So far, we’ve covered FIFO (First-In, First-Out) and FEFO (First-Expired, First-Out), two common inventory management methods used to streamline operations and manage costs. Today, we’re diving into another important approach: LIFO or Last-In, First-Out. While it’s less common in industries that deal with perishable goods, LIFO can be useful in specific business environments.

What Does LIFO Stand For?

LIFO stands for Last-In, First-Out, which means that the most recently added items in inventory are the first to be sold or used. While FIFO and FEFO prioritize older stock, LIFO focuses on moving newer stock out first.

This method is widely used in industries where inventory doesn't expire quickly, and can also be advantageous in times of rising costs, as it can result in higher reported costs of goods sold (COGS), potentially lowering taxable income.

Why is LIFO Important?

1. Cost Savings in Times of Inflation One of the biggest reasons companies choose LIFO is that it allows them to account for higher COGS during inflation, where newer inventory often costs more than older stock. By selling the newest items first, businesses can lower their taxable income, as the higher costs of the newer inventory reduce reported profit margins. This strategy can be particularly useful for companies that need to manage cash flow in an environment of fluctuating costs, such as manufacturers or retailers.

2. Better Reflection of Current Market Costs With LIFO, the cost of goods sold is based on the most recent prices. For companies in industries with volatile pricing or materials costs, this can provide a more accurate reflection of what it would cost to replace the sold goods. By aligning COGS with current market rates, businesses can better understand their profit margins and how price changes impact their bottom line.

3. Simplified Inventory for Non-Perishable Goods LIFO can also streamline inventory management for businesses that handle non-perishable goods, where expiration dates are not a concern. In these cases, prioritizing newer inventory first can make restocking more straightforward and reduce the time spent on rotation. Industries like construction materials, machinery, and certain types of manufacturing often benefit from the simplicity of LIFO.

LIFO vs. FIFO and FEFO: How Do They Differ?

While all three methods—FIFO, FEFO, and LIFO—are designed to manage inventory efficiently, each serves a different purpose:

• FIFO: Moves older stock out first, ideal for perishable goods.
• FEFO: Prioritizes products based on expiration dates, critical for time-sensitive items.
• LIFO: Sells the newest inventory first, making it useful for non-perishable goods and for managing costs in times of inflation.

Businesses often choose the method that best aligns with their products, industry needs, and financial goals. LIFO may not be the best choice for industries with strict regulatory standards around product dating, but it can be advantageous for sectors where product cost fluctuates significantly over time.

Implementing LIFO in Your Warehouse

If you decide that LIFO is a good fit for your business, here are some key steps to implement it effectively:

• Organize Storage to Prioritize Newer Stock: In a LIFO system, it’s essential to organize your warehouse so that newer stock is easily accessible. This might involve creating dedicated storage areas where the latest arrivals are stored upfront and can be picked first.
• Use Inventory Management Software: An effective inventory management system is crucial for implementing LIFO correctly. This software should allow you to track the age and costs of inventory, making it easier to ensure newer stock is always sold or used first. Automated tracking can also help prevent human error and maintain accuracy in financial reporting.
• Train Your Team on the LIFO Process: Staff need to understand and follow LIFO procedures, especially when picking items for shipment or replenishment. Regular audits can help ensure your team consistently follows LIFO guidelines, even when new shipments come in or older inventory needs reassessment.

Is LIFO Right for Every Business?

LIFO can be beneficial, but it isn’t for everyone. This method generally works best for companies that:

• Handle Non-Perishable Goods: Since there’s no risk of items expiring, it doesn’t matter if older stock stays on shelves longer.
• Experience Rising Costs: In times of inflation, LIFO can lower taxable income by reflecting higher COGS.
• Want to Simplify Restocking: With LIFO, older stock can stay in the background, making room for newer arrivals without constant stock rotation.

However, LIFO may not work as well for companies that must track expiration dates or adhere to industry standards requiring FIFO or FEFO. Additionally, LIFO is not permitted in some countries’ financial reporting standards, such as under the International Financial Reporting Standards (IFRS), so it’s worth checking applicable accounting guidelines.

Conclusion

LIFO can be an effective inventory management strategy for certain industries, especially in times of inflation and for companies handling non-perishable goods. It provides a way to better align the cost of goods sold with current market prices, potentially reducing tax obligations and simplifying inventory processes.

At Fast Fulfillment, we understand that each business’s inventory needs are unique. By exploring options like LIFO, we help our clients find inventory strategies that align with their goals, whether that’s managing costs, optimizing stock levels, or adapting to changing market conditions. Understanding LIFO offers valuable insights into inventory management, giving you the tools to make informed decisions that support growth and efficiency.