In order to remain competitive, several companies are increasing their inventory management efforts. In fact, the raw parts and the finished products stored can become very expensive and the secret of a good logistics resides in the movements of the goods through the warehouse.
So which system is best for your business?
First of all, FIFO (First In First Out) minimizes losses due to obsolescence. Companies that manufacture or distribute perishable products (such as food), products that have a life cycle (such as clothing) or products that become obsolete after a certain time (such as high technology) use FIFO. However, the FIFO does not allow for an overall picture of the value of the inventory if the increase in inflation and prices are not followed closely.
LIFO (last in first out) is best when the value of the products increases with the storage time. It is mainly used for homogeneous goods such as coal, sand, rock, etc. When a new batch arrives at the warehouse, it is put on top of the last batch. It is also useful in cases where the warehouse is small and does not allow rotating lots. LIFO makes it possible to monitor market price changes. When production costs increase, manufactured products cost more. So, if you sell those made with lower production costs, you underestimate the costs and overestimate the profits, since you are working with old information. LIFO provides more reliable and accurate earnings information. You will also be less affected by market price declines, since you will sell the products that cost the most first.
Which method is the best?
It depends on the type of products you make. In any case, it is important that the layout of the warehouse minimizes and facilitates travel.