The FIFO method is one of the strategies used in stock management of a business’s products. Stock management is a key element in keeping the operations of every business running smoothly. The use of FIFO method in a business will optimize product inventory management more efficiently.
The use of this method can also improve supply chain management (supply chain), so that the distribution of goods can run barrier-free. As a business owner, understanding this method is important.
To increase your understanding of the FIFO method, TransTRACK has summarized it in this article. Here is a complete explanation of the FIFO method that is important to know.
What is FIFO (First In First Out)?
FIFO stands for “First In First Out,” which translates to “First In, First Out.” The basic concept behind the First In First Out method is that items that first enter storage are the first to leave. This method is often used in stock management to organize the sale and use of products in a way that ensures products with a longer age or expiry date are used earlier.
The First In First Out system is a simple but effective method of managing stock items. It works well in situations where products have relevant expiration dates or lifespans. With FIFO, the risk of expired products can be minimized as older products always take precedence for use. Besides the First In First Out method, there are other stock management methods, namely the LIFO and FEFO methods. However, this time we will focus more on discussing the LIFO Method.
Advantages of FIFO Method
There are several advantages in applying the First In First Out method for stock management. Here are some of them:
Reduced Risk of Expired Products
One of the main advantages of the First In First Out method is its ability to reduce the risk of expired products. The FIFO method ensures that the products that first enter the inventory are also the first to be used. Thus, the potential for products to expire is minimized.
Accurate Inventory Calculation
The First In First Out method helps in more accurate inventory calculations. Since products are taken out of stock in the order they arrive, you can have a clearer picture of the number of products still available. This is very important for inventory planning, procurement, and cost control.
Especially in businesses that sell products with expiration dates, such as food products, beverages or medicines, FIFO can trigger faster sales. By prioritizing the use of older products, you can keep the products fresh and more attractive to customers.
Better Cost Management
In addition to being helpful in calculating inventory, the First In First Out method can also improve accuracy in calculating product costs. This is especially true in businesses where products have significant price variations. With the FIFO method, the cost of older products is used first, so the cost of products sold is also more precise.
Disadvantages of FIFO Method in Stock Management
Although it has significant advantages, the First In First Out method also has disadvantages that need to be considered, namely:
Increases Tax Costs
The First In First Out method can result in higher tax costs because the end-of-period inventory will be valued at the higher cost of the last purchase. This may cause the company to pay more taxes.
Lack of Flexibility
The First In First Out method has low flexibility. Since the FIFO method prioritizes the use of earlier products, diverse customer demands with specific item characteristics (such as quality, color, or weight) may not be met.
Not Always Suitable for All Products
The FIFO method is an ideal solution for products with expiration dates or that require strict stock rotation. However, for products that do not have expiration date dependency or other criteria, the application of this method may not be necessary and may cause a waste of time and resources.
FIFO Method is the Solution for Whom?
The FIFO method is not always suitable for all types of businesses. The FIFO method is suitable for companies that sell products with expiration dates, such as food, beverages, and medicines. For items that do not have an age or expiry date dependency, this method is less suitable.
In the food business, especially in restaurants, FIFO is a common practice that helps in maintaining food quality and avoiding wastage. Restaurants often prioritize the use of older raw materials to minimize cost wastage.
Using the FIFO method is an important step to reduce waste and maintain product quality. However, this method is not a general solution, so it needs to be adapted to the type of business and stock being managed. With a good understanding of FIFO and the right effort, you can maintain efficient stock and optimize business operations.
Implementing the FIFO method in stock management is a wise move to reduce waste and maintain product quality. To optimize this method, you can also use the help of Logistic Service Integrator (LSI) technology from TransTRACK.
With LSI, companies can monitor stock in real-time, optimize deliveries, and manage stock more accurately. LSI also allows companies to run the FIFO method more efficiently, minimize waste, and improve overall stock management. In a competitive business world, efficiency in stock management can be a significant competitive advantage. Contact TransTRACK immediately to get complete information about Logistic Service Integrator technology. You can also apply for a free demo to experience the various benefits offered.