7 Inventory Management Techniques: Exploring FIFO, FEFO, and LIFO Methods
July 03, 2023
Originating from the French word “Inventaire”, inventory means a listicle of things discovered. It simply refers to raw materials, products in the manufacturing process, goods, packaging, and all sorts of physical inventory. These items are stored to be kept prepared for future distribution needs.
What are the inventory management techniques?
The key factors that make a venture successful include its ability to provide valuable services to users and retain finances. Its major activity of it is to have suitable products available at an affordable price within an acceptable timescale. In stabilizing this situation, many parts of a business are involved, for eg., designing, purchasing, and manufacturing. The next important process involves the continuity of goods supply to the users. It applies to the items that are already in the marketplace.
Customer service, logistics or manufacturing of a company is supported by inventory management techniques, especially in situations where the item is unable to satisfy the demand. It could arise due to many reasons such as the pace of purchasing, protracted manufacturing, or the demand rate exceeding the maximum supply rate.
Inventory management techniques and tools
The inventory control organization employs inventory management techniques within the framework of one of the basic inventory models. The basic inventory management models include the fixed order quantity system or fixed order period system. All items of inventory and all stages from the stage of receipt from suppliers to the stage of their use should be covered.
ABC Analysis
The mechanism provided by ABC analysis inventory management techniques for identifying items not only has a significant impact on overall inventory cost but also identifies different categories of stock that demand different management and control. The inventory items are valued while carrying out ABC analysis. Following this, the results are ranked. These results are grouped into three bands- ABC codes. The A band accounts for 85% of the total values while the B&C classes have 15% and 5% for the remaining.
XYZ Analysis
Another one of crucial inventory management techniques items is XYZ analysis. X refers to very little variation and is characterized by steady turnover occurring over time. Y means some variation and is not steady. Hence, the demand variability can be predicted to an extent. Factors causing demand fluctuations include seasonality, lifecycles, and the economy. Z has the most variation and the demand can fluctuate strongly for Z items.
HML Analysis
Similar to ABC analysis, HML analysis differentiates from ABC analysis in terms of cost per unit criterion. The items under HML analysis are classified based on their unit prices. They are categorized into high-price, medium-price, and low-price items.
VED Analysis
Aiming for vital, essential, and desirable analysis, VED analysis refers to the maintenance of spare parts and the functionality of stocking spares. The non-availability of some important spares renders a number of equipment and even causes damage to human life. Some spares on the other hand are non-functional and serve unimportant purposes. So all in all, V stands for the vital items which render the whole line operation or the equipment. In this process, unsafety leads to loss of production. E is the essential item which reduces the performance of the equipment without rendering it. D stands for the desired items which are non-functional and hence do not affect the performance.
SDE Analysis
SDE Analysis is done by knowing the availability in the market. This analysis is useful in industries where some materials are scarce as it provides proper guidelines for deciding inventory management policies. S are the items which are in short supply for eg., raw materials and spare parts. D refers to difficult items that are not available in the markets readily. For these items, it is difficult to get quality suppliers. E are the items which are easily available in the markets.
SOS Analysis
SOS refers to seasonal, off-seasonal systems and consists of raw materials like agricultural inputs. The price of these materials during the off-season would generally be lower. These items are procured and stocked for meeting the entire year’s needs. The prices of these items are almost the same throughout the year and are less during the harvest season.
A perpetual inventory system is a stock management technique that updates stock levels when there are transactions, like sales, purchases, or returns of purchases.
FSN Analysis
The FSN analysis is based on the rate of spare parts usage. FSN stands for fast-moving, slow-moving and non-moving items. The items in the FSN analysis are characterized based on how frequently the parts are issued and used. For instance, fast-moving are items which are issued from inventory and are used more than once for a specific duration. Slow-moving items are less frequently used and might be used once. Non-moving items are not issued from the inventory at all.
FIFO, FEFO, and LIFO Methods
First in, first out method (FIFO)
The items under the FIFO inventory management techniques that are first procured must be sold for production first. This implies that in-hand items are recent ones. This strategy connects with the actual progress of stock in most industries and therefore is desirable. In the phase when the cost is increased. It is presumed that most primitive units are first utilized. This means that the smallest amounts are charged according to the cost of goods that are sold first. One advantage of this method is that the oldest stocks are flushed out and inventory that is retained.
First Expired First Out (FEFO)
Under FEFO the items that are procured with early expiry are sold for production first. It means that the items in hand are more durable. The materials that are utilized are the ones about to expire in recent times. This method benefits by flushing out the stocks and retaining the most fresh inventory.
Last In, First Out Method (LIFO)
One of the inventory management techniques where the items that are procured last are consumed first is LIFO. This implies that in-hand items are the oldest ones. LIFO is banned under international financial reporting standards as it does not go with the natural flow of stock. The last units procured are utilized first. The cost of goods that are sold, leads to a low amount of operating costs and low-income taxes. One disadvantage of this method is that the oldest stock is not flushed out for years.
FIFO VS FEFO
When organizations distribute products with a limited shelf life FIFO or FEFO plays an important role in inventory management accounting. In the FIFO analysis, the goods selected first are the ones which are procured first. Whereas in FEFO, when new stock is purchased the goods are scheduled in the line of expiry. This is useful for beverages, medical products, and groceries that can perish rapidly. The basic objective is to keep fresh food in hand with FEFO inventory management techniques. In the FIFO method, goods may be purchased by mistake which has less expiry date and in such case, organizations may have to suffer a hefty loss due to its First in first out policy.
Conclusion
The key factors that make a venture successful include its ability to provide valuable services to users and retain finances. Customer service, logistics or manufacturing of a company is supported by inventory management techniques, especially in situations where the item is unable to satisfy the demand.
The basic inventory management models include the fixed order quantity system or fixed order period system. When organizations distribute products with a limited shelf life FIFO or FEFO plays an important role in inventory management accounting. In the FIFO analysis, the goods selected first are the ones which are procured first. In LIFO, The last units procured are utilized first. The cost of goods that are sold, leads to a low amount of operating costs and low-income taxes.
