warehouse management

What are FIFO, LIFO, FEFO & LEFO in Warehouse Management?

Warehouse management is considered to be the most important thing for a trade or goods business. Optimizing your warehouse management systems. Enabling and regulating the flow of goods is the key to the smooth flow of your trades as well. The smoother the processes, the more efficient the trades are.

Consider, if you have a business that depends heavily upon how effectively swiftly your products are delivered into the hands of your customers. Or you are in inventory management, warehouse management or supply chain, this article is a must-read for you.

There are four major techniques applied in warehouse management, abbreviated as FIFO, LIFO, FEFO & LEFO.

Let’s discuss thoroughly each of these with examples and their major benefit to the business.

FIFO

Definition:

FIFO stands for First in first out. Its a method applied in the supply chain under inventory management on the assumption that the first, goods are purchased for resale becomes the first goods sold.

This is a widely practised method in inventory management. It is used by almost all kind of goods businesses from small to large scale.

Benefit:

Businesses applying FIFO are considered to be less in danger. More in profits due to the very common fluctuations in economical situations. The risk of the cost of goods production may rise over time. Therefore, businesses using FIFO are practically more profitable.

Example:

A bakery and dairy shop purchases packed milk bottles daily from the wholesaler. As the customers purchase milk, the shop owner pushes the oldest bought bottle on the front of the shelf and pushes the fresh milk bottles behind them. Milk bottles with the earliest expiry dates are thus sold first. Whereas the cartons with the later expiry are sold after.

LIFO

Definition:

LIFO (last-in, first-out) method used in inventory management is about using the current prices to calculate the cost of goods sold. Opposite to using what was paid for the stock already in the inventory. If the prices of those goods have increased since the initial date of purchase, the cost of goods sold will be higher. Hence it reduces profits and tax burdens.

Benefit:

LIFO is not considered a good indicator of ending inventory value in general supply chain processes. Because the leftover stock can be very old, outdated, old-fashioned (in the textile sector) and obsolete.

This results in a net valuation that is comparatively much lower than today’s current prices. The only major benefit is that LIFO demonstrates a lower net income because the cost of goods (COGs) sold is higher. So there is a lower taxable income on the business person.

Example:

A web design company bought a plugin for $40 some months ago, and then they sell the finished software product built with that plugin for $500. That’s a big profit. However, a few months later, that plugin price increases to $50.

When the company calculates its net profits, it will use the most recent price of $50 of the development plugins. So the cost of manufacturing will increase in accounts papers and hence the fewer profits are calculated this way.

FEFO

Definition:

FEFO (first expiry, first-out) is a very organized approach to deal with products with a specific expiry date. This begins at your factory and ends at the store where it is being sold to the customer. It’s the expiry date or sell-by date of that product.

Benefit:

If you’ve assigned expiry dates to your various batches of products, everyone in the supply chain process knows what’s happening right up to when your product reaches the retail store.

If you have an inventory management system that keeps tracks of the information. You’ll know when to exactly push the stocks from the warehouse to the store so that it doesn’t become expired or disposable.

Example:

When a product is added to your store, instead of putting them on your shelf for display. You first need to check the expiry dates for all of them. Then display the products with the shortest expiry date on the front of your shelf. This way, the buyers see and buy them first.

LEFO

Definition:

LEFO (Last expiry first out) is another method applied in inventory management in which the products with the shortest shelf lives are shipped last under specific circumstances. This usually applied in the food and beverages storage industry.

Benefit:

In LEFO, the quality of all stored batches is calculated and recalculated every time the goods are selected for delivery or dispatch. The customer either buys the products with the lowest quality (FEFO), or the highest quality (LEFO).

If the buyer values high quality, the LEFO stock rotation scheme performs well in this scenario, similar to the FEFO one. The highest qualities can be offered to customers if LEFO stock rotation is implemented along with FEFO.

Example:

LEFO is applied mostly in modern food storage and cold storages where the food has to be preserved for months or even years. Taking the example of fruits. As in FEFO, most fruits can be sold and the lowest food losses can be achieved. Whereas LEFO produces most food losses and random performs in-between.

If the farmers want to maximize goods storage for alternative use, no fruits can be rejected at the distribution centre. Overall, most fruits can be sold following the LEFO approach. To reduce fruits losses, at both stages fruits should be alternatively used.

Author: Roohan Shah

I am Muhammad Roohan (AKA Rohan Shah) a Geek in Digital marketing, SEO, SEM, Social media, Content Marketing, Growth Hacking, Coding, AI, and Big Data. I love to seek every single opportunity to enhance my entrepreneurship skills and thirst for knowledge covering all domains in Information Technology.

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