better monitor the impact of costs on their profitability.

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Adaptation to perishable products

The FIFO method is particularly effective in industries that handle perishable goods, such as food or pharmaceuticals. Given the ephemeral nature of these products, implementing a system that ensures proper rotation is essential to operate efficiently and responsibly.

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Disadvantages of FIFO

Despite its many advantages, the FIFO method also has certain disadvantages that need to be considered before implementation.

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Operational costs

Implementing a FIFO system may entail additional operational costs. The need for constant movement of goods to ensure that older products are accessible can increase the manpower required and, as a consequence, the overall costs of inventory management.

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Complex implementation

Managing a FIFO system can be complex (or at least more complex than other options). Specific storage systems are required to facilitate product rotation, which can require significant investments in infrastructure and technology to ensure efficiency.

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Definition and rationale of the LIFO method

The LIFO (Last In - First Out) method is a completely opposite inventory management strategy, which prioritises the sale or utilisation of the last items to enter the warehouse (Last In - First Out). This methodology is particularly effective for non-perishable products, where the turnover of goods is not affected by shelf life.

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The basic rationale of the LIFO method lies in the idea that the most recent products in inventory are dispatched first. This approach is the opposite of the FIFO method, which prioritises the release of the oldest items. The logic behind LIFO is simple: by using the newest products first, you can take advantage of the current cost of replenishment, which, in times of inflation, is often higher than the cost of older items.

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Advantages of LIFO

In environments where prices are volatile, LIFO can help companies reflect a higher cost of goods sold in their financial statements, which in turn can result in a lower tax burden. However, this strategy also carries certain risks (and disadvantages) that are important to consider.

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Simplicity of storage

One of the main advantages of LIFO is the simplicity it offers in the warehousing process. As older products do not need to be constantly moved, loading and unloading operations can be faster and more efficient. This is particularly useful in large warehouses where access to older units may be difficult. With the LIFO method, newer items are placed on top of older items, simplifying space management.

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Tax benefits

It may seem strange that logistics organisation has an impact on a company's taxation, but let's look at why. The LIFO method assumes that the most recent items, which tend to have a higher cost, are the first to be sold, resulting in a higher cost of goods sold. As a result, the company can report a lower profitability in its financial statements, potentially reducing its tax burden.

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Disadvantages of LIFO

Despite its advantages, the LIFO method also has disadvantages that should be considered when implementing this strategy. The following are some of the disadvantages associated with the use of this method.

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Obsolescence

One of the weaknesses of the LIFO method is the risk of inventory obsolescence. As newer products go out first, older items may remain in the warehouse for extended periods of time. This is especially problematic for industries where products can become obsolete, such as technology and certain consumer goods. Failure to properly manage this can lead to an increase in the accumulation of obsolete inventory.

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Complex management and planning

The LIFO method can lead to complexities in inventory management and long-term planning. Since it does not follow a logical rotation of products, it can be difficult for companies to maintain a clear understanding of the costs associated with their inventory. Lack of rotation can also complicate profitability analysis, as the flow of costs through inventory cannot be effectively tracked.

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Why have a well organised warehouse?

Proper warehouse organisation is critical to the efficient operation of any business that handles physical products. The way inventories are managed directly influences various operational aspects of the business.

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Avoiding stock outs

As you know, stock-outs are a topic we frequently discuss on our blog, and on several occasions we have addressed how to prevent them. Maintaining proper product organisation and following an efficient inventory management system significantly reduces the risk of unexpected stock-outs.

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Optimising the purchasing process

A clear and orderly warehouse structure also contributes to the optimisation of purchasing processes. When you have an overview of available products, it is easier to make informed decisions about when and how to make new purchases.

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Increased operational efficiency

Operational efficiency is a direct benefit of good warehouse organisation. A well-designed and managed workspace allows daily operations to run more smoothly and quickly.

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Better management of goods

Logically, good warehouse organisation also impacts merchandise management. Properly controlling inventory flows helps to keep a clear record of incoming and outgoing goods, which is essential for any company operating in the physical environment.

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Optimise your international purchasing!

Regardless of sector or company size, international purchasing requires careful planning to ensure that import processes are streamlined and efficient. Although we are not experts in warehouse management, we offer customised solutions that optimise each stage of the import process, allowing you to manage your international purchases in a more agile and effective way.

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We take care of the entire import process, from supplier management, quality control or transport, to legal advice to ensure regulatory compliance. These varied and strategic services translate into an optimisation of resources, similar to what is achieved with a well-managed warehouse.

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