The LIFO principle: How to optimise warehouse management?

Effective inventory management is a key aspect of strategic management for many businesses. One of the tools used in inventory management is the Last In, First Out (LIFO) principle – this means that goods received last are issued first. This is a different principle from the very popular FIFO (First In, First Out) or FEFO (First Expired, First Out) principles, but under certain circumstances, this principle can bring many benefits to a company.

What exactly is the LIFO principle?

LIFO, or ‘last in, first out’, is the method by which the most recent p roducts delivered to the warehouse are issued before those that have been there for a long time. This method can be particularly useful for goods that do not lose value over a long period of storage, or when you are keen to have quick access to new products.

For example, in building material warehouses, where we store bricks, steel or timber, these older products can be based deep into the warehouse, while, for example, new deliveries can be brought in from the beginning and are available on an ongoing basis. Storage is then streamlined and will result in goods moving better and adapted to market changes.

LIFO versus FIFO and FEFO

Before we talk about the LIFO method, let us learn about two other principles of commodity trading:

• FIFO (First In, First Out) – or issuing the oldest goods first. This is the most popular method in industries where the expiry date of the product is decisive, for example in the food, pharmaceutical or chemical trade.
• FEFO (First Expired, First Out) – issuing goods closest to the expiry date. This method is important, especially in grocery shops, to avoid having to throw away mouldy fruit and vegetables.

Unlike the two principles described, LIFO does not focus on either production or use-by dates. It will therefore work well for goods with a long shelf life and less so for those that expire quickly.

Where does LIFO work?

LIFO is primarily used in warehouses where stock rotation does not affect product quality. Here are the most important examples:

1. Building materials warehouses – Products such as bricks, pipes or steel can be stored for a long time without losing value. LIFO allows new deliveries to be issued more quickly, which streamlines logistics processes.
2. Seasonal warehouses – For goods of a seasonal nature, such as clothes or decorations, LIFO allows new collections to be issued to meet current customer demand.
3. Long-life products – Chemicals, paints or tools are further examples of goods that can be managed according to the LIFO principle.

Does LIFO work for food storage?

Food storage requires special care, which is why the FIFO and FEFO principles are much more popular in this industry. However, LIFO can be used in limited cases, such as when storing frozen products or those with a very long shelf life, such as canned or freeze-dried products. In such situations, LIFO allows fresh supplies to be issued when older stocks are equally durable and retain their quality.

Advantages of LIFO

The LIFO principle has several important advantages:

1. Optimisation of storage space – New products are readily available, while older products can be stored in less strategic warehouse locations.
2. Adaptation to fluctuating prices – In industries where product prices fluctuate frequently, issuing the latest stock helps minimise the impact of price fluctuations on operating costs.
3. Simplifying logistics – Products taken into stock last are the easiest to release, reducing the cost and time of warehouse operations.

Disadvantages and limitations

Despite its advantages, the LIFO method also presents some challenges:

1. Risk of out-of-date products – For goods with an expiry date, the use of LIFO can lead to older stock being left in the warehouse, increasing the risk of loss.
2. Disadvantageous in some industries – In the food or pharmaceutical industry, the LIFO principle is rarely used as it can compromise product safety and quality standards.
3. High management requirements – This method requires close monitoring of stock levels to avoid problems with older stock.

Summary

The LIFO principle is an effective method for managing stock in warehouses where logistical simplicity and operational efficiency are key. Although its application is limited in sectors such as food storage, it can be beneficial in industrial, construction or seasonal goods storage. However, proper implementation of this method requires precise planning and regular stock control to realise its full potential.