Proper warehouse management can provide the competitive advantage 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 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.
What the FIFO method is for
The use of the FIFO management method is very effective in warehouses with stock of perishable goods, with expiration dates, etc…
It is also a good management method for products that by their nature may become obsolete or go out of fashion: technological products, textile, etc…
In this way it is possible to achieve an excellent turnover of goods, adding more possibilities to dispose of the goods at the right time.
How it works
The FIFO management method is very easy to put into practice, there are only a few things to consider.
Valuation of goods
The first step is to know your merchandise in depth. For this purpose, a valuation of the goods must be made, recording important data such as: date of entry, number of units or purchase price per unit.
It is also necessary to make the same record for movements out of the warehouse. Thanks to the FIFO method, we can know the value of our merchandise, a key point for accounting purposes.
Placement of merchandise
Once the products have been evaluated, they will be sorted by category and date of entry. At the time of an output, the product with the oldest input value will be identified and selected.
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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 to perishable products. Allows greater control and output of perishable products, reducing their loss.
- Improved 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.
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 valuation method works, we show you this simple example:
In the first week of March 2023, 100 products with an expiration date of June 2023 are purchased/manufactured.
In the first week of April, 50 products are purchased/manufactured at a best-before date of July 2023.
Total stock = 150 products.
In week 3 of May, 120 products are sold, thanks to the FIFO method, all the products with an earlier expiration date have been sold, leaving 30 products with a later expiration date, giving more room for this product to be used for consumption.
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