HOW TO MANAGE FIFO IN A WAREHOUSE.
HOW TO MANAGE FIFO IN A WAREHOUSE.
FIRST IN FIRST OUT (FIFO) is an inventory control method whereby, the first items entered into the warehouse are the first to leave.To be more explicit, this method simply implies that, the items you received first are the items you’ve held longest and therefore closest to obsolescence or expiry. In order to avoid worthless inventory, business owners move these products before they can’t be sold maybe because it has depreciated.
The FIFO method applies to both warehouse management and accounting where it’s used as an inventory valuation method. FOR a company’s FINANCIAL STATEMENT to reflect reality, the inventory valuation method should be accurate. Thus helps to make good decisions.
Before we take a close look at FIFO warehousing, it important for us to differentiate between the different methods of inventory management
How Many Different Ways Can You Manage Your Inventory?
It not always easy, but you always have to carefully manage your inventory. this is because your inventory is that which is required for the continued functioning of your business. Auspiciously, businesses have been managing inventory for so long that there are established methods that fall into two main schools of thought. So, we have the:
- Periodic inventory accounting system
- Perpetual inventory accounting system
In the periodic inventory accounting system, the business check the stock after a specific period of time. this can be monthly, quarterly annually.
With regard to the perpetual inventory system, the stock amount is known each time a product is been sold. Here, at every moment in time, the stock amount is known even without necessarily going to the warehouse.
There are four inventory valuation methods used under the perpetual system:
- First in, first out (FIFO) accounting
- Last in, first out (LIFO) accounting
- Highest in, first out (HIFO) accounting
- Average cost or the weighted average cost accounting
FIFO: this method implies that, the First products to arrive are the first products sold or taken out of stock. This is however the Simplest method, especially for products quick to spoil
LIFO: with lifo, the Last products to arrive are the first products sold or taken out of stock.
HIFO: here, Products with the highest cost of purchase are the first products sold/taken out of stock
Average cost / Average weighted cost: Finding the cost of products based on the average cost and does not consider purchase date. Here, all the different cost prices are being summed up and divided to get a unique price at which the goods will be sold Used when it is difficult to assign a specific cost to individual items, e.g. oil and gas industry.
It should be noted that, The United States is the only country that allows last in, first out (LIFO) inventory accounting. LIFO is accepted under the Generally Accepted Accounting Principles (GAAP). Other countries, which use the International Financial Reporting Standards, do not.
In order for us to easily understand how the FIFO inventory method functions, we are going to take a simple example;
EXAMPLE TO SHOW HOW THE FIFO INVENTORY MANAGEMENT METHOD FUNCTIONS
Assuming that your warehouse stocks computers, and that,
- In month one you ordered 150 computers for 135000 FCFA each
- The next month, you ordered 120 computers for 145000 FCFA each (the unit price has changed !!!!)
You now have 270 computers as stocks.
It happens that you sell 200 computers for 200000 each. this implies that you are left with 70 of them.
Using the FIFO method, you first sold the stock which was bought for 135000 FCFA before selling the one bought for 145000 FCFA. That is, 150 computers of 135000 FCFA and 50 computers of 145000 FCFA.
This means that, you will price the remaining 70 computers at the cost of 145000 FCFA, so your Inventory using this method is worth 10150000 FCFA.
145000 FCFA x 70= 10150000 FCFA worth of computers
How to implement The First In First out (FIFO) in a warehouse environment
There are many things to consider when implementing a First In First Out (FIFO) approach in your warehouse. this practice should be implemented regardless of whether or not the quality of your product degrades over time. In most cases when you’re warehousing expiring products, you need a FIFO warehouse management system that involves specific procedures during the put away and picking process. The putaway process is the process of moving incoming goods from the dock to their permanent location within a warehouse. This permanent location could be anywhere, including the pick area, the replenishment area, or the storage area.
In order to, implement the FIFO method, we have to:
Identify Expiration Dates: If your products have defined the expiration dates, you can easily use those dates to age your inventory. Easy access to old items will allow warehouse personnel to quickly and easily remove the oldest inventory first. Using these dates will help you easily ship older product first and avoid any potential supplier issues.
Sequential Pallet Licensing: Another simple way to implement FIFO in an environment without dated inventory would be to use sequential pallet license plates to age the inventory. Stocking your pallets properly is fundamental to simplifying the process as palletized material arrives at the warehouse, the operator can use ascending license plates to identify the pallets. Using this method, older pallets would contain sequentially lower pallet IDs, making FIFO fairly straightforward.
Label Items Clearly: It is also helpful to clearly label your items so that operators can easily identify the older items when there are multiple product choices in the same bin location. This gives warehouse workers an instant visual as to the receiving date of the inventory. Additionally, Carton Cloud can tag pallets/packages based on age through our barcode system
Sincerely, there are many benefits to implementing FIFO in your warehouse. By shipping the oldest items first, you prevent degradation of your products and avoid potential obsolescence of your inventory. Your customers will also receive their products in relatively clean boxes, because products will have spent less time in your warehouse.
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