How It Works
In FIFO, the oldest inventory is prioritized for fulfillment. For example, a warehouse receiving 100 shirts on January 1 and 100 more on February 1 ships the January batch first. Financially, the cost of these older goods is used to calculate the cost of goods sold (COGS), reflecting actual inventory flow.
Logistical Benefits:
- Efficient Stock Rotation: Ensures older inventory moves out first, reducing spoilage for perishables (e.g., food, cosmetics) or obsolescence for seasonal items (e.g., fashion).
- Streamlined Warehousing: Simplifies picking and packing by organizing stock chronologically, boosting fulfillment speed in busy e-commerce operations.
- Inventory Turnover: Promotes faster stock refresh, critical for high-demand products on platforms like Shopify.
Financial Benefits:
- Accurate Cost Tracking: Uses older, often lower costs for COGS, potentially increasing reported profits during inflation.
- Compliance: Aligns with International Financial Reporting Standards (IFRS), unlike LIFO, which is less widely accepted.
Challenges:
- Logistical Complexity: Requires precise tracking systems to maintain chronological order, especially in large warehouses.
- Tax Implications: Higher profits from lower COGS can increase tax liability.
Example
A coffee roaster receives beans on July 1 (cost: $5/kg) and July 15 (cost: $6/kg). Using FIFO, the July 1 beans are shipped first, ensuring freshness and valuing COGS at $5/kg, optimizing both logistics and financials.
Why It Matters
FIFO enhances warehouse efficiency, reduces waste, and supports accurate financial reporting. For e-commerce businesses, integrating FIFO with inventory management tools ensures seamless fulfillment and stock control, aligning with platforms like Shopify.
Frequently Asked Questions:
When is FIFO best used in e-commerce or fulfillment?
FIFO excels for perishable goods (e.g., food, pharmaceuticals) or seasonal items (e.g., apparel), ensuring older stock is sold first to prevent waste. It’s ideal for businesses with fluctuating prices or regulatory needs for batch tracking.
How does FIFO differ from LIFO?
Unlike FIFO, LIFO (Last In, First Out) prioritizes the newest inventory for sale. FIFO better reflects physical stock flow and reduces obsolescence, while LIFO may lower taxes by using recent, higher costs for COGS but is less common due to IFRS restrictions.
What are best practices for implementing FIFO?
Use clear labeling (e.g., batch numbers), invest in inventory tracking software, train staff on stock rotation, and monitor expiration dates to ensure older goods are prioritized, optimizing warehouse efficiency.
