Learn about the FIFO system and its importance for inventory flow management

In times when the production processes must be carried out in an increasingly efficient way, it is evident the importance of planning and managing the inventory flow by the companies, aiming at increasing efficiency and reducing waste. And that is what FIFO is there for.

This system was created to control the storage of products in order to evaluate the volume of incoming and outgoing goods.

If you are curious to learn more about this system, continue reading this article. In it you will learn:

•  What is FIFO?
• Difference between LIFO, FIFO and FEFO
• Examples of FIFO application
•  How to use FIFO?
• Advantages of FIFO

Let's go?

What is FIFO?

FIFO is an acronym for "First In, First Out" and its primary concept is simple: the company must work with queues, in which as the new products are placed in the queue, the old ones are removed, obeying the order of arrival of the items in stock.

What is FIFO for?

The name FIFO is an abbreviation of the expression "First In, First Out”. This methodology is generally used by companies that work with perishable products, such as supermarkets, to avoid the loss of products due to expiration, for example.

Besides FIFO, there are other ways to plan and manage inventory. Below you will see the difference between them.

Difference between FIFO, LIFO and FEFO

FIFO is not the only system that exists for inventory planning and control. Other methods have been created that can be useful according to the needs of each company, such as LIFO and FEFO. Below we will understand the definition of each one:

LIFO

LIFO stands for "Last In, First Out". This is an inventory methodology that works in the opposite way to FIFO, that is, the last product to enter the storage should be the first to leave it.

This methodology is recommended for companies that work with stocks that do not offer risk of loss due to expiration or obsolescence, for example.

The logic of this method allows an increase in the purchase price of the goods from the supplier to be quickly passed on to the consumer, avoiding losses for the company.

An example of stock where the LIFO methodology is indicated is the stock of electronics in general, such as TVs and Smartphones since they have no expiration date.

FEFO

This method is directly linked to product shelf life. The acronym FEFO stands for "First Expire, First Out". The company needs to have control of the validity of the items, and as the expiration date approaches, they must be removed from stock.

It is widely used in the food sector, for example, in which the evaluation of product quality is directly related to the shelf life.

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Examples of FIFO Usage

For the use of FIFO, the basic rule is that the oldest products in stock are the first to be delivered to the consumer.

As an example, let's consider that your company resells products:

In the month of January, you made the purchase of two lots of product A, with lot 1 purchased on 10/01 and lot 2 on 20/01.

If a customer purchases a product on 01/21, he should receive an item from lot 1 (if it is not already sold out), even though lot 2 has already been delivered by the supplier.

Only after the exhaustion of the items from batch 1 should the products from batch 2 be issued.

Another example can easily be seen in a supermarket, where the products that arrived first at the distribution center are placed at the front of the shelves.

This way it is possible to get consumers to buy the oldest items, avoiding problems such as the loss of goods due to expiration dates.

How to apply FIFO

For a correct application of the method, there are two basic rules that must be followed and that show the relationship of this system with the Lean Manufacturing methodology:

1. No item can overtake another item

The sequence of the parts must be maintained, no part can overtake another in the queue. In addition, an item that is outside the queue cannot be "slotted" in front of other parts.

Imagine yourself in a supermarket queue with 10 people in front of you. Given a constant flow, you can get an idea of how long it will take to be served. Now, imagine that one person "cuts" the line in front of you: your waiting time will certainly be longer.

This rule is important to maintain a constant and smooth flow, one of the principles of Lean logistics.

2. A maximum capacity must be defined

The second rule for implementing the FIFO method is to clearly define a maximum capacity, above which there is no more space in the queue, and when it is reached, the process must be stopped.

The idea of this rule is to avoid overproduction, which is considered as one of the 8 Lean Manufacturing wastes.

Advantages of FIFO

FIFO controls the volume of incoming and outgoing goods in a company, and this process can generate benefits for several sectors of the company, as we will see below:

Accounting ease

On the accounting side, FIFO is useful to facilitate the calculation of the value of the goods stored at a certain time. We bring you an example to make it easier to understand:

In week 1, your company purchases 300 items of product A with a unit value of $50.00 (lot 1).

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In week 2, your company acquires another 400 items of product A, but now with a unit value of $60.00 (lot 2).

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In week 3, your company sells 600 items of product A.

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In your inventory, your company has 100 items of product A, but what was the cost of these?

Since you use the FIFO system in your company, you know that of the 600 items sold in week 3, 300 came from lot 1, because it is the first to be sold out.

Thus, it is easy to see that the 100 items remaining in your inventory come from batch 2.

Therefore, the value of your stock is 100 (items) * $ 60.00 (unit value of batch 2) = $ 6,000.00.

Reducing costs and waste

With the FIFO system, you can optimize the storage of goods, since it reduces the need for large inventory spaces. Thus, the related costs fall, which is fundamental for any company.

The use of this method facilitates the handling of perishable products and avoids the loss of goods due to expiration date.

Agility

Since FIFO works with a lean material flow, the system prevents overproduction and overfilling of the system, since we have a defined maximum capacity (remember the rules?).

This makes it much easier for the company to react quickly and efficiently to variations in demand for its products.

Defined flow of information

Since it is a relatively simple method, you only need to control the first process in the system, while the others are capable of managing themselves. In this sense, the Kanban tool has great value.

Visual Management

It is usually easy to identify a bottleneck in a FIFO system. In addition, the employees themselves may be able to identify some flaw in the system and can correct it before it becomes a critical problem.

As we have seen, the FIFO methodology is largely related to Lean Manufacturing, as it has its total focus to avoid waste, this being one of the principles of Lean. Furthermore, Lean Manufacturing enables the use of several tools that can be used to improve various processes in a company, maximizing productivity and increasing revenues.

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