First In, First Out (FIFO) Inventory Flow

In the world of warehousing and distribution, how inventory flows through your facility can make or break operational efficiency.

The FIFO method — short for First In, First Out — is a tried-and-true strategy that prioritizes using or shipping older items before newer ones. It’s essential for maintaining product freshness, reducing spoilage, and staying compliant in industries where safety and shelf-life matter most.

What is FIFO?

 

The FIFO method ensures the first out items from your system are the ones that were first in. It’s most commonly used for managing perishable inventory like food, beverages, pharmaceuticals, and cosmetics. This helps prevent older inventory from expiring or becoming unsellable, protecting both customer safety and business margins.

In contrast, the LIFO method (Last In, First Out) does the opposite — a system better suited for certain financial and tax scenarios during an inflationary period. By recording the cost of the most recently acquired items as the cost of goods sold, LIFO can reduce reported profits and income taxes when prices are rising.

FIFO supports product rotation and regulatory alignment in sectors where quality and safety are top concerns. It's also compliant with International Financial Reporting Standards (IFRS), making it globally recognized in accounting practices and a dependable choice for businesses that value transparency, compliance, and accurate financial reporting.

How FIFO Works in a Warehouse Setting

 

In a real-world warehouse, FIFO isn’t just a concept — it’s a physical workflow. Layout design, labeling, and digital tools all play a role. Pallet flow racks or carton flow systems are commonly used to support FIFO movement. These systems allow older inventory to be accessed first, automatically positioning newer inventory behind it.

Date codes, barcode scanning, and employee Standard Operating Procedures (SOPs) are key. A good Warehouse Management System (WMS) automates tracking and ensures FIFO flow without manual intervention. This automation reduces human error, ensures older inventory is prioritized, and provides a clear audit trail for compliance and quality assurance.

Ultimately, successful FIFO execution depends on both physical setup and digital precision. When racking strategies, scanning technology, and workforce training all work together, the FIFO method becomes a seamless part of daily operations — supporting better inventory management and smarter fulfillment across the board.

Benefits of FIFO for Manufacturers and Distributors

 

For product-based businesses, maintaining precise control over inventory is critical to profitability, compliance, and customer satisfaction. The FIFO method offers a practical approach that aligns inventory flow with both operational needs and financial accuracy.

Implementing the FIFO method offers several tangible benefits:

  • Reduces spoilage and eliminates outdated stock, especially critical for older stock in the food and pharma industries.
  • Supports better inventory management by avoiding costly write-offs.
  • Accurately represents ending inventory on the balance sheet based on the cost of the most recent goods.
  • Increases profits by minimizing waste and improving cash flow.
  • Enhances customer satisfaction — products arrive fresher, boosting brand trust.

By using FIFO, businesses ensure optimal inventory levels, minimize dead stock, and maintain tight control over their inventory accounting. These advantages make the FIFO inventory method a smart choice for companies aiming to streamline operations and strengthen their bottom line.

FIFO and Technology: WMS & Barcode Integration

 

A digital-first strategy is essential for maintaining FIFO accuracy at scale. By leveraging technology, warehouses can maintain tighter control over inventory levels, minimize delays, and ensure older inventory is always prioritized.

Leading-edge WMS solutions integrate with barcode and RFID scanning tools to:

  • Track stock movement in real time
  • Flag aging inventory
  • Prioritize older SKUs for picking and packing

These systems help streamline fulfillment workflows, reduce human error, and provide a digital audit trail — all while ensuring FIFO compliance. This is especially beneficial for companies with complex logistics services. In these environments, automated FIFO enforcement reduces the risk of stock mismanagement and enhances both speed and accuracy throughout the supply chain.

Common Industries That Use FIFO

 

While the FIFO inventory method is useful in nearly any environment managing physical goods, it's especially vital in sectors where timing, safety, and shelf life directly impact compliance and profitability:

  • Food and beverage warehousing: Ensures freshness and health code compliance
  • Pharmaceuticals and healthcare: Reduces liability and meets safety regulations
  • Consumer packaged goods: Supports brand reputation with fresher product delivery
  • Manufacturers: Keeps raw stock rotated, avoiding costly material obsolescence

Each of these industries relies on FIFO to maintain product integrity, avoid legal risks, and optimize storage capacity. By aligning inventory flow with product lifecycle and customer expectations, these industries reduce waste and enhance overall inventory management efficiency.

When FIFO Might Not Be the Right Fit

 

Despite its strengths, FIFO isn’t a one-size-fits-all inventory method. In times of high inflation, the LIFO method can lower taxable income by attributing higher costs to goods sold — boosting cash flow in the short term.

Also, businesses dealing with durable goods or products without expiration dates might not benefit as much from FIFO. Without proper digital tools, implementing FIFO can add operational complexity and increase labor costs. Manual tracking increases the risk of errors and inefficiencies that can undermine the benefits of the FIFO method altogether.

Make FIFO Part of a Smarter Supply Chain

 

At Midwest AWD, we help businesses streamline inventory management by tailoring strategies like FIFO to their exact needs. Whether you’re optimizing your 3PL fulfillment services, evaluating different types of warehousing, or recalculating your warehousing price, our expert team can guide you through the best-fit solutions for your business.

Contact MAWD today to explore how FIFO can enhance your supply chain efficiency and maximize ROI.