First in First Out (FIFO) Method
An inventory valuation and management method where oldest stock is sold or used first.
Definition
FIFO ensures proper inventory rotation, reducing the risk of obsolescence or expiration by selling older items before newer stock.
Overview of First in First Out (FIFO) Method
First In, First Out (FIFO) is an inventory management and accounting method in which the oldest units of inventory — those received or produced first — are assumed to be sold or used before more recently acquired units. In physical warehouse operations, FIFO dictates that inventory received in earlier lots is picked and shipped before newer receipts of the same SKU, regardless of storage location. In accounting, FIFO affects cost of goods sold (COGS) calculations and ending inventory valuation: under FIFO, COGS reflects the oldest (typically lower) purchase prices, while ending inventory is valued at more recent (typically higher) purchase prices. This distinction has material tax and financial reporting implications, particularly in inflationary environments. In warehousing practice, enforcing FIFO requires deliberate slotting, storage, and pick path design. The simplest approach is flow-through racking (gravity or push-back rack), where product enters from the rear and is picked from the front, naturally rotating inventory. Selective pallet rack requires more discipline — receiving teams must label each pallet with the receipt date and lot number, and pick instructions must specify picking from the oldest receipt first. For SKUs with expiration dates (food, pharma, cosmetics, chemicals), FIFO often becomes FEFO (First Expired, First Out) — the operational principle is the same but the sorting key is expiration date rather than receipt date. WMS systems enforce FIFO by assigning pick tasks to the location holding the oldest lot, preventing pickers from defaulting to the most accessible location regardless of age. On WareMatch, FIFO compliance is a non-negotiable capability requirement for shippers in regulated industries — food and beverage, pharmaceuticals, medical devices, beauty products, and consumer goods with limited shelf life. A 3PL that cannot demonstrate FIFO enforcement through WMS lot tracking and directed put-away/pick exposes their clients to spoilage, compliance violations, and potentially product liability. WareMatch facility listings allow operators to highlight their WMS capabilities, lot tracking functionality, and expiration date management systems, enabling shippers in regulated sectors to quickly identify compliant partners.
Role
An inventory valuation and management method where oldest stock is sold or used first.
Focus
First In, First Out (FIFO) is an inventory management and accounting method in which the oldest units of inventory — those received or produced first — are assumed to be sold or used before more recently acquired units. In physical warehouse operations, FIFO dictates that inventory received in earlier lots is picked and shipped before newer receipts of the same SKU, regardless of storage location. In accounting, FIFO affects cost of goods sold (COGS) calculations and ending inventory valuation: under FIFO, COGS reflects the oldest (typically lower) purchase prices, while ending inventory is valued at more recent (typically higher) purchase prices. This distinction has material tax and financial reporting implications, particularly in inflationary environments. In warehousing practice, enforcing FIFO requires deliberate slotting, storage, and pick path design. The simplest approach is flow-through racking (gravity or push-back rack), where product enters from the rear and is picked from the front, naturally rotating inventory. Selective pallet rack requires more discipline — receiving teams must label each pallet with the receipt date and lot number, and pick instructions must specify picking from the oldest receipt first. For SKUs with expiration dates (food, pharma, cosmetics, chemicals), FIFO often becomes FEFO (First Expired, First Out) — the operational principle is the same but the sorting key is expiration date rather than receipt date. WMS systems enforce FIFO by assigning pick tasks to the location holding the oldest lot, preventing pickers from defaulting to the most accessible location regardless of age. On WareMatch, FIFO compliance is a non-negotiable capability requirement for shippers in regulated industries — food and beverage, pharmaceuticals, medical devices, beauty products, and consumer goods with limited shelf life. A 3PL that cannot demonstrate FIFO enforcement through WMS lot tracking and directed put-away/pick exposes their clients to spoilage, compliance violations, and potentially product liability. WareMatch facility listings allow operators to highlight their WMS capabilities, lot tracking functionality, and expiration date management systems, enabling shippers in regulated sectors to quickly identify compliant partners.
Example
See the definition above for context.
Benefits
- Prevents inventory obsolescence and spoilage by ensuring older stock is consumed before newer receipts accumulate excessive age
- Required for compliance with FDA, USDA, and other regulatory frameworks governing food safety, pharmaceutical distribution, and medical device handling
- Aligns physical inventory flow with FIFO accounting assumptions, simplifying inventory reconciliation and financial reporting
- Reduces shrinkage associated with expired or degraded product that sat too long behind newer receipts
- Improves customer satisfaction by ensuring product shipped to customers has maximum remaining shelf life
- Supports FEFO (First Expired, First Out) rotation for items with variable production dates, optimizing shelf life allocation across orders
FAQs
Q: What is the difference between FIFO and FEFO in warehouse operations?
A: FIFO rotates inventory based on receipt date — the oldest received units are picked first. FEFO rotates based on expiration date — the soonest-to-expire units are picked first. FEFO is more appropriate when products from different production runs have different shelf lives (batch variability), since strictly following receipt date could result in sending product with a shorter shelf life than a later-received batch with a longer one.
Q: How does a WMS enforce FIFO in a pallet racking environment?
A: The WMS assigns a receipt date or lot ID to each pallet upon inbound receiving and records its storage location. When a pick task is generated, the WMS system queries all locations holding the target SKU and directs the picker to the location with the oldest receipt date or soonest expiration. Pickers cannot override this without supervisor authorization, and the system tracks compliance at the task level.
Q: Does FIFO accounting match physical FIFO inventory management?
A: Not necessarily. FIFO accounting is a cost flow assumption used to calculate COGS — a company can use FIFO accounting even if its physical warehouse doesn't rotate inventory in strict receipt-date order. However, for regulatory compliance (food, pharma) or quality management reasons, physical FIFO/FEFO rotation is a separate operational requirement from the accounting method chosen.
Q: What are the alternatives to FIFO and when are they used?
A: LIFO (Last In, First Out) is used in accounting primarily in the U.S. for tax advantages in inflationary environments but is not permitted under IFRS and is rare in physical operations. FEFO (First Expired) is common in perishable goods. Lot-specific rotation and zone-specific rotation (for hazmat or temperature-sensitive goods requiring segregation) are used in specialty operations. For commodity goods with no expiration and no lot tracking requirements, operational convenience sometimes takes precedence, though FIFO remains the industry default.