Inventory management might not be the most exciting aspect of running a business, but it’s one of the most important. Your products are the backbone of your business, so managing them effectively can mean the difference between making a profit or losing money to waste, storage expenses, and other inefficiencies.

A solid inventory strategy helps you control costs, keep operations running smoothly, and maximize profitability. Whether you deal with perishable goods, fast-moving consumer items, or seasonal inventory, choosing the right approach, such as the FIFO method, is key. So, what is “FIFO”? And how does it compare to other inventory approaches?

This article breaks down the most common inventory management strategies to provide a clear understanding of each and help you decide which makes the most sense for your business.

What is FIFO?

The FIFO method (First In, First Out) is a straightforward, yet impactful strategy in which the oldest stock is sold or used first. This ensures products don’t sit too long in storage, making it ideal for businesses that handle perishable or time-sensitive goods.

Advantages of FIFO

• Reduces inventory spoilage and waste: Since older stock is pushed first, there’s less risk of items expiring or becoming unsellable. This is especially crucial for the food, medicine, and cosmetics industries, where product freshness impacts safety and quality.
• Supports accurate cost accounting: FIFO reflects actual purchasing costs by using the oldest inventory price when calculating the cost of goods sold (COGS). This provides a more precise picture of profit margins, especially when prices fluctuate over time.
• Ideal for perishable and time-sensitive products: The FIFO method ensures items with a limited shelf life, such as food, pharmaceuticals, and cosmetics, are sold or consumed before they expire. It also helps businesses maintain product quality while complying with safety regulations.

Who benefits from FIFO?

The FIFO method is essential in industries where freshness and shelf life matter, such as:

• Food and beverage: Prevents expired products from being sold and reduces health risks
• Pharmaceuticals and cosmetics: Ensures medications and skincare products remain effective and safe for consumption
• eCommerce and retail: Ideal for seasonal products, fashion, and fast-moving inventory that may lose value over time

Understanding LIFO

Now we turn to the opposite of FIFO: the LIFO (Last In, First Out) method.

Instead of selling the oldest inventory first, LIFO has the most recently added stock be used first. While FIFO is ideal for keeping products fresh, LIFO is often a cost-saving strategy, especially in industries where inventory doesn’t expire.

Advantages of LIFO

• Lower COGS in certain cases: When prices rise, LIFO assigns the higher, more recent cost to the COGS. This can make a company’s profits appear lower on paper.
• Tax advantages in inflationary environments: Because LIFO matches recent, higher costs to sales, it can result in lower taxable income and, therefore, lower tax payments.

However, the LIFO approach won’t suit every business or model. Here are some limitations of this inventory strategy:

• Not suitable for perishable products: Since LIFO sells the newest stock first, older inventory may sit too long and become outdated. That’s why industries like food, pharmaceuticals, and cosmetics typically can’t use this method.
• Can distort financial statements: LIFO can make a business appear less profitable on paper, which may be detrimental when trying to attract investors or secure loans.

The FEFO approach

If you manage products with strict expiration dates, you need a system that ensures the oldest (and closest to expiring) stock is sold or used first. That’s precisely how FEFO (First Expired, First Out) works: Instead of simply following the order in which products arrive, FEFO prioritizes items that’ll expire soon, so businesses reduce waste.

This method is critical in industries where freshness and compliance matter. Food and beverage, pharmaceuticals, and cosmetics rely on FEFO to ensure customers receive safe, high-quality products.

Advantages of FEFO

• Minimizes waste and product expiration: Businesses avoid throwing away unsellable stock by selling or using items based on their expiration date. This can also reduce financial losses and environmental impact.
• Essential for food, pharmaceuticals, and cosmetics: In these industries, expired products aren’t only a loss but can also pose serious health risks to consumers. FEFO ensures compliance with safety regulations and customer protection.

Just-in-time (JIT) inventory explained

Imagine running a business where you only order and receive inventory when you need it — no overstock or wasted space. That’s the power of JIT inventory. Instead of holding large amounts of stock, businesses using this method function with minimal inventory, thereby reducing excess and keeping operations lean.

Advantages of JIT inventory

• Lower storage costs: Since products only arrive when needed, businesses spend less on warehousing and inventory holding.
• Increased cash flow efficiency: With less money tied up in stock, businesses can invest in other areas like marketing, R&D, or expansion.

JIT is an excellent strategy for businesses looking to cut costs and operate efficiently, but it requires a highly reliable supply chain — any supplier delays can disrupt production or sales, leading to lost revenue. So, if demand suddenly spikes, businesses may struggle to fulfill orders quickly. When done right though, JIT can transform inventory management and boost profitability.

Understanding ABC analysis

Not all inventory is equal. Some products bring in the most revenue, while others are lower in value but still necessary. ABC analysis addresses this by categorizing stock based on importance, ensuring time and resources are spent wisely:

• Category A: High-value items that contribute the most to sales. These products require close monitoring and precise stock control
• Category B: Moderately valuable items that sell regularly but have less of an impact on profits than those in Category A
• Category C: Low-value items that generate the least revenue but often have the highest quantity

Choosing the right inventory strategy for your business

There’s no one-size-fits-all approach to inventory management; what works for one business might not be the best option for another. When deciding on an inventory strategy, brands should consider the following factors:

• Industry type: Different industries have different inventory needs. For example, a grocery store would benefit from the FIFO method to keep products fresh, while a manufacturing company might use JIT to minimize storage costs.
• Product shelf life: Businesses that deal in perishable goods like food and medicine should prioritize FEFO to prevent waste, while durable goods suppliers enjoy more flexibility.
• Tax implications: Methods like LIFO offer tax advantages by lowering taxable income in inflationary environments. However, some accounting standards may not allow this method, so businesses that operate globally may need to consider alternatives.
• Supply chain reliability: If suppliers are inconsistent and prone to delays, strategies like JIT can be risky. Businesses with an unpredictable supply chain may prefer FIFO or ABC analysis to ensure there’s always stock on hand.

Many businesses use a combination of strategies to optimize efficiency. For example, a retailer might use ABC analysis to prioritize high-value items while applying FIFO for perishable goods. Or, a manufacturer could implement JIT for raw materials and adopt FIFO for finished products.

Wrapping up — The right inventory strategy for your success is at hand

More than merely stocking shelves, inventory management involves making smart decisions that boost efficiency, reduce waste, and improve profitability. From FIFO to ABC analysis, the right inventory strategy depends on your industry, product type, and other influential factors.

Aligning your approach with your business goals supports better cash flow, reduced costs, and a more efficient operation. To stay competitive, businesses should regularly evaluate and refine their inventory practices to adapt to changing market conditions and consumer demand.