What is FIFO? Definition & Manufacturing Examples

What is FIFO?

FIFO (First In, First Out) is an inventory management and valuation method where the oldest items in inventory — those received or produced first — are consumed, issued to production, or sold before newer items. The principle is simple: materials that arrive first leave first, ensuring proper stock rotation and preventing inventory from aging indefinitely in storage.

In manufacturing, FIFO applies to both physical material flow and financial inventory valuation. Physical FIFO means warehouse personnel physically pick and issue the oldest stock first. Financial FIFO means the cost of goods sold is calculated using the cost of the oldest inventory, regardless of which physical units were actually consumed.

FIFO is the most widely used inventory rotation method in manufacturing because it aligns with common sense — use old stock before it deteriorates or becomes obsolete. It is particularly critical in industries with shelf-life constraints (food, pharmaceuticals, chemicals), traceability requirements (aerospace, defense, automotive), and material property sensitivity (adhesives, resins, elastomers).

How FIFO Works in Manufacturing

Implementing physical FIFO requires both warehouse organization and operational discipline.

Warehouse layout. FIFO-compatible storage systems include flow racks (gravity-fed lanes where items are loaded from the back and picked from the front), designated date-labeled zones, and clearly marked lot-number sequences. Standard shelving can support FIFO if items are consistently organized with the oldest stock in the most accessible position.

Receiving and labeling. Every incoming material receives a date label, lot number, or receiving sequence number at the time of receipt. This identification enables warehouse personnel to identify the oldest stock for each item.

Issuing. When production requires material, the warehouse issues the oldest available lot. In ERP systems, FIFO logic automatically suggests the oldest lot for picking. In manual systems, visual management tools like color-coded date labels or FIFO lane markings guide personnel to pick correctly.

Monitoring. Regular audits verify that FIFO is being followed. Common violations include stacking new material in front of old, picking the most convenient location rather than the oldest, and mixing lots within a single storage location.

FIFO is contrasted with LIFO (Last In, First Out), which uses the newest inventory first. While LIFO can offer tax advantages in inflationary periods, most manufacturers prefer FIFO for its operational and quality benefits.

FIFO Example

A manufacturer of industrial adhesives receives epoxy resin with a 12-month shelf life. Three batches are in inventory:

A production order requires 350 kg of epoxy resin. Under FIFO, the warehouse issues all 200 kg from lot A-101 (oldest) plus 150 kg from lot A-102. This ensures the oldest material with the shortest remaining shelf life is consumed first.

Without FIFO, an operator might grab 350 kg from lot A-103 (the most recently received and most accessible in the warehouse). This would leave lot A-101 sitting in storage, potentially expiring before it is needed. If A-101 expires unused, the manufacturer loses $4,200 in material cost plus the carrying cost of storing it for months before scrapping.

Over a year, strict FIFO compliance on shelf-life materials prevents an estimated $35,000 in material write-offs for this manufacturer.

Why FIFO Matters for Production Scheduling

FIFO affects production scheduling in several ways. First, FIFO ensures that materials issued to production are within their usable life, preventing quality failures that would disrupt the schedule through rework or scrap.

Second, FIFO supports lot traceability. When a quality issue is discovered, the ability to trace which lots were used in which production orders — enabled by FIFO discipline — allows the scheduler to identify and quarantine only the affected orders rather than halting all production.

Third, FIFO prevents the accumulation of dead stock and obsolete inventory that consume warehouse space needed for active production materials.

Production scheduling software like Resource Manager DB can integrate with inventory systems that enforce FIFO, ensuring that scheduled production orders are allocated the correct material lots in the proper sequence.

Related Terms

• LIFO — the opposite inventory rotation method where newest items are used first
• Dead Stock — inventory that accumulates when FIFO is not followed, leading to aging stock
• Raw Materials — the inventory category where FIFO is most commonly applied

FAQ

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This term is part of our Manufacturing & Production Scheduling Glossary. Learn more about inventory management, scheduling, and manufacturing terminology.