Inventory Management: FIFO Method
FIFO stands for “first in, first out.” It is a way of keeping track of the cost of your inventory. It means that the first items you put into your inventory are also the first items you sell. The inventory you still have when your year is ending therefore consists of the last items you acquired since the first items were sold first.
Why Is FIFO Important?
Many warehouses, grocery stores, and other businesses use the FIFO method. It makes intuitive sense. Who gets served first when they show up at a restaurant? The people who got there first. Similarly, the first products to arrive in the warehouse are the top priority to get out of there.
The reason this is helpful is that your older products (the ones placed in the warehouse first) are the ones that may expire, become obsolete, or lose market demand. It’s best to get value out of them while you can—before their value drops to zero.
Plus, businesses use the FIFO method all around the world to calculate the value of inventories. Using the same method, you’ll be better able to interact with vendors and supply chain partners who use it. Also, it can help your business stay ahead of inflation, as you sell older products purchased while prices were lower.
FIFO can also be used in your accounting department. There, it helps determine the book value of your inventory. For many shops, FIFO gives a more accurate valuation of assets than LIFO (last in, first out) because it is a better reflection of the actual flow of their stock.
Initiating the Use of a FIFO System
How do you start using the FIFO method, step-by-step? The method sounds helpful, but how can a warehouse manager ensure that employees are using it?
1. Research a Pallet Flow Rack System
An excellent way to implement FIFO is to install a system that causes it to occur automatically. For example, a pallet flow rack (AKA gravity flow racking) system requires employees to place inventory in one end of the system and take it out of the other end.
You have seen this principle at work in a grocery store: Cartons of juice or milk slide down an inclined surface, which means the first products placed will be the first ones to be taken by a customer. FIFO is inevitable.
In a warehouse, the system works similarly. Once a pallet is loaded onto a rack, gravity pulls it downward, and it is at the front of the line to be unloaded later.
2. Work within Your Budget
Carefully evaluate the cost of a pallet flow rack system. It may make a significant dent in your budget, especially if it must be customized for your warehouse. You should also project whether it will save you money and justify the purchase. (For example, the system may let you use forklifts less often)
3. Make the Space
Prepare enough space to have a free aisle on the loading side of the rack system and another free aisle on the unloading side—space to operate a forklift.
4. Focus Only on the New System
Stop any plans you had to create more storage space in the warehouse. A pallet flow rack maximizes the efficient use of space, allowing you to keep more pallets in one area.
Contact Elite OPS for Warehouse Assistance
If you need help with your inventory management, you can also outsource it to an experienced partner. At Elite OPS, we have helped many businesses like yours, taking over warehousing, fulfillment, and/or logistics to free businesspeople to focus on innovation.