LIFO and FIFO methodes for inventory optimization

What is inventory management?

Inventories are all the goods, components and raw materials of a company. The acquisition, maintenance and devaluation of these stocks have a cost.

Inventory management, which concerns all the procedures for the supply of stocks, must therefore be relevant to ensure the sustainability of your company. There are several ways to manage inventory in a factory.

Let’s go over some of these optimization methods.

The FIFO method: first in – first out

The FIFO method,  or First In First Out, considers that the company gets rid of the assets acquired first.

In other words, the objective is to get the goods out in order of entry into stock.

The FIFO method: an asset for factory logistics?

The organization of the FIFO method allows a simple management of stock sequencing. It follows the current market prices and thus corresponds to what is generally applied in companies, especially since, unlike the LIFO method, it is authorized by the French tax authorities.

However, it requires an adapted storage method. The storage in the warehouse must be done rigorously, respecting the circuit of entry and exit of the products.

It does not take into account the variation of products over time and can therefore lead to calculation errors.

The disadvantages of the FIFO method being minimal, this method is highly appreciated by companies.

The LIFO method: last in first out

The LIFO method considers that the company gets rid of the assets acquired last.

In other words, the objective is to get rid of the goods in decreasing order of entry into stock, contrary to the FIFO method.

The LIFO method: an asset in times of inflation

The LIFO method, less instinctive than the FIFO method, must be applied in warehouses with homogeneous products that do not lose value.
It is much more difficult to implement, as it is prohibited by the French tax authorities and does not necessarily indicate a very accurate value of the remaining assets in stock.

However, it may be wise for companies to use this method to optimize their inventory management.

Indeed, this method allows to take into account the possible variation of prices over time, and can therefore be particularly useful in periods of inflation.

Adopt the right inventory management for your company!

In addition to the FIFO and LIFO methods, there is the FEFO method, for example, which is particularly relevant for inventory management of perishable products.

By taking a holistic view of the different inventory management methods, you can choose the one that will be optimal for your business.

Written by Emma Guignard