FIFO; What is it? How is it used?

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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…

Breathtaking design for home living.

FIFO; What is it? How is it used?

Nam aliquet ante porta, gravida elit interdum, luctus porta sapien justo, at fringilla felis suscipit vestibulum.

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…

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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’.

 

 

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’.

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

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.

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?

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.

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

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.

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.

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

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…

Pro; Inventory Management.

Using the FIFO method can improve your inventory management to help you avoid excess costs. These excess costs may arise as a result of having to dispose of expired stock that wasn’t sold, or as a result of excess storage costs due to having to hold more stock than necessary. So, using the FIFO method can improve inventory management and the costs associated with storing inventory.

Pro; Higher Valuation and net income.

As explained, using the FIFO method means that goods purchased/manufactured first, are then sold first. Due to things such as inflation, causing the cost of purchasing/manufacturing to increase, meaning goods purchased earlier in the year are more likely to be cheaper compared to goods purchased later on in the year. Since FIFO assumes that goods purchased first are then sold first, you will find that your ending inventory is primarily made up of goods with a higher value, which will then lead to having a higher ending inventory value.

In terms of net income, the FIFO method requires you to log higher profits, and subsequently your higher net income because it uses a lower COGS.

Pro; Reflects actual inventory movement more accurately.

The FIFO method can provide more accuracy when it comes to tracking your inventory movement since the FIFO method reflects the order in which inventory units are actually sold. This is especially true and important for any brands that sell products with expiry dates and short shelf lives as it helps to avoid inventory obsoletion and dead stock.

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…

Pro; Inventory Management.

Using the FIFO method can improve your inventory management to help you avoid excess costs. These excess costs may arise as a result of having to dispose of expired stock that wasn’t sold, or as a result of excess storage costs due to having to hold more stock than necessary. So, using the FIFO method can improve inventory management and the costs associated with storing inventory.

Pro; Higher Valuation and net income.

As explained, using the FIFO method means that goods purchased/manufactured first, are then sold first. Due to things such as inflation, causing the cost of purchasing/manufacturing to increase, meaning goods purchased earlier in the year are more likely to be cheaper compared to goods purchased later on in the year. Since FIFO assumes that goods purchased first are then sold first, you will find that your ending inventory is primarily made up of goods with a higher value, which will then lead to having a higher ending inventory value.

In terms of net income, the FIFO method requires you to log higher profits, and subsequently your higher net income because it uses a lower COGS.

Pro; Reflects actual inventory movement more accurately.

The FIFO method can provide more accuracy when it comes to tracking your inventory movement since the FIFO method reflects the order in which inventory units are actually sold. This is especially true and important for any brands that sell products with expiry dates and short shelf lives as it helps to avoid inventory obsoletion and dead stock.

FIFO Method; Disadvantages

Now that we have explored the advantages of FIFO, lets explore the disadvantages…

Con; Discrepancies if COGS increase or spike

The FIFO method works best when COGS increases gradually, not drastically. If your supplier or manufacturer suddenly increases their prices drastically, you may end up with significant discrepancies in your recorded vs actual profits and costs. So, its important to take this into consideration when using FIFO and COGS.

Con; Higher Taxes

When using FIFO, it can lead to higher taxes as a result of the net-income being higher. Depending on your business, this could potentially cause cash flow issues and eat further into your bottom line. So this needs to be taken into consideration as well when determining whether or not the FIFO method is the right inventory management method for your business.

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.

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

Con; Discrepancies if COGS increase or spike

The FIFO method works best when COGS increases gradually, not drastically. If your supplier or manufacturer suddenly increases their prices drastically, you may end up with significant discrepancies in your recorded vs actual profits and costs. So, its important to take this into consideration when using FIFO and COGS.

Con; Higher Taxes

When using FIFO, it can lead to higher taxes as a result of the net-income being higher. Depending on your business, this could potentially cause cash flow issues and eat further into your bottom line. So this needs to be taken into consideration as well when determining whether or not the FIFO method is the right inventory management method for your business.

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.

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

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…

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.

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Our Range of Fulfilment Services

Storage, Pick and pack

At TSP we handle everything, starting with the storage, picking, and packing of your products.

We serve a range of markets so we have experience storing, picking, and packing a variety of different products, so we’ve got you covered regardless of what you sell.

Outsourcing your pick and pack with us will help free up your time, while also improving the entire process due to our highly experienced team of staff.

B2B and B2C Fulfilment

Regardless of whether you just do B2C or B2B, or a mixture of both, our team have the knowledge and resources required to successfully get your orders picked, packed, and shipped to your customer or chosen retailer.

While we handle your B2B and B2C fulfilment, you can focus on putting more time and money back into other areas of your business, such as your sales, marketing, and product development.

Shipping and logistics

After we pick and pack your orders, we ship them too.

We ensure you get better deals on shipping and packaging by letting you leverage our buying power, meaning you can save money and put it back into growing your business.

We also partner with a range of couriers, ensuring the needs of your business are being met through a diverse choice in reliable couriers.

Amazon FBM, FBA, SFP…

We are your one stop solution for all Amazon seller services, including FBA, FBM and SFP. With over 20 years of industry experience you can be assured that we are fully equipped to support you..

So regardless of what Amazon service you’re using, or if its a mix of all 3, we’ve got you covered. Check out our Amazon page for more information regarding our Amazon fulfilment services.

Inventory Management

Our cloud-based inventory management system, Mintsoft is easy to navigate and provides you with real time updates so you can always make informed decisions about your stock.

Returns Management

Returns are inevitable when it comes to your eCommerce business, but managing them correctly is a critical aspect on 3PL services. Here at TSP, we will handle the entire process from start to finish, helping you to main a high level of customer satisfaction.

Carbon Neutral Fulfilment

Are you a sustainable business? Looking to become more sustainable? Working with us means you can do your bit for the planet too, since we are a certified carbon neutral 3PL company.

Kitting, Bundling, and Assembly

Do you sell custom bundles or kits? We’ve got you covered. Our team is trained in kitting and bundle building, so you can be assured your customers will receive their orders in an accurate, timely manner.

Global Fulfilment

Do you require international shipping, or are you looking to expand into global markets? We’ve got you covered with our extensive network of couriers and global warehouses.

Explore our global fulfilment solutions page to see how we can help you dominate the global market, right from the heart of Newcastle.

Customs Bonded Warehouse

Here at TSP we are one of the very few Newcastle based order fulfilment companies with a dry bonded warehouse license.

Our network of freight forwarders means you can easily utilise the power of cross-border selling, allowing you to boost sales and drive growth.

Storage, Pick and pack

At TSP we handle everything, starting with the storage, picking, and packing of your products.

We serve a range of markets so we have experience storing, picking, and packing a variety of different products, so we’ve got you covered regardless of what you sell.

Outsourcing your pick and pack with us will help free up your time, while also improving the entire process due to our highly experienced team of staff.

B2B and B2C Fulfilment

Regardless of whether you just do B2C or B2B, or a mixture of both, our team have the knowledge and resources required to successfully get your orders picked, packed, and shipped to your customer or chosen retailer.

While we handle your B2B and B2C fulfilment, you can focus on putting more time and money back into other areas of your business, such as your sales, marketing, and product development.

Shipping and logistics

After we pick and pack your orders, we ship them too.

We ensure you get better deals on shipping and packaging by letting you leverage our buying power, meaning you can save money and put it back into growing your business.

We also partner with a range of couriers, ensuring the needs of your business are being met through a diverse choice in reliable couriers.

Amazon FBM, FBA, SFP…

We are your one stop solution for all Amazon seller services, including FBA, FBM and SFP. With over 20 years of industry experience you can be assured that we are fully equipped to support you..

So regardless of what Amazon service you’re using, or if its a mix of all 3, we’ve got you covered. Check out our Amazon page for more information regarding our Amazon fulfilment services.

Inventory Management

Our cloud-based inventory management system, Mintsoft is easy to navigate and provides you with real time updates so you can always make informed decisions about your stock.

Returns Management

Returns are inevitable when it comes to your eCommerce business, but managing them correctly is a critical aspect on 3PL services. Here at TSP, we will handle the entire process from start to finish, helping you to main a high level of customer satisfaction.

Carbon Neutral Fulfilment

Are you a sustainable business? Looking to become more sustainable? Working with us means you can do your bit for the planet too, since we are a certified carbon neutral 3PL company.

Kitting, Bundling, and Assembly

Do you sell custom bundles or kits? We’ve got you covered. Our team is trained in kitting and bundle building, so you can be assured your customers will receive their orders in an accurate, timely manner.

Global Fulfilment

Do you require international shipping, or are you looking to expand into global markets? We’ve got you covered with our extensive network of couriers and global warehouses.

Explore our global fulfilment solutions page to see how we can help you dominate the global market, right from the heart of Newcastle.

Customs Bonded Warehouse

Here at TSP we are one of the very few Newcastle based order fulfilment companies with a dry bonded warehouse license.

Our network of freight forwarders means you can easily utilise the power of cross-border selling, allowing you to boost sales and drive growth.

Collate your product details and connect your stores / market places

Link you into our preferred courier network

Take delivery of your stock, go live!



Collate your product details and connect your stores & marketplaces.



Link you into our preferred courier network.

Take delivery of your stock, go live!

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