Why is the FIFO (The First In, First Out) Method a Better Choice for Inventory Management

by | Feb 10, 2023 | E-commerce Industry, Inventory Management

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E-commerce businesses face significant financial implications due to inefficient inventory management practices. A report from IHL Group revealed inventory distortion (combined cost of out-of-stock and overstock) is projected to cost retailers $1.77 trillion worldwide this year. With these statistics, it’s evident that mastering inventory management is not just an option—it’s a necessity for e-commerce businesses aiming to succeed and scale. 

Effective inventory management is vital for several reasons. It helps avoid overstocking or understocking, which can lead to financial losses. By maintaining optimal inventory levels, e-commerce businesses can meet customer demands promptly, enhance customer satisfaction, and boost overall profitability.

So, how can businesses achieve this level of efficiency in inventory management? One of the most reliable and strategic approaches in inventory management is by implementing the FIFO method. Let’s discover how it can revolutionize your inventory management!

What is The First In, First Out (FIFO) in Inventory Management Method?

FIFO, short for First In, First Out, is a method where the oldest inventory items are sold or used first. In other words, the products that enter the warehouse first are the ones that leave first when an order is placed. This method ensures that products with shorter shelf life or those prone to obsolescence are used before newer stock.

FIFO vs. FEFO vs. LIFO: Comparing Inventory Management Methods

Inventory management consists of various methods tailored to specific business needs. Let’s compare FIFO with a couple of other prominent inventory management methods!

1. FIFO vs. FEFO

While FIFO ensures that the oldest items are used first, FEFO takes it a step further by prioritizing products based on their expiration dates. This method is particularly critical for industries with items that are perishable and have limited shelf lives, such as pharmaceuticals, cosmetics, and certain food products. By using the items with the nearest expiration dates first, FEFO minimizes the risk of selling expired goods. It’s essentially a more precise version of FIFO, suitable for highly perishable items.

2. FIFO vs. LIFO

On the other hand, LIFO flips the script. LIFO, or Last In, First Out, means that the most recent inventory items are used or sold first. While this approach may seem beneficial during times of rising costs (as it can reduce taxable income), it can lead to higher holding costs, particularly in industries with products susceptible to obsolescence. It’s an approach less common than FIFO but still has its place in certain contexts.

FIFO in Action: Industries Embracing First In, First Out

FIFO’s versatility makes it an ideal choice for a wide range of industries, including footwear, electronics, fashion, toys, and kitchenware. Notably, companies like Upscalio, a renowned hub for brands, have proactively used FIFO to handle inventory across their brand portfolio.

By identifying products with the nearest expiration, they exemplify the practical application of FIFO in the real world. Through strategic expiry management methods, like FIFO, such forward-thinking companies optimize their inventory, minimize losses, and maintain a competitive edge in their respective industries.

What are the Advantages of Using the FIFO Method for Inventory Management

  • Minimizes Product Obsolescence
  • Reduces Wastage
  • Improves Inventory Accuracy
  • Optimizes Storage Space
  • Enhances Customer Satisfaction
  • Streamlines Order Fulfillment
  • Reduces Holding Costs

advantages of fifo in inventory management method

FIFO offers several advantages for e-commerce businesses, especially in the context of order fulfillment and inventory management. Here are the key benefits of FIFO:

1. Minimizes Product Obsolescence

FIFO ensures that older products are used or sold first, reducing the risk of items becoming obsolete or outdated. This is particularly crucial for industries where technological advancements or changing consumer preferences quickly render products obsolete. In industries like fashion and electronics, where trends and consumer preferences change rapidly, FIFO ensures that older products are sold first.

2. Reduces Wastage

By rotating stock and using older items first, businesses can significantly reduce wastage, especially in industries like fashion, footwear, electronics, etc. These sectors, driven by constantly evolving trends, necessitate regular stock rotation and inventory updates. Such measures help prevent overstocking and mitigate the natural wear and tear of products. This reduction in wastage not only saves costs for the business but also aligns with sustainability goals, reducing environmental impact.

3. Improves Inventory Accuracy

FIFO-based picking methods enhance inventory accuracy. By ensuring that products are used in the order they are received, businesses can maintain precise records of stock levels, minimizing discrepancies and errors in inventory tracking. For instance, by employing FIFO, The Urban Company maintained a seamless record of their service materials, ensuring that older supplies are used first, thereby preventing stockpile errors and maintaining a precise understanding of their resource availability.

4. Optimizes Storage Space

Picking older items first frees up storage space by reducing the amount of excess stock. By adhering to FIFO, businesses can rearrange their storage shelves to prioritize older inventory at the front, ensuring that these items are picked or used first. This reorganization facilitates easier access to older stock, streamlining the retrieval process and reducing the chances of items getting forgotten or misplaced in the back of shelves.

5. Enhances Customer Satisfaction

By consistently delivering fresh and newer products, businesses can enhance customer satisfaction. Customers receive items with longer shelf lives, reducing the likelihood of receiving products close to expiration, which can lead to dissatisfaction and returns. Not only does providing fresh products contribute to customer satisfaction, but it also builds trust and loyalty. When customers consistently receive high-quality, fresh items, they are more likely to return for future purchases. 

6. Streamlines Order Fulfillment

FIFO-based picking simplifies the order fulfillment process. Warehouse staff can easily locate and pick items, reducing picking errors and ensuring that the right products are dispatched to customers. This method also contributes to faster order processing times. By having a clear system in place for selecting items based on their entry into the inventory, warehouses can expedite the fulfillment process, leading to quicker dispatch and delivery of orders to customers.

7. Reduces Holding Costs

FIFO effectively reduces the duration products stay in storage. This reduction in storage time directly lowers associated holding costs such as warehousing fees, utility expenses, and insurance premiums. As products move out of the warehouse more efficiently, the overall financial burden on the company decreases, positively influencing its bottom line.

Let’s Make Inventory Management Easier!

As technology advances and consumer demands evolve, the future of inventory management in e-commerce lies in innovative stock rotation methods like FIFO. Leveraging data analytics and real-time inventory tracking will further optimize efficiency. Investing in a robust inventory management system  will be pivotal for businesses to adapt, thrive, and maintain a competitive edge in the dynamic landscape of e-commerce.

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