Streamlined inventory management is indispensable for a well-functioning logistics chain. Here, the method by which goods are stored and delivered plays a major role. One of the most widely used methods worldwide is FIFO, or First In, First Out. As the name suggests, this method ensures that products that enter the warehouse first are also the first to leave.
For logistics professionals - from warehouse workers to supply chain managers - understanding and applying FIFO is key. This approach not only helps prevent spoilage or obsolescence, but also promotes an efficient and orderly flow of goods. In this article, we will discuss exactly what FIFO is, how the system works, its benefits, how it differs from LIFO and what it looks like in practice.
How does a FIFO system work?
A FIFO system is based on a logical and ordered flow of goods. In practice, this means that new stock is always placed behind or below existing stock, so that the oldest items are picked first. This principle is supported by an efficient warehouse layout and clear working procedures.
Examples of FIFO systems in the warehouse:
- Flow racks: Racks with an incline where products slide forward via gravity once the front item is grabbed.
- Pallet live systems: Automated storage systems where pallets roll forward automatically.
- Manual storage with clear labelling: Simple shelf layouts where employees always select the oldest item first based on date or batch number.
FIFO is often supported by Warehouse Management Software (WMS) that automatically indicates which stock should be picked first. This prevents errors, increases efficiency and contributes to traceability and quality control.
For logistics staff and planners, working according to FIFO means more structure, less waste and better customer satisfaction thanks to fresher products.
5 advantages of the FIFO method
Using the FIFO method brings several benefits to both operational and strategic processes within logistics. Here are the main ones:
- Controlling product quality
Always using the oldest stock first significantly reduces the risk of spoilage, ageing or deterioration of product properties. This is crucial with fresh produce, pharmaceuticals or other time-sensitive goods.
- Better stock rotation
FIFO promotes a natural turnover of stock. This prevents products from being forgotten or left in the warehouse for long periods of time, leading to more efficient use of storage space and lower depreciation.
- Complying with regulations
In sectors such as food, healthcare and chemicals, FIFO is often mandatory from quality standards and legislation. The method supports correct product traceability and batch management.
- Customer satisfaction and reliability
Consistently delivering fresh and high-quality products reduces the likelihood of complaints and returns. Customers receive what they expect: recent, reliable goods.
- Easy implementation with technology
FIFO is relatively easy to automate via WMS systems or barcode scanning. This makes it scalable, even for larger warehouses with high throughputs.
How does it differ from the LIFO method?
Although both FIFO and LIFO are methods of managing inventory, they differ fundamentally in approach and application. Here is an overview of the main differences:
➤ Order of delivery
- FIFO (First In, First Out): The oldest goods leave the warehouse first.
- LIFO (Last In, First Out): The newest stock is grabbed and delivered first.
➤ Application
- FIFO is ideal for perishable or time-sensitive products such as food, pharmaceuticals and cosmetics.
- LIFO is mainly used with durable goods or in situations where physical access to the oldest stock is limited (such as stackable products or bulk storage).
➤ Accounting impact
- With rising prices, FIFO results in lower cost of goods sold (COGS) and higher profits - which means more taxes.
- LIFO leads to higher COGS and lower profits in the same situation, which can result in tax benefits (especially in countries where it is allowed for accounting purposes, such as the US).
➤ Stock valuation
- With FIFO, inventory is usually valued higher on the balance sheet because older, cheaper products are delivered earlier.
- With LIFO, cheaper stock stays in the warehouse and appears on the balance sheet, depressing its value.
In short: FIFO focuses on quality and consistency, while LIFO plays more into cost optimisation and operational simplicity in certain storage structures.
Example of the FIFO method
Imagine a warehouse working with packaged dairy products such as milk or cheese. A new shipment arrives every week, and each product has an expiry date. To avoid waste, the warehouse uses the FIFO principle: the milk that arrived first is also the first to be picked and delivered to supermarkets or catering customers.
Case study:
- Week 1: 500 packs of milk arrive, shelfable until 30 June.
- Week 2: 500 new packs of milk arrive, shelfable until 7 July.
- Shipping: When an order is placed, the 500 packs from week 1 are shipped first, so the oldest stock is used.
In the warehouse, these products are placed in flow racks, with the first added goods automatically moving to the front. Employees always grab the front items - the oldest product - without any additional handling. This ensures quality and prevents waste.
For logistics staff, this system is logical, efficient and easy to learn. It is also great for the stock manager: less wastage, higher customer satisfaction and better control over the product flow.
