On this page;
- What is FIFO?
- When is the FIFO method most commonly used?
- How the FIFO method works; an example
- You own a skincare brand, your products contain ingredients that expire after 3-12 months depending on the product.
If these products are used past their shelf life date, customers are at risk of developing skin rashes and general irritation, and the overall purpose of the product becomes less and less effective the longer it is left. - You (or your 3PL) receive a shipment of products on the 1st of the month. One the last day of the month, a fresh batch is received.
You still have 15 units from the previous shipment, and 30 open orders.
15 of those orders will be fulfilled using the units left from the first batch, and the remaining 15 orders will be fulfilled using the batch from your most recent shipment. This the first in first out method. - FIFO and COGS; What are they?
- What is the COGS formula?
- COGS in Practice…
- FIFO method; advantages
- FIFO Method; Disadvantages
- What is LIFO?
- Comparing FIFO with LIFO
- FIFO Advantages; simple and accurate Disadvantages; Creates higher tax inflation Ideal for; Perishable goods, clothing, makeup, rapid tech/automotive products
- LIFO Advantages; Beneficial for taxes during periods of inflation Disadvantages; Outdated or unusable stock Ideal for; Non perishables, stable tech/automotive, products without an expiry date
- We don’t just meet the standard. We make it
FIFO; An introduction…
If you’re in the world of eCommerce and fulfilment you may have come across the term FIFO at some point.
If not – don’t worry!
On this page we are going to explore the ins and outs of FIFO, including what it is, why its important, how it can be used, and how it compares against the LIFO method.
Lets dive in an explore how the FIFO method can be a beneficial tool for your business…
FIFO; An Introduction
If you’re in the world of eCommerce and fulfilment you may have come across the term FIFO at some point.
If not – don’t worry!
On this page we are going to explore the ins and outs of FIFO, including what it is, why its important, how it can be used, and how it compares against the LIFO method.
Lets dive in an explore how the FIFO method can be a beneficial tool for your business…
What is FIFO?
Beautifully crafted leather products.
FIFO is an abbreviation that stands for ‘First In First Out’, it is a method commonly used in inventory management whereby stock that is produced or purchased first is then sold first. ‘Old’ inventory is therefore shipped out before the ‘new’ inventory.
This method is designed to track the cost of your inventory, and is also used to help you avoid spending extra money replenishing stock due to having excess stock that can’t be sold because it is too ‘old’.
![Hand truck and brown cardboard boxes on pastel lilac background.](https://tspfulfilment.co.uk/wp-content/uploads/2023/07/AdobeStock_579089772-scaled.jpeg)
Homeware; Exploring the growing market…
Understanding FIFO; What is it?
FIFO is an abbreviation that stands for ‘First In First Out’, it is a method commonly used in inventory management whereby stock that is produced or purchased first is then sold first. ‘Old’ inventory is therefore shipped out before the ‘new’ inventory.
This method is designed to track the cost of your inventory, and is also used to help you avoid spending extra money replenishing stock due to having excess stock that can’t be sold because it is too ‘old’.
![the concept of storage and transportation of parcels. parcels on pallets on a pastel background. 3D render](https://tspfulfilment.co.uk/wp-content/uploads/2023/08/AdobeStock_563678641-scaled.jpeg)
![the concept of storage and transportation of parcels. parcels on pallets on a pastel background. 3D render](https://tspfulfilment.co.uk/wp-content/uploads/2023/08/AdobeStock_563678641-scaled.jpeg)
When is the FIFO method most commonly used?
The FIFO method can be used as an inventory management tool regardless of your products, but it is most commonly used in products that have an expiry date due to the ingredients that are in them. So, you will find this method is most commonly used in the following sectors;
- Retail; Especially for goods in supermarkets, or clothing retailers where a large portion of inventory is ‘trend’ or ‘seasonal’ based
- Automotive; Particularly for parts/components that may become less efficient over time if they are not sold fast enough
- Electronics; Technology develops quickly, old stock needs to be sold first
- Hospitality; Food supplies and other perishables have a shelf life, meaning older stock needs to be sold first
- Healthcare; Certain medical supplies have a shelf life and need to be used and sold first to avoid posing a risk to the consumers health
Other reasons where the FIFO method is used might include;
- A re-brand, new packaging. Old products are then sold first before new packaging and branding is introduced to avoid wasting money on excess stock
- Change in the product itself- an ingredient, design, component, etc. Old products are then sold first before the ‘new’ product is introduced.
What is Kitting and Assembly?
Kitting and assembly is a fulfilment service that is offered by most 3PL companies. It is a process that involves compiling, or assembling different parts and components together to create one final product, bundle, or kit. It is worth noting that this then becomes one singular SKU rather than multiple.
Kitting and assembly gives you the chance to offer customised bundles, kits, and products, meaning that you can drive more sales through discounts, promotions, etc.
How the FIFO method works; an example
How the FIFO method works; an example
FIFO and COGS; What are they?
Beautifully crafted leather products.
COGS is an abbreviation that stands for ‘Cost of Goods Sold’, and refers to the direct cost that both retailers and eCommerce businesses need to pay in order to sell products. This cost includes things such as; labour, manufacturing, raw materials, vendors, suppliers, etc.
COGS is important as it helps you calculate things such as profits, so implementing and tracking the COGS method will help you accurately calculate your profitability, which is a critical KPI for any eCommerce or retail business. It will allow you to make more strategic and informed decisions about your stock, and how much money is being spent on the production/purchasing of goods, which can then help you determine the retail cost of your products once you start selling them.
![3D rendering Calculator and money dollar Floating , Banknotes coins Business investment, calculate Finance saving concept. on pestel Purple background cartoon style](https://tspfulfilment.co.uk/wp-content/uploads/2023/08/AdobeStock_436241977-1-scaled.jpeg)
![Online payments coin floating with mobile phone, transfer exchange shopping cart online concept. pay money via app Internet banking on purple background. cartoon minimal. 3d render illustration](https://tspfulfilment.co.uk/wp-content/uploads/2023/08/AdobeStock_510994076-scaled.jpeg)
What is the COGS formula?
To calculate your cost of goods, you simply add together your starting inventory + your inventory purchases, followed by deducting your ending inventory from that total. Therefore, the formula is as follows;
COGS= Starting inventory + Purchases – Ending Inventory
What is Kitting and Assembly?
Kitting and assembly is a fulfilment service that is offered by most 3PL companies. It is a process that involves compiling, or assembling different parts and components together to create one final product, bundle, or kit. It is worth noting that this then becomes one singular SKU rather than multiple.
Kitting and assembly gives you the chance to offer customised bundles, kits, and products, meaning that you can drive more sales through discounts, promotions, etc.
COGS in Practice…
Beautifully crafted leather products.
You are a shoe manufacturer, and you start off your year with £10,000 worth of inventory.
During the course of that same year, an extra £25,000 is spent on materials and production costs to create more inventory.
By the end of the year, you are left with £5,000 worth of inventory. So, to calculate your COGS, it would be as follows;
£10,000 (starting inventory) + £25,000 (purchasing) – £5000 (ending inventory) = £30,000
![imresizer-1690890810650](https://tspfulfilment.co.uk/wp-content/uploads/2023/08/imresizer-1690890810650-scaled.jpg)
Giving your brand a competitive edge; exploring your fulfilment options…
When is the FIFO method most commonly used?
The FIFO method can be used as an inventory management tool regardless of your products, but it is most commonly used in products that have an expiry date due to the ingredients that are in them. So, you will find this method is most commonly used in;
- Makeup products
- Skincare products
- Haircare products
- Food and Drink products
- Vitamins and supplement products
- Other pharmaceutical products
- Clothing products
- Electronical products – phones, laptops etc
Although, as mentioned, the FIFO method can be used for any business and any product. Other reasons where the FIFO method is used might include;
- A re-brand, new packaging. Old products are then sold first before new packaging and branding is introduced to avoid wasting money on excess stock
- Change in the product itself- an ingredient, design, component, etc. Old products are then sold first before the ‘new’ product is introduced.
![Hand truck with brown cardboard box on a pastel lilac background. Transportation and delivery concept. 3d render illustration](https://tspfulfilment.co.uk/wp-content/uploads/2023/08/AdobeStock_579089765-scaled.jpeg)
Giving your brand a competitive edge; exploring your fulfilment options…
FIFO and COGS…
COGS is an abbreviation that stands for ‘Cost of Goods Sold’, and refers to the direct cost that both retailers and eCommerce businesses need to pay in order to sell products. This cost includes things such as; labour, manufacturing, raw materials, vendors, suppliers, etc. COGS is important as it helps you calculate things such as profits, so implementing and tracking the COGS method will help you accurately calculate your profitability, which is a critical KPI for any eCommerce or retail business. It will allow you to make more strategic and informed decisions about your stock, and how much money is being spent on the production/purchasing of goods, which can then help you determine the retail cost of your products once you start selling them.
![Toy cartoon forklift isolated on pastel light flat background with copy space. Pink, green, orange palette colors. Generative AI 3d render illustration imitation.](https://tspfulfilment.co.uk/wp-content/uploads/2023/08/AdobeStock_620875856-scaled.jpeg)
Giving your brand a competitive edge; exploring your fulfilment options…
COGS in practice…
You are a shoe manufacturer, and you start off your year with £10,000 worth of inventory.
During the course of that same year, an extra £25,000 is spent on materials and production costs to create more inventory.
By the end of the year, you are left with £5,000 worth of inventory. So, to calculate your COGS, it would be as follows;
£10,000 (starting inventory) + £25,000 (purchasing) – £5000 (ending inventory) = £30,000
![Minimal cartoon shop store and Shopping bag on smartphone app sh](https://tspfulfilment.co.uk/wp-content/uploads/2023/08/AdobeStock_487692879-1-scaled.jpeg)
FIFO method; advantages
There are many different inventory management methods meaning there is no ‘right’ method with each method having pros and cons. But, with that being said, FIFO and COGS holds more advantages than disadvantages. Lets explore them…
FIFO method; advantages
There are many different inventory management methods meaning there is no ‘right’ method with each method having pros and cons. But, with that being said, FIFO and COGS holds more advantages than disadvantages. Lets explore them…
FIFO Method; Disadvantages
Now that we have explored the advantages of FIFO, lets explore the disadvantages…
FIFO Method; Disadvantages
Now that we have explored the advantages of FIFO, lets explore the disadvantages…
What is LIFO?
Beautifully crafted leather products.
Put simply, LIFO is the opposite of FIFO and stands for ‘last in first out’. This approach is obviously different and requires new stock to be sold before old stock. LIFO can help businesses save on taxes and better match their revenue income with the latest costs of goods during times of inflation.
Although, it is worth mentioning that this method is only used in the United States and is permitted under GAAP.
![imresizer-1690890810650](https://tspfulfilment.co.uk/wp-content/uploads/2023/08/imresizer-1690890810650-scaled.jpg)
Comparing FIFO with LIFO
FIFO Method; Disadvantages
Now that we have explored the advantages of FIFO, lets explore the disadvantages…
Giving your brand a competitive edge; exploring your fulfilment options…
What is LIFO?
Put simply, LIFO is the opposite of FIFO and stands for ‘last in first out’. This approach is obviously different and requires new stock to be sold before old stock. LIFO can help businesses save on taxes and better match their revenue income with the latest costs of goods during times of inflation.
Although, it is worth mentioning that this method is only used in the United States and is permitted under GAAP.
![Online payments coin floating with mobile phone, transfer exchange shopping cart online concept. pay money via app Internet banking on purple background. cartoon minimal. 3d render illustration](https://tspfulfilment.co.uk/wp-content/uploads/2023/08/AdobeStock_510994076-scaled.jpeg)
Comparing FIFO with LIFO
Giving your brand a competitive edge; exploring your fulfilment options…
Leave it with us…
At TSP, we have industry leading inventory management systems in place that allow us and our clients to easily see and track their inventory. Not only this, we actively work with clients who require the FIFO method to be used due to expiry and shelf life dates on their products, meaning we are more than capable of handling your inventory and orders.
Explore our other fulfilment services below…
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![imresizer-1690981235507](https://tspfulfilment.co.uk/wp-content/uploads/2023/08/imresizer-1690981235507.jpg)
Leave your inventory management with us…
At TSP, we have industry leading inventory management systems in place that allow us and our clients to easily see and track their inventory. Not only this, we actively work with clients who require the FIFO method to be used due to expiry and shelf life dates on their products, meaning we are more than capable of handling your inventory and orders.
Explore our other fulfilment services below…
What is Kitting and Assembly?
Kitting and assembly is a fulfilment service that is offered by most 3PL companies. It is a process that involves compiling, or assembling different parts and components together to create one final product, bundle, or kit. It is worth noting that this then becomes one singular SKU rather than multiple.
Kitting and assembly gives you the chance to offer customised bundles, kits, and products, meaning that you can drive more sales through discounts, promotions, etc.
Why Choose TSP?
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