9. FIFO, LIFO, and FEFO Methods
Inventory Rotation Strategies Explained
In logistics, warehousing, and inventory management, how you rotate your stock matters. It impacts not only your operational efficiency but also your product quality, cost accounting, profit margins, and even customer satisfaction.
Three of the most important methods used to manage inventory flow are:
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FIFO – First In, First Out
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LIFO – Last In, First Out
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FEFO – First Expired, First Out
Each of these methods determines which items get picked, shipped, or consumed first, and each has different implications depending on your type of product, your industry, and your strategic goals.
1. FIFO – First In, First Out
Definition:
The first items to enter inventory are the first to leave. In other words, the oldest stock is sold or used first.
Use Cases:
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Perishable goods (food, cosmetics, medicine)
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Fashion or trend-based items
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Businesses that want to minimize obsolescence or expiration risk
Benefits:
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Reduces risk of expired or outdated stock
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Keeps inventory fresh
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Better reflects physical inventory flow
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Matches well with real-world shelf movement
Challenges:
Example:
You receive 100 units of milk on Monday and another 100 units on Thursday. Under FIFO, you ship the Monday batch first, even if the Thursday one is closer to the door.
2. LIFO – Last In, First Out
Definition:
The most recently added items are the first to be sold or used. The newest stock goes out first, leaving older inventory on the shelves.
Use Cases:
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Rarely used in physical product rotation (more common in accounting)
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Used in non-perishable environments where product obsolescence is low
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Some manufacturing processes with price volatility in raw materials
Benefits:
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In accounting, it helps reflect current cost of goods sold (COGS) more accurately during inflation — leading to lower taxable income
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Useful when prices are rising rapidly and the goal is tax deferral
Challenges:
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Can lead to old stock sitting too long (dead stock)
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Inappropriate for food, cosmetics, or any expirable items
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Often not practical operationally in real warehouses
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Not allowed under IFRS accounting standards (only GAAP)
Example:
If you receive 100 T-shirts in May and 100 more in June, and a customer orders 50, under LIFO you’ll ship the June batch first, leaving May stock unused.
3. FEFO – First Expired, First Out
Definition:
Products with the earliest expiration dates are shipped or used first, regardless of when they entered inventory. It’s expiration-driven, not arrival-driven.
Use Cases:
Benefits:
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Ensures product safety and compliance
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Minimizes waste from expired goods
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Prioritizes based on risk, not just age
Challenges:
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Requires clear labeling of expiration dates
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Needs more advanced tracking systems (WMS, barcode scanners)
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Complex to manage manually at scale
Example:
You receive two shipments of yogurt:
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One batch on Monday expires in 10 days
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Another on Tuesday expires in 5 days
Even though the Monday batch arrived first, you ship the Tuesday batch first, because it expires sooner.
Comparison Table: FIFO vs LIFO vs FEFO
| Feature | FIFO | LIFO | FEFO |
|---|
| Rotation Based On | Arrival date (oldest first) | Arrival date (newest first) | Expiry date (earliest first) |
| Used In | Perishables, fashion, retail | Accounting, raw materials | Pharma, food, chemicals |
| Inventory Freshness | High | Low | Very High |
| Risk of Expiry | Low | High | Very Low |
| Ease of Implementation | Moderate | Easy (for accounting), impractical for operations | High (if systems are in place) |
| Accounting Use | Yes | Yes (under GAAP) | No |
Choosing the Right Method for Your Business
Ask yourself:
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Do your products expire or degrade? → Use FEFO
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Are your products time-sensitive but not expirable (e.g., clothing)? → Use FIFO
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Are you focused on accounting/tax optimization with stable stock? → May consider LIFO (if permitted)
Also, consider hybrid models:
In Summary
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FIFO protects product freshness and aligns with most real-world physical flows.
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LIFO is more of a financial strategy than a physical inventory method.
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FEFO is essential where product safety and expiration are critical.
Mastering these methods isn't just about terminology — it's about choosing the right logic to move goods, reduce waste, protect customers, and improve profitability.
