What is the meaning of FIFO?
FIFO stands for First In, First Out, a widely used inventory management method where the oldest stock (first in) is the first to be sold or used (first out). This approach is especially important in industries where product freshness or expiration dates matter, such as food, pharmaceuticals, and cosmetics. FIFO helps ensure that older inventory doesn’t expire or become obsolete while sitting in storage.
How does FIFO work in practice?
Under the FIFO method, when a customer order is fulfilled, the system (or warehouse staff) prioritizes the earliest received inventory. For example, if a business has 100 units of a product received in January and another 100 received in March, the January batch will be shipped out first.
FIFO is typically implemented by:
- Storing items by arrival date: Older stock is placed at the front, newer at the back
- Tracking inventory age: Using warehouse management systems (WMS) with timestamps or batch codes
- Scanning and automation: Barcodes and RFID help ensure proper rotation in larger fulfillment centers
Why is FIFO important in inventory management?
FIFO is crucial for maintaining accurate inventory valuation and avoiding waste. Key benefits include:
- Reduced spoilage and obsolescence: Especially for perishable or seasonal products
- Accurate accounting: FIFO often matches the actual flow of goods and aligns with most tax regulations
- Improved inventory turnover: Older stock doesn’t sit idle while newer items move
- Better customer satisfaction: Customers receive fresh, recently manufactured goods
It’s also considered a best practice in industries with high product churn or fast-changing demand.
Where is FIFO used?
FIFO is used in a variety of sectors, including:
- Retail and ecommerce – For fashion, beauty, and electronics where older SKUs may go out of style or depreciate
- Food and beverage – To manage expiration dates and prevent spoilage
- Healthcare and pharma – For medicines and medical supplies with strict shelf lives
- Warehousing and 3PL services – To optimize stock movement and prevent inventory loss
It’s also a core setting in most ERP, accounting, and inventory management systems.
What’s the difference between FIFO and LIFO?
The opposite of FIFO is LIFO – Last In, First Out. While FIFO prioritizes older inventory, LIFO fulfills orders using the most recently received stock.
Main differences:
- FIFO: Matches real-world flow, lowers risk of spoilage, used in most countries
- LIFO: May lower taxable income in inflationary environments but is banned in many international accounting standards
FIFO is preferred for most physical inventory systems, especially where product freshness and traceability are vital.
Can you give an example of FIFO in action?
A coffee distributor receives two batches of beans:
- Batch A: 500 kg on March 1
- Batch B: 500 kg on April 1
When a customer orders 400 kg on April 15, the warehouse ships the 400 kg from Batch A first, as it was received earlier. This ensures optimal freshness and accurate stock rotation.
