The FIFO or First-In, First-Out inventory method is probably one of the most popular used by companies to manage their stocks. It lies on the rationale that the products oldest in (first-in) should be utilized or sold prior (first-out). This can work well especially with companies operating in perishables, including drugs, food products, and similar products that only last for so long. Through FIFO, they maintain their goods to be continually fresh and with minimised chances for spoilage and obsolescence.
The purpose of this post is to learn more about the FIFO method of inventory control and its related advantages and disadvantages.
Explanation of the FIFO Method of Inventory Control
The FIFO method is a popular inventory management technique utilized by businesses to manage their stock. It stands for “first in, first out,” and it works by assuming that the oldest products in a company’s inventory are the ones sold or used first. This means that products purchased or produced more recently are considered to be left over until the older ones are depleted.
Under this system, companies keep track of inventory using a chronological record of all goods entering and leaving their warehouse. When sales orders come in, items from the oldest batch available are shipped out first, leaving newer stock untouched until necessary.
Using the FIFO method helps businesses ensure they don’t end up with expired or outdated products that sit on their shelves for too long. Furthermore, it can also help establish an accurate cost of goods sold (COGS) which is crucial when calculating profits and losses. Overall, this system provides valuable insights into how much inventory needs to be ordered at any given time as well as promotes better cash flow management across supply chains.
Also Read: What is a Perpetual Inventory System?
Advantages of the FIFO Method
The FIFO (First-In, First-Out) method of inventory control is an effective system that helps reduce spoilage and improve cash flow. This method ensures that the oldest inventory items are sold first, which reduces the risk of spoilage for perishable goods. By selling the older stock before it becomes outdated, businesses can avoid unnecessary losses due to spoilage.
Moreover, this process also improves cash flow by allowing businesses to sell their products at a higher price point without incurring additional costs. With the FIFO method, businesses can ensure they have fresh and new stock on hand for their customers while keeping their operating expenses low. This keeps them competitive with other businesses in the industry and allows them to make a profit.
Furthermore, using this method encourages businesses to purchase inventory in smaller quantities or more frequently since they know they will be selling it quickly. This leads to better inventory management and a reduction in unsold items taking up valuable storage space. In conclusion, implementing the FIFO method of inventory control brings many benefits to businesses including reduced spoilage and improved cash flow while maintaining competitiveness within their industry.
Also Read: What Are Perpetual and Periodic Stock Systems?
Implementation: Setting up a FIFO system
Setting up a FIFO system requires careful planning and implementation. The first step is to identify which products need to be managed using this method. Then, the inventory needs to be organized based on their purchase date or expiration date if applicable. Clear labelling and tracking systems should also be put in place to monitor stock movement and prevent any deviations from the system.
Another crucial aspect of implementing a FIFO system is training personnel involved in handling inventory management. They need to understand how it works, why it’s important, and how they can contribute towards maintaining its effectiveness by adhering strictly to its principles. Regular reviews should also be conducted to assess the efficiency of the system, identify areas for improvement, and make necessary adjustments for optimal results over time.
Also Read: What Are Perpetual and Periodic Stock Systems?
Common Challenges With FIFO Method
One of the most common challenges in inventory management is managing expiration dates and product rotation. This is especially important in industries such as food, pharmaceuticals, and cosmetics where products have a limited shelf life. The first-in-first-out (FIFO) method of inventory control can help with this challenge by ensuring that the oldest products are used or sold first.
To implement FIFO, it’s crucial to know when each product was received and to label them with a visible “use-by” date. This way, employees can easily identify which products need to be used or sold first. However, there are some challenges associated with this method. For example, it may be challenging to manage different expiration dates for various products or if you have a large amount of inventory. Additionally, if employees do not follow the system correctly, it could lead to expired products remaining on shelves and potential waste.
Conclusion
In summary, FIFO is a good inventory control technique since it ensures that the oldest items are sold first, minimizing the risk of spoiled or expired products. This method ensures that companies keep their brand image intact and minimize losses from spoiled or outdated products. FIFO also gives a better picture of a company’s financial position by reflecting the most recent cost of goods sold. Additionally, using the FIFO approach helps companies prevent overstocking and understocking problems. Prioritizing older stock over newer stock ensures that companies are not left with slow-moving products that take up valuable space and consume capital. Thus, FIFO helps companies make informed purchasing decisions based on real demand and not on guesswork.
