FIFO

What does FIFO refer to?

The FIFO (first in first out) goods management method consists in delivering the products that first entered the company or supply chain operator. To put things more simply, it means getting rid of products from the oldest to the most recent.

The FIFO method is generally used in stock management for perishable produce, or for products only temporarily in fashion, in season or due for range renewal. This is the case for the food industry, home appliances and textile goods. As company profitability depends on excellent stock management for products subject to financial downgrading due to obsolescence, the FIFO method is the ideal solution for maximising product rotation in the company or within the supply chain warehouse. As stock generates revenue (and expenses: shortages, overstocking), stock rotation (5 times a month for instance) is a reliable indicator for provisional management.

It is for these logical reasons that retail businesses, food retailers, the cold food industry, the agri-food industry and shops selling trend-reliant products manage their stock rotations using the FIFO method. Stock valuation in FIFO mode is also generally used in analytical accounting. It is the direct opposite of the LIFO method (last in, first out).

Specificities of the FIFO method

Here are the advantages of FIFO stock management:

• The FIFO method allows for good product rotation (in consideration of sell-by date and shelf life date), thus ensuring that products which entered stocks first are the first ones sold;
• As such, products with the closest obsolescence or expiry date are the first ones sold;
• The FIFO method increases company profitability, by encouraging fair stock valuation as there is no depreciation or disposal;
• Proper stock management is also important to ensure good treasury management - which is the main reason why lots of companies go bankrupt;
• The larger the stock rotation, the better the company’s fixed costs are amortised for a large number of products.

Examples and practical applications

To encourage FIFO management, adapting your industrial storage is essential. The main specificity is the implementation of a product loading area which is entirely separate from the unloading area. The loading and unloading bays are not linked, just like for drive-in or push-back methods - with the latter being better suited to LIFO (last in, first out).

Storage systems are used for warehouse management in the case of FIFO:

• Use of dynamic shelving for pallets (FIFO): pallets are moved around on a conveyor belt, from the loading bay to the unloading bay;
• Use of compact Drive-Through racks: loading and unloading bays are separate. The racks are emptied to make sure no products are left in stock, to avoid them expiring or becoming obsolete. Once empty, the must be entirely reloaded.
• Shuttle shelving for pallets: motorised wireless shuttles install the pallets at the back of the racks, so they will be the first ones out. To sum up, the FIFO method means loading is done on one side of the racks, and unloading from the other side.
• The dynamic box rack: aimed at very small boxes and light goods, travelling round on a conveyor belt from the loading bay to the unloading bay.

Regulatory cornerstones

• Transport contract, if there is one
• Sales contract
• Internal transport orientation law, no. 82 - 1153 dated 31 December 1982 that made a written agreement mandatory
• International accounting standards, known as IFRS, for listed companies

Legal and tax rules applicable to the field of activity at hand, consistent with analytical accounting for stock valuation