In running an Ecommerce business, it is important to ensure that the expiry dates in our warehouse are up-to-date and properly manage the stock flow. To do this, you need to choose a product management model that fits your business. Depending on the industry, this problem will affect you to a greater or lesser extent
In order to properly maintain the FIFO (First In First Out) method in the warehouse, it is necessary to keep track of the expiry dates and first sell those products that were purchased the earliest. This method is the most popular method of inventory management and brings many benefits.
In this article, we take a look at the benefits of managing a warehouse stock with FIFO methods, and we will relate it to other methods. Let’s dive into this.
What is FIFO inventory management?
FIFO Inventory Management or First In First Out is a method of maintaining Your stock levels in Ecommerce or traditional store. The assumption of this method is that the flow of products through our warehouse will take place in a sequence consistent with the time of purchase of goods.
First, we sell the goods bought at the earliest, and then the goods bought in later batches, based on the purchase time.
The goal of FIFO Method is to prevent goods from remaining on the shelves for too long and getting out-of-date. Using the FIFO method, we make sure that the products that were purchased first leave our warehouse also first.
Most often, it is also associated with selling products with the shortest expiry dates.
What is LIFO in warehouse management?
LIFO Method (Last In First Out) is an inventory management method based on selling the newest goods in the first place. This may be the case in the rising Inflation economic environment or non-perishable and long expiry dates goods.
LIFO is a less common method of inventory management and is most often a response to the changing economic environment in a given country and a method of tax optimization.
Which inventory method is best?
Do You wonder which inventory management method to choose – FIFO or LIFO?
The most popular method of Inventory Management is FIFO – FIRST IN FIRST OUT, which helps entrepreneurs keep their use-by dates up to date and prevents paying double taxation.
However, it should be assessed whether it is beneficial in a given business or economic situation on the market. If the priority in our industry is to offer our customers products with the longest expiry dates, we should definitely choose the FIFO method as a way to manage our warehouse.
FIFO is a suitable method in normal economic conditions on the market. If you run your business in a country where the end-of-year taxation of products left in stock is applicable, it will be beneficial for you to sell off as many old goods as possible before the end of the year and to stock up on new products in the new year.
From the point of view of taxation, the entire assumption of FIFO is based on the fact that we sell the oldest goods first, i.e. those that we purchased the earliest. In such case, we have the newest goods in stock. When we pay tax at the end of the year on goods that remain on the shelves, we pay it in relation to the prices on purchase invoices.
Products bought closer to the end of the year, could be bought at a similar price as at the beginning of the year, and thus the difference in the cost of goods remaining on the shelves is small and we can only focus on the expiry dates of the products.
However, the LIFO – Last In First Out method can also have its advantages. This method is most useful when there is inflation in the market or when we expect the goods we buy will be more expensive at the end of the year than at the beginning of the year.
In this situation, we have products in stock with 2 different purchase costs. The cheaper ones – bought at the beginning of the year and the more expensive ones that we bought at the end of the year.
In order to optimize year-end taxes on goods in stock, it will be beneficial to sell goods purchased at higher prices first and only after that – cheaper ones. In this way, the average value of the remaining goods at the end of the year will be lower, which translates into lower taxes.
What are the 5 benefits of FIFO?
1. Products always stays up to date
This is the most important benefit of the FIFO method. Due to the fact that you sell the oldest products first, you have always fresh goods on your shelves with a long shelf life.
By taking care of the proper management of the warehouse according to the FIFO rules, you can be sure that the customers will receive the best quality goods with a long expiry dates
2. Natural Stock Flow
It is a natural method of running a warehouse, requiring no special supervision of the products or their relocation by the employees. Products leave the warehouse in the order in which they arrived.
3. Quality Control
Thanks to the FIFO method, we can control the quality of products in stock by selling out the oldest of them. This happens naturally thanks to the unidirectional flow of products in the warehouse.
The products are refreshed all the time through their continuous sale and order cycles. If we see that certain products start to stay in our warehouse for too long, let’s just make a sale on them.
4. Warranty control
A side effect of the FIFO method is that we can control the leftover producer warranty period on the products.
If we sell older products in the first place, we will not have the products for so long that the warranty ends there.
5. Easiest Logistic Method
With the FIFO method, no special logistic methods are needed. It is enough that we always take the oldest goods from the shelf first. When adding goods from a new delivery to a shelf, remember to place it at the back of the rack, so that as the product in front is sold first, the new products move to the front of the rack.
What is an example of FIFO?
If a company purchases 100 units for $10 each at the beginning of the year and 100 units for $20 in the second half of the year and sells 50 products in total, the cost of the goods in stock will be $250. In the same situation, with the LIFO method, the cost of the products would be $200.
In this example, it is evident that the inventory management method affects not only the expiry date but also the average cost of the products. But what if the price at which we buy the product does not change? Let’s look at an example:
At the beginning of the year, we buy 100 items at a price of $10 per item. Then we buy 200 items of goods also at a price of $10 per item. In this case, the unit purchase price remains at $10, regardless of the FIFO or LIFO method.
However, the advantage of FIFO, in this case, is that we sell first the goods that we bought in the first batch. Thanks to this, we maintain the freshness of products and long expiry dates.
How do I calculate FIFO?
When calculating with FIFO, we check the costs of products that are in our warehouse, taking into account the goods already sold. It is important to first subtract sold items’ value from old product prices and only then move to newer ones.
In this case, the purchase unit prices for the first delivery should be summed up and the number of products sold should be subtracted from them. Only then should the prices of the remaining deliveries be added and the average of the prices of the products based on this sum should be drawn.
From the previous example, we calculate the average purchase price of the product as follows:
((100 pcs * 10USD) - (50 pcs * 10USD) + (100 pcs * 20USD)) / 150 pcs = 16.66 USD
How do you ensure FIFO is maintained?
In order to properly maintain a FIFO in your store’s warehouse, you need to follow a few simple rules. Follow the rules below and you will be sure that the flow of goods is undisturbed and you will not encounter any surprises.
1. Take the Goods from one side of the rack and add new ones on the other side.
Thanks to this, the goods given to the customer will always be the oldest ones. You will also not have expired goods on the shelves.
2. Use appropriate warehouse management software.
This will allow you to track the expiry dates of products, locate products stuck for too long, and react quickly when certain goods are found to have near expiry dates.
3. Always take the oldest product from the shelves
If your shelves are messy at least sell the oldest products first. This will prevent the accumulation of expired products.
4. Do sales on products with a short expiry date
If you find Yourself in a situation where You have too much of short expiry dates for products then making a Sale (and a good one) would be a great idea. All in all, if they will expire, You will not sell any of them.
Why is it important to follow the FIFO method?
Following the FIFO rules greatly facilitates the management of inventory. To optimize your warehouse and customer satisfaction, you should follow these rules on a daily basis.
Using FIFO allows you to control the expiry dates of products, their warranty, and also maintain the natural flow of goods in the warehouse. Thanks to this method, you will avoid stacking expired goods that you may not even know about.