What is FIFO?
FIFO, an acronym for First-In, First-Out, is an inventory management strategy where the goods that are first added to inventory are the first to be sold. This approach is particularly important for perishable products or products with an expiration date.
Operational Mechanics of FIFO
Stock Rotation: Products are organized in a way that the oldest stock is sold first.
Inventory Valuation: In accounting, FIFO assumes that the costs of the earliest goods purchased are the first to be recognized in cost of goods sold.
Benefits of FIFO
1. Minimizes Waste
FIFO ensures that older products are sold first, reducing the risk of discarding items due to expiration or obsolescence.
2. Ensures Product Freshness
Particularly important for perishable goods, FIFO helps maintain product quality and freshness for the consumer.
3. Accurate Financial Reporting
By selling older inventory first, FIFO provides a more accurate representation of current market costs in financial records.
4. Streamlines Inventory Management
FIFO simplifies inventory tracking and management, making it easier to identify which products need to be restocked.
FIFO Method Example
In the context of e-commerce fulfillment, let's consider a simple FIFO (First-In, First-Out) example:
Suppose an online bookstore specializes in selling novels. In January, they received 100 copies of a new book titled "Mystery of the Old Mansion." In March, they received an additional 100 copies of the same book due to its popularity. Each batch is stored separately in their warehouse.
When online orders for "Mystery of the Old Mansion" come in, the bookstore always ships out copies from the January batch first, even though it might be easier to access the more recently received March batch. This ensures that the books stored since January are sold and dispatched before the ones received in March.
Adhering to the FIFO method, the bookstore minimizes the risk of books becoming outdated or damaged over time, ensuring customers receive the best quality products. It also helps in accurate accounting and inventory management, as it sells off older stock first, reflecting the true cost of goods sold in their financial records.
Which Businesses Should Use FIFO?
The FIFO (First-In, First-Out) method is best suited for businesses dealing with products that have a limited shelf life or are subject to obsolescence, degradation, or fashion and technology changes. Key industries and products where FIFO is particularly effective include:
1. Perishable Goods
Such as food and beverages, flowers, and pharmaceuticals, where products expire and must be sold before reaching their expiration date.
2. Fashion and Seasonal Items
Clothing and accessories that are trend-sensitive and need to be sold within a particular season.
3. Technology Products
Given the rapid pace of technological advancements, electronic goods like smartphones, laptops, and other consumer electronics are ideal for FIFO to avoid obsolescence.
4. Pharmaceuticals and Healthcare Products
Medications, vaccines, and other healthcare items often have expiration dates and specific storage requirements, making FIFO a necessary approach.
5. Fast-Moving Consumer Goods (FMCG)
Products such as household items, personal care products, and other consumables that have high turnover rates.
By using FIFO, these businesses ensure that the oldest inventory (by date of production, purchase, or receipt) is sold first, thus reducing the risk of waste due to expiration or obsolescence and maintaining product quality for consumers.