The High-Stakes Balancing Act of Managing Inventory

FIFO Warehouse Storage Method    

Inventory management practices are heading in a very interesting direction. All the technological leaps of the last few decades have extended manufacturers’ inventory horizons all the way upstream to raw material sources, and all the way downstream to inside of individual businesses and homes. Traditional inventory management methods still apply in this modern context, though can be increasingly difficult to exercise at today’s distribution pace and volume. Looking out into the future, this trend of vertical integration and extended inventory footprints can only continue, compounded further by predicted economic uncertainty. In this article, we’ll present an overview of the first in, first out (FIFO) inventory management method and its applications, with an eye towards the near future of industrial distribution.  

To begin, let’s answer a few questions: 

What is Inventory Management?  

Inventory Management is a technical and operational management toolkit of concepts, systems, and specific actions that an organization will use to move materials across an entire supply chain. It answers day-to-day questions around what raw materials and finished goods to procure, store, and distribute, striving to best balance ever-moving financial, sales, plant capacity, and material availability factors.  

What are the main Functions of Inventory Management?  

Inventory Management can be wrapped up into two main functions: 

• Material Availability – making sure that the right products are in the right place, in the right volume, at the right cost point, at the right time.  
• Cost Accounting – aligning the cost of goods sold with the costs of production, through the active control of deciding which actual products to move over others according to the actual cost incurred when those products were produced. 

What benefits does Inventory Management provide?  

• Ideal inventory balance between production and sales demands 
• Better operational efficiency, avoiding over- or under-production, storage, and movement of goods 
• Heightened preparation for, and ability to react to, changing market conditions (such as raw material constraints and sales surges) 
• Higher customer satisfaction  
• Much better product quality and integrity, for products that have a shelf-life consideration  

What are the main Methods of Inventory Management? 

• FIFO – First In, First Out method. The first products made across all inventory (as in the oldest products by date of manufacture) are to be shipped out first, before newer products.
• LIFO – Last In, First Out method. The last products made across all inventory (as in the newest products by date of manufacture) are to be shipped out first, before older products.  
• AVCO – Average Cost method. Products can be physically shipped out in any order regardless of their manufacture date, and the cost recognized of each shipment is averaged across all inventory.  

What Goes In (First), Must Come Out (First)  

First In, First Out – sounds simple enough, but this phrase has a mountain of detail under the surface. The first place to start in understanding FIFO methodology is to split apart the accounting and physical availability aspects of the topic, as follows: 

FIFO Material Availability Elements  

In a warehouse environment, materials can be stored in a physical manner in which the first products placed into the storage system are also the first products removed. A good way to visualize this process is to picture gravity flow pallet racking, where a pallet set on the input end naturally flows down to the opposite outbound end and will be the first pallet to be picked by the outbound forklift. Products manufactured later will be set into the rack behind the first pallet and won’t be removed until the first pallet is pulled.  

Physically speaking, the reason FIFO would be selected is to assure that the oldest products are the first distributed downstream, which usually is coupled with shelf life and perishability concerns. Products such as packaged foods, fresh produce, and medicines all have expiration dates, and so the goal would be to move products in a way that maximizes their shelf life. If we pull newer products before older products such as with the LIFO method, we inherently leave older products in inventory longer than necessary, leading to degraded product quality, spoiled inventory, and waste.  

FIFO Cost Accounting Elements 

As an accounting method, First In, First Out can be termed a purely financial strategy intent on recognizing lower inventory costs and higher operating margins on financial statements. As a numbers game, FIFO accounting may or may not be coupled with physical FIFO inventory movements – that is, physical inventory could move in no specific sequence while the accounting end strictly records costs in the FIFO method.  The principle at play here is that in times of rising inflation, the costs of production tend to be lower in the past than they are at the time of sale. This means that a higher gross margin would be seen when recording older (lower) costs. Using FIFO accounting is a way to represent transactions in this margin-maximizing manner, making cashflows and the sitting cost of inventory look better to stakeholders.  

Readers might have guessed that there’s a downside when inflation subsides, and deflation occurs. In a deflationary period, today’s costs could be lower than older manufacturing dates’ costs, which is where Last In, First Out (LIFO) accounting comes in to use today’s costs and sell price to achieve higher recognized margin.  

Income statement strategies aside, FIFO tends to be the preferred cost accounting method due to its simple nature, and that most businesses marry up their physical inventory movements to match as moving older inventory first is generally a good idea.  

Applications in First In, First Out Inventory Management  

Examples of actual FIFO Inventory Management include:  

• Perishable Goods – FIFO inventory management is most often found in food, beverage, and pharmaceutical industries, where moving the first-stored (oldest) items from inventory is paramount to maintain freshness and quality. In the years to come, topics such as food safety, accelerated farm-to-table delivery lifecycles, and the shift towards direct home ingredient and meal delivery makes managing shelf life with FIFO methods all the more critical.    
• Rapid Generation Changes – for products where versions, releases, or generations change quickly, distributors do not want to be stuck with older versions held in inventory because they shipped newer versions too quickly. For this reason, FIFO methods assure that the oldest products move first – an increasingly important objective in electronic and technology products that revise multiple times a year.  
• Packaging Changes – marketing and branding changes are destined to happen across any product category, and FIFO allows distributors to make sure that they clear out old packaging designs ahead of new designs. A leading trend in this arena is found on social fronts, pushing manufacturers towards sustainable packaging and ultra-timely demographic marketing appeals.   
• Regulatory Compliance – regulated industries and products typically require tight tracking of product lots, batches, and SKUs, which can be easily achieved when inventory is managed in a chronological FIFO fashion. Compliance requirements are on an upward trajectory as global supply chains resettle around geopolitical, trade sanction, and raw material origin shifts.     
• Warehouse Optimization – thinking purely about how to design a material handling warehouse with optimization in mind, FIFO methodology pools together equipment and features that favor streamlined movement of materials. Gravity racking, linear layout, automated storage, flow-through pick modules, and split incoming and outgoing docks are just a few solutions that FIFO methods drive into warehouse design. Hitting again on sustainability as well as energy, workforce, and financial efficiency motives, warehouse and overall supply chain efficiency will be a major theme in the decades to come.    

Design a FIFO System 

Working with an experienced material handling company like Fairchild Equipment can be invaluable in designing a FIFO storage system tailored to your specific needs and industry. 

This process involves careful planning and consideration of various factors to ensure the efficient flow of goods in your storage system. Some of these factors include:  

• Identify Your Inventory Needs: 
  • Product Types: Determine the types of products you need to store and their specific storage requirements, such as size, weight, and temperature sensitivity. 
  • Inventory Volume: Assess the volume of inventory you need to handle, and whether it’s perishable or non-perishable. 
• Space Analysis: 
  • Racking Systems: Discuss the use of different racking systems, such as selective racks, push-back racks, flow racks, and drive-in racks, to determine which suits your needs best. 
  • Aisle Configuration: Decide on the width and layout of aisles, considering factors like the size of your inventory and how often items need to be accessed. 
• FIFO-Friendly Storage Solutions: 
  • Flow Racks: Flow racks use gravity to move items from the loading end to the unloading end, ensuring FIFO rotation. 
  • Conveyor Systems: Conveyors can be used to transport items in a FIFO manner, especially in high-throughput operations. 
  • Shelving with Clear Labeling: Ensure clear and consistent labeling of products and shelving to make it easy for employees to locate and pick the oldest items. 
• Inventory Tracking:
  • Barcode and Radio Frequency Identification (RFID) Systems: Implement barcode or RFID technology for accurate tracking of items, which is crucial for FIFO inventory management. 
  • Warehouse Management Systems (WMS): Utilize WMS software to track and manage inventory, ensuring that the oldest items are picked and shipped first. 
• Safety and Accessibility: 
  • Safety Measures: Ensure safety measures are in place for workers and products, and consider features like safety netting and protective barriers. 
  • Accessibility: Make sure the design allows easy access for both storing and retrieving items in a FIFO sequence. 
• Temperature and Environment Control: 
  • Cold Storage: If dealing with perishable goods, consider the need for refrigerated or cold storage facilities. 
  • Environmental Control: Control factors like humidity and dust if your inventory is sensitive to environmental conditions. 
• Budget and Cost Analysis: 
  • Cost Efficiency: Discuss cost-effective solutions that meet your FIFO needs without unnecessary expenses. 
  • ROI Analysis: Consider the return on investment (ROI) for the chosen storage system in terms of reduced waste, improved inventory control, and labor efficiency. 
• Training and Maintenance: 
  • Employee Training: Ensure your staff is trained to follow FIFO procedures. 
  • Regular Maintenance: Implement a maintenance plan for your storage system to keep it in optimal condition. 

Ensure that you communicate your requirements clearly and consider factors like inventory type, volume, and operational workflow when designing your storage system. 

We hope that this discussion has been helpful for your commercial material handling needs. Fairchild Equipment is the Upper Midwest’s premier Material Handling Equipment and Service resource, with headquarters in Green Bay, Wisconsin, and numerous locations in 5 states ready 24/7 to serve your needs. For more information or to discuss which Warehouse Optimization solution might be best for you, please send us a message or call us at (844) 432-4724.