The correct warehouse management can provide that competitive edge needed to take a company’s performance to a new level.
Knowing the inventory of a warehouse as well as the flow and management of the movement of goods is essential to be much more effective and productive.
Different warehouse management methods are used for this purpose, the FIFO method being one of the most common and offering great advantages in the management of warehouse inventory.
Read on, we tell you everything you need to know about the FIFO (First In, First Out) method of warehouse management.
What is the FIFO method
The FIFO method is an acronym that stands for“First In, FirstOut“. It is an inventory management system used to determine when to use or sell products that have been purchased or produced.
The FIFO method assumes that the first items to enter inventory are the first to be sold or used. In this way, it is assumed that older products are the first to expire or have a near expiration date, so they need to be used before newer products.
This method is often used in the food industry, pharmaceutical y chemical industry to guarantee the quality and safety of the products. It is also applied in accounting and finance to value inventories on the balance sheet and determine the profit or loss on the sale of products.
Comparison: FIFO vs. other inventory methods
Selecting the appropriate inventory management/valuation method depends on product type, turnover, price volatility and the applicable accounting framework. Below is a clear comparison to place FIFO versus LIFO and Weighted Average Cost (WAC), while maintaining consistency with the item’s warehouse operating approach.
FIFO (First In, First Out): A physical and accounting approach whereby the oldest units are shipped out first. It is the method described in the article because of its natural fit with age-based rotation and perishables management.
When it fits: perishables, products with obsolescence (techno, textile), chains with high traceability.
📦 O perational advantages: reduced risk of shelf life/obsolescence, intuitive flow in loading/unloading aisles and dynamic racking.
Accounting framework: permitted by IFRS and US GAAP. IFRS contemplates FIFO as one of the accepted cost formulas together with weighted average.
LIFO (Last In, First Out): Outputs the most recent units first. Although it may have specific accounting objectives in certain countries, it does not describe physical flow well in most warehouses and has significant regulatory restrictions outside the US.
⚠️ Accounting framework: prohibited by IFRS (IAS 2); permitted under US GAAP with specific requirements. If the company reports under IFRS (e.g., EU/Spain), it cannot use LIFO for accounting valuation.
🔎 Implications: may alter the international comparability of financial statements and does not usually align with physical rotation practices oriented to expiration/obsolescence.
More information at: LIFO method. What it is and when to use it.
Weighted Average Cost (WAC / Weighted Average Cost): It values the outflows at the average cost of the available stock, recalculated with each purchase.
✅ When it fits: environments with highly variable pricing or large volume of homogeneous SKUs, where maintaining FIFO/LIFO layers is costly.
📦 O perational advantages: simplifies valuation when there are many entries at different prices.
Accounting framework: accepted by IFRS and US GAAP together with FIFO
PEPS (first-in, first-out): useful variant of FIFO
In sectors where the expiration or shelf life of the product is decisive, applying FIFO alone may not be sufficient. This is why a variant known as PEPS (First Expired, First Out) or FEFO (First Expired, First Out) is used.
This method focuses not so much on the date of entry into the warehouse, but on the expiration date or best before date of the product. This ensures that items with the shortest shelf life available are the first to go, even if they were not necessarily the first to enter.
Where is PEPS/FEFO particularly useful?
🥛 Food industry ensures that products with an earlier best-before date reach the end consumer sooner.
💊 Pharmaceutical and healthcare sector: essential to prevent the use or marketing of expired medicines and medical devices.
🛠️ Chemical products or sensitive materials where stability depends on storage conditions and dates of use.
Benefits versus traditional FIFO
⚖️ Increased safety and legal compliance: reduces the risk of non-compliance with health regulations.
📦 Waste reduction: optimizes the rotation of perishable goods, reducing shrinkage.
More precise control: requires management systems that include expiration dates in each batch record.
Ultimately, PEPS/FEFO is a natural evolution of FIFO in perishable or regulated product contexts. While FIFO ensures chronological rotation, PEPS adds a layer of control focused on safety and compliance.
What the FIFO method is for
The FIFO method aims to order the flow of goods within the warehouse to make management more efficient and transparent. Its application allows the output of products to follow a clear and verifiable criterion, which facilitates:
📑 Comply with regulations requiring traceability in regulated sectors.
🚚 Better planning of logistics operations, since the movement of goods follows a pre-established system.
🔄 Reduce errors in inventory handling by simplifying the identification of which products should be shipped first.
📊 Align physical management with accounting, as inventory more accurately reflects the real value of stock.
In essence, FIFO not only serves to avoid expiration or obsolescence problems, but also becomes a control and organization tool that improves coordination between warehouse, logistics and administration.
How it works
The FIFO method is based on a simple rule: the first products to enter the warehouse are the first to leave. To implement it effectively, it is necessary to consider both accounting management and warehouse operations:
Valuation of the goods
📑 Record in each entry essential data such as date, number of units, lot and acquisition cost.
📊 Apply this same criterion to each issue: the oldest products are deducted from inventory first.
💰 This allows you to accurately calculate the book value of the stock, reflecting an up-to-date inventory that is consistent with the reality of the warehouse.
2. Placement and physical management
🏷 Organize merchandise in the warehouse by category and date of entry, with labeling systems or barcodes.
🚚 When preparing an order, the products with the oldest entry date or the closest expiration date (in the case of FEFO) are selected first.
🔄 This ensures natural inventory turnover and reduces the risk of accumulation of obsolete stock.
Advantages of the FIFO method
The FIFO warehouse management method is one of the most widely used for its simplicity and effectiveness in stock management.
It is also a method that offers some very interesting advantages:
⏳ Minimizes obsolete inventory. The FIFO method helps prevent obsolete inventory by prioritizing outgoing goods according to their storage or expiration date. It offers an efficient rotation of goods.
🥕 Priority perishable products. Allows greater control and output of perishable products, reducing their loss.
Better inventory control: By using the FIFO method, an accurate record of the oldest and newest products in inventory is maintained, making it easier to track products.
📋 Better reflects the reality of the business: The FIFO method better reflects the reality of a business’ operations, as it assumes that older products are sold or used before newer products.
Costs and financial impact of the FIFO method
The FIFO method not only has operational implications in the warehouse, it also affects the accounting valuation of inventories and, consequently, the company’s financial statements. The way in which the cost of goods issues is determined directly influences the gross margin, stock valuation and the tax burden.
Main accounting effects of FIFO
📈 In inflationary environments: as the first units to enter are the first to leave, the cost recognized in sales is lower (because it corresponds to older purchase prices). This causes:
-Higher gross margin in the short term.
-Higher value of ending inventory on the balance sheet.
-Possible increase in the tax base and, therefore, in the taxes to be paid.
📉 In deflationary environments: the opposite effect occurs. Selling costs are calculated on higher prices (older ones), reducing the margin, but also showing a lower ending inventory on balance sheet.
Benefits of FIFO in financial reporting
📊 Better reflects the reality of the warehouse: the balance sheet stock is valued at more recent prices, giving a more current view of the replacement value.
Internationally accepted: both International Financial Reporting Standards (IFRS) and US GAAP allow FIFO as a valid valuation method.
🔎 Greater transparency: it is an intuitive and easy-to-understand method, which facilitates comparability between companies and review by auditors.
Strategic consideration
Although FIFO may increase the tax burden in inflationary scenarios, most companies prefer it because:
📦 Better matches the actual physical flow of goods.
📊 Provides more realistic inventory figures for decision making.
🤝 Generates confidence in investors, auditors and business partners.
What type of warehouses allow FIFO management?
The FIFO method of warehouse management is widespread in a large number of companies in many industries, with particular importance in the healthcare, pharmaceutical and chemical sectors.
There are industrial storage systems specially adapted for this type of method. Thus, they must have an aisle for loading goods and another for unloading.
This means that the loading and unloading aisle cannot coincide. This makes it possible to identify a number of storage systems that are ideal for the FIFO method:
Dynamic Picking Racks. System that allows the products to slide through rollers from the loading area to the unloading area.
Drive Through Compact Shelving. It allows to reduce the working aisles by differentiating the loading and unloading aisles, making the best use of the available space and height of the warehouse.
AR Shuttle pallet racking. Semi-automatic systems that provide maximum space optimization and time savings.
Example of the FIFO method calculation
To better understand how the FIFO method works in inventory valuation, let’s look at a practical example:
📦 Week March 1, 2023: Entry of 100 units at a cost of €10 per unit.
Week April 1, 2023: Entry of 50 units at a cost of €12 per unit.
🔢 Total stock: 150 units.
In week 3 of May 2023, 120 units are sold.
Application of the FIFO method
According to FIFO, the first units in are the first out:
-The 100 units of March (valued at 10 €) are released.
-Complete with 20 units of April (valued at 12 €).
Calculation result
✅ Cost of the 120 units sold = (100 × £10) + (20 × £12) = £1,000 + £240 = £1,240.
📦 E nding inventory = 30 units of April (at 12 €) = 360 €.
Across Logistics: your strategic partner in warehousing and distribution
Having a management system such as FIFO is key, but implementing it efficiently requires a prepared infrastructure and team. At Across Logistics we provide you with strategic warehouses, picking & packing services, bonded warehouses and advanced control technology, all designed to move your goods safely, quickly and cost-effectively.
Our goal is to become an extension of your business, taking care of every detail of your supply chain: from the reception of the merchandise to its preparation and final distribution.
👉 If you want a logistics partner that guarantees efficiency, safety and full traceability, contact Across Logistics and find out how we can help you take your operation to the next level.
