What is FIFO?
FIFO stands for First In, First Out. FIFO is an inventory management method that the first items received or produced are the first items to be sold or used.
A common example of FIFO in use is in a retail store’s inventory management. Let’s say a store receives a shipment of 100 smartphones on Monday and then receives another shipment of 50 smartphones on Wednesday.
Under the FIFO method, the store would sell 100 smartphones from the Monday shipment first, as they were received first, and then move on to the Wednesday shipment to sell the remaining 50 smartphones.
This way, the store is ensuring that it is selling the oldest smartphones first, which helps to minimize the risk of having to sell obsoleted or expired products.
Minimizes the risk of having to sell or use outdated or expired items: By selling or using the oldest items first, FIFO helps to minimize the chances that the items being sold or used are still fresh and of good quality.
Simplicity: In common sense, the first items received or produced are also the first items to be sold or used. The simple concept helps FIFO method easy to understand and implement.
Can result in higher carrying costs: If older items are not sold or used quickly enough, the cost of storing them for an extended period of time can become significant.
Doesn’t account for price changes: FIFO doesn’t take into account changes in the price of goods, so it may not be the most cost-effective method for managing inventory.
Doesn’t account for demand changes: FIFO also doesn’t take into account changes in demand for goods, so it may not be the most efficient method for managing inventory.
May not be the best option for certain types of inventory: FIFO may not be the best option for certain types of inventory, such as perishable goods, that have a shelf life.