FIFO, FEFO and LIFO: which stock rotation method to use
Three abbreviations sit at the heart of stock rotation, and they sound like three ways of saying the same thing. They are not. They answer two different questions, and mixing the questions up is how a perfectly sensible shop ends up arguing with its accountant.
Rotation and costing are two decisions
One question is which physical unit you hand to a customer. The other is which cost you book for the unit that left. Rotation is about the first, and it is yours to decide on the shelf. Costing is about the second, and your accountant decides it.
The three methods
- FIFO, first in first out: the oldest stock goes first. It suits goods that age with time on the shelf, and it is the usual default.
- FEFO, first expired first out: the batch with the earliest expiry date goes first. It suits anything that can expire, and it beats FIFO whenever a later delivery expires sooner.
- LIFO, last in first out: the newest stock goes first. It appears mostly as a costing method. As a picking rule it is rare, because the old stock stays behind.
Lot 1 arrived first, but Lot 2 expires first. FIFO picks Lot 1 and risks losing Lot 2. FEFO picks Lot 2.
Choosing between FIFO and FEFO
If nothing you stock expires, FIFO is enough. If something does, FEFO is the safer choice, and it needs a recorded expiry date for every batch. Without the dates, you are back to FIFO by habit. Batch tracking and expiry dates, without the waste explains how lots work.
Picks first
FIFO
The earliest received
FEFO
The earliest to expire
Needs
FIFO
Receipt dates
FEFO
An expiry date on every batch
Good for
FIFO
Goods that age on the shelf
FEFO
Anything that can expire
Risk
FIFO
A short-dated late delivery expires unseen
FEFO
Needs careful entry at receiving
| FIFO | FEFO | |
|---|---|---|
| Picks first | The earliest received | The earliest to expire |
| Needs | Receipt dates | An expiry date on every batch |
| Good for | Goods that age on the shelf | Anything that can expire |
| Risk | A short-dated late delivery expires unseen | Needs careful entry at receiving |
Costing is a separate decision
FIFO and LIFO are also ways to assign a cost to the units you sold. The two shelf rules and the two cost rules share names but do not have to match. You can rotate by FEFO on the shelf and still book costs another way.
LIFO costing is allowed in the United States but not under IFRS, the standard used in many other countries. Ask your accountant rather than choosing by what is convenient on the shelf.
- 1On the shelfWhich unit goes out: FIFO or FEFO. Yours to decide.
- 2On the booksWhich cost is booked: FIFO, LIFO or average. Your accountant decides.
What if nothing has a date?
Plenty of businesses sell things that never expire. Screws, cables, brackets, brushes. For those, the rotation question is mostly about keeping the shelf tidy so the older boxes do not hide at the back for ten years.
A simple habit solves it: when new stock arrives, put it behind or beneath what is already there, and take from the front. Shelves that slope forward make it automatic. You do not need any software to run FIFO on a shelf.
Even so, old stock can fade, rust, yellow or go out of fashion. If you see boxes of an item that look older than the rest, treat them as a sign. They may be the first thing to sell, or the first thing to mark down.