FIFO (First In, First Out)
An inventory management principle where the oldest stock is used or sold first.
FIFO (First In, First Out) is an inventory rotation method where the materials or products received first (oldest) are consumed or sold first, before newer stock. It's like a queue – the first person in line is the first to be served. This prevents material spoilage, obsolescence, and ensures product quality.
Why FIFO Matters
Without FIFO discipline:
- Expiry Risk: New stock is used first; old batch expires unused
- Quality Degrade: Material sitting on shelf for months develops rust, brittleness, color fade
- Dead Stock: Old inventory becomes obsolete while new items sell
- Customer Complaints: Customer receives old/expired product
- Financial Loss: Inventory write-off when old stock finally discarded
Industries Where FIFO is Critical
1. Pharmaceuticals & Food
Legal requirement. If tablets expire before being used, they're destroyed (total loss). FIFO ensures older batches are shipped first before expiry.
2. Paint & Chemical Manufacturing
Paint sitting for 6 months can separate or thicken. Chemicals can deteriorate. FIFO reduces shelf time, ensuring better product quality to customer.
3. Steel & Raw Materials
Steel can rust if stored in humid conditions for months. Plastics can degrade under UV light. FIFO minimizes degradation.
4. Fast-Moving Consumer Goods (FMCG)
Snacks, beverages with short shelf life. Customer expects "freshness" date. FIFO ensures they get products near manufacturing date.
Real Factory Examples
Example 1: Dairy Manufacturing (Milk Powder)
- Batch A: Manufactured Jan 1, 2024 → Shelf life 12 months (expired Dec 31, 2024)
- Batch B: Manufactured Feb 1, 2024 → Shelf life 12 months (expired Jan 31, 2025)
- Batch A arrives: 1000 boxes stored in warehouse
- Batch B arrives: 1000 boxes stored behind Batch A (chronologically)
FIFO Scenario: Batch A is used for customer orders first. By October 2024, Batch A is fully consumed. Batch B (fresher) now becomes available. No expiry loss.
Non-FIFO Scenario: Store staff mistakenly picks from Batch B first (newer is easier to reach). By Dec 2024, Batch A reaches expiry with 500 boxes still unused. ₹5 lakh loss.
Example 2: Auto Paint Supplier
- Paint Shipment A (arrived May 2024): 500L blue automotive paint, viscosity X
- Paint Shipment B (arrived June 2024): 500L blue automotive paint, same color
FIFO Approach: Use Shipment A first despite Shipment B being more accessible. By August, Shipment A is consumed and Shipment B is about to be used (good freshness).
Non-FIFO Approach: Use Shipment B first (newer stock). Shipment A sits until November. Paint has thickened/separated slightly (quality down). Customer complains about application issues. Supplier reputation damaged.
Example 3: Textiles (Fabric Dyeing)
- Batch 1 (arrived March 2024): 5000M white cotton fabric
- Batch 2 (arrived April 2024): 5000M white cotton fabric
FIFO Practice: Process Batch 1 into production first. By July, Batch 1 is converted to finished goods and delivered. Batch 2 is then processed (no long storage).
Without FIFO: Production team randomly picks. Batch 2 gets used. Batch 1 sits for 4 months in warehouse. When finally used in July, it has yellowed slightly (humidity). Dyed product color is slightly off (batch mismatch). Customer demands redo.
FIFO Implementation Strategy
1. Batch Numbering & Dating
- Every incoming batch must have: Batch number, Date received, Expiry date (if applicable)
- Use large, visible stickers on each box/pallet
- Example label: "BATCH 2024-156 | REC: 15-Mar-24 | EXP: 14-Mar-25"
2. Physical Arrangement
- For boxes: Place older batches in front (closer to picking area), newer in back
- For pallets: Arrange racks so old pallet is at eye level/easily accessible, newer pallets higher/deeper
- Color coding: Mark oldest batch with RED tape, newest with GREEN tape (visual management)
3. Picking Process
- Train all staff: Always pick from the front/older section first
- For large items, place older batch closest to production floor entrance
- Post FIFO signage in warehouse: "ALWAYS PICK FROM THIS SIDE (OLDEST FIRST)"
4. Receiving Process
- When new batch arrives, DON'T place it in front of existing stock
- Place it BEHIND the existing stock (new arrivals go to back)
- This automatically creates FIFO flow without special picking instructions
5. System Checks
- Monthly audit: Pick a random batch → Verify age → Confirm it's being consumed before expiry
- Spot check: Visit warehouse, look for batches sitting unusually long
FIFO vs. LIFO
| Aspect | FIFO | LIFO (Last In, First Out) |
|---|---|---|
| Usage Order | Oldest first → Newest last | Newest first → Oldest last |
| When Used | Perishables, items with expiry, materials that degrade over time | Some manufacturing accounting methods (reduces tax in inflation) |
| Example | Milk, medicine, paint (must use old before new) | Not recommended for physical inventory; mainly for financial valuation |
| Financial Impact | Matches economic reality (oldest cost flows out first) | Can understate costs in inflationary periods |
FIFO Challenges & Solutions
Challenge 1: Multiple Suppliers, Same Item
You receive steel from Supplier A on Jan 1 and Supplier B on Jan 5. Both are "steel bars" but different grades. Can't mix them in FIFO queue.
Solution: Maintain separate FIFO queues by supplier or by spec. Use "FIFO by SKU" – each material has its own FIFO line.
Challenge 2: Mixed Lot Pick Instructions
Production order needs "200 units red paint" but current batch (Batch A) only has 150 units. Staff picks 150 from Batch A + 50 from newer Batch B (breaking FIFO).
Solution: Revise production orders to match batch sizes if possible. If not possible, explicitly allow "Batch A + Batch B" combination in picking instructions (maintaining FIFO for each batch still).
Challenge 3: Staff Forgets FIFO During Rush
During urgent orders, staff grabs closest/easiest material (often newer stuff in back) without checking age.
Solution: Use automated storage systems (ERP-linked bins) where only oldest batch location is visible on pick list. Make FIFO foolproof.
Real Cost Impact of Poor FIFO
A pharmaceutical factory with ₹5 crore inventory:
- Without FIFO: 3-5% of inventory expires unused annually = ₹15-25 lakh annual loss
- With FIFO: <0.5% expiry wastage = ₹25 lakh saved annually
- Added benefit: Better product quality to customer, fewer complaints, repeat orders
How ERP Systems Enable FIFO
- Batch Lot Tracking: System records each batch's receipt date automatically. When picking, system recommends oldest batch first.
- Expiry Date Alerts: If material is approaching expiry and hasn't been used, system sends alert to suggest urgent usage
- Automatic Pick Sequence: Production team receives pick list with batches in FIFO order (oldest first)
- Warehouse Bin Location: System assigns bins such that oldest batch location appears first in pick instructions
- Variance Reporting: If material is picked out of FIFO sequence, system flags it and asks why (training opportunity)
- Expiry Management: Dashboard showing all materials by "days until expiry," helps prioritize production
FIFO Best Practices
- Mark Everything: Every batch gets received date label immediately upon arrival
- Physical Arrangement = Natural FIFO: Arrange racks so old batches are naturally encountered before new batches (better than relying on staff memory)
- Train Once, Reinforce Always: New staff training includes FIFO demonstration. Monthly reminders reduce lapses.
- Measure & Monitor: Track average age of consumed material. If trend is increasing, discipline is slipping.
- Exception Handling: Document any times FIFO is violated (e.g., newer material picked due to specific reason). Understand root causes.
See FIFO (First In, First Out) in Action
Don't just read about FIFO (First In, First Out). See how Karygar automates this process to reduce manual work and errors on your factory floor.