FIFO in inventory management stands for First In, First Out, and means the oldest stock is sold or used first. For retailers, FIFO is both a stock-rotation rule on the shop floor and an accounting method that affects margins, taxes, and the true health of your inventory.
What does FIFO mean in inventory?
In simple terms, FIFO tells you to move out the oldest units first before you touch newer deliveries. In a store or warehouse, that means placing new stock behind existing stock and always picking from the front, so products flow in the same order they arrived. This is critical for perishables like food, beauty, and pharmaceuticals, but it also helps keep fashion, electronics, and seasonal items current.
On the books, FIFO as a valuation method assumes that when you sell 10 units, you are selling the 10 earliest units you bought. Their purchase cost is what flows into cost of goods sold (COGS), and the newer, usually more expensive stock remains in your ending inventory.
Why FIFO matters for retailers
Operationally, FIFO helps reduce waste and markdowns. By clearing older stock first, you cut the risk of products expiring, going out of trend, or needing heavy discounting to move. For multi‑store retailers, consistent FIFO also stabilizes quality across locations, so customers get fresher or more current merchandise no matter which store they visit.
Financially, FIFO often leads to higher reported profit in inflationary environments, because older, cheaper stock is recognized in COGS while newer, pricier stock sits in inventory. That can improve gross margin on paper, but it also means your inventory line reflects more recent costs, giving a more realistic view of what it would cost to replace goods today.
How FIFO works in practice
On the ground, FIFO relies on layout and process, not just policy. Stock needs to be shelved so that older cases or cartons are physically easier to pick first—think flow‑through racking, dated labels, and strict “front first” rules for staff. In apparel and general merchandise, that can mean rotating rails and tables regularly so early deliveries don’t get buried behind new drops.
In systems, you configure your ERP, WMS, or POS to track receipt dates or batches, and to cost sales from the earliest layer on hand. For products with lot numbers or expiry dates, your processes should align picking priorities with those fields, so the items closest to expiry always go first.
Benefits of FIFO for inventory health
When applied consistently, FIFO improves stock rotation, so you carry less dead stock and keep weeks of supply closer to target. That frees up cash, floor space, and back‑room capacity for faster-turning inventory. It also supports better demand planning, because you get a clearer read on how quickly lines really sell when old units are not lingering in the background.
FIFO also simplifies multi‑channel operations. If you apply the same rule across stores, e-commerce, and warehouses, your teams know that the oldest available stock—regardless of its location—should be allocated and picked first, thereby reducing mismatches between what the system indicates as fresh and what is actually on the shelf.
How to implement FIFO as a retailer
To embed FIFO, start by auditing your current stock flow: how goods are received, where they are placed, and how staff actually pick for customers and replenishment. Update planograms and racking so there is a clear physical “first in, first out” path, and train teams to always move older product to the front when new deliveries arrive.
Next, check that your systems capture receipt dates, batches, or lots, and that your costing method is set to FIFO where appropriate. Pair this with regular reporting on aging inventory, expiry risk, and slow movers so you can act early with markdowns, transfer, or promotions instead of waiting until stock is unsaleable.
