LIFO vs. FIFO: Which Inventory Method Is Right for Your Business?
Inventory management is the backbone of efficient business operations. Managing inventory well can significantly impact your business’s profitability and customer satisfaction. Among the most widely used inventory management methods are LIFO (Last In, First Out) and FIFO (First In, First Out).
In this comprehensive guide, we’ll compare LIFO vs. FIFO to help you decide which method suits your business needs.
Understanding LIFO (Last In, First Out)
The Last In, First Out (LIFO) inventory method is designed for the most recently received products to be used first. Essentially, the most recently acquired items are the first to leave the inventory.
Under LIFO, when you sell a product, you record the cost of the most recent inventory purchased. For example, if you bought 100 units at $10 each and then another 100 units at $12 each, you would record the $12 cost for each unit sold until those units run out, then move to the $10 units.
LIFO is commonly used in industries dealing with non-perishable commodities such as oil, gas, and metals.
Advantages of LIFO
- Lower tax liability (during inflationary periods)
- Easy implementation for recently purchased inventory
- Lower reported income (resulting in lower tax bill)
- Allows companies to claim greater expenses
Disadvantages of LIFO
- Inaccurate inventory movement as older products are used
- Lower net income
- Misrepresentation of the value of the flow of inventory
- Not regulatory compliant in all jurisdictions
- Limited global implementation as prohibited by International Financial Reporting Standards and Canada Revenue Agency regulations
Understanding FIFO (First In, First Out)
The First In, First Out (FIFO) inventory method uses/sells the oldest received inventory first before the newest products. In a warehouse setting, this means the older products are brought to the front of the shelf to ensure they are used/sold before their expiry.
Under FIFO, when you sell a product, you record the cost of the oldest inventory purchased. For example, if you bought 100 units at $10 each and then another 100 units at $12 each, you would record the $10 cost for each unit sold until those units run out, then move to the $12 units.
This approach is commonly used in sectors that involve perishable goods such as pharmaceuticals and food/beverages.
Advantages of FIFO
- Higher net income
- Higher inventory balances
- Promotes regular inventory turnover
- Prevents stock from becoming outdated
- Higher gross income and profits reporting
- Accurate inventory value count
Disadvantages of FIFO
- Higher tax liability (during inflationary times)
- Inaccurate cost of materials with stagnant inventory
- Exaggerate profits (due to the gap between costs and revenue)
- High reported income (resulting in a higher tax bill)
Key Differences Between LIFO and FIFO
- Inventory Valuation: The FIFO method offers a more accurate value indicator as the most recent inventory falls under the current market price. In the LIFO system, a large percentage of the inventory must be considered under the current value.
- Cost of Goods Sold (COGS): LIFO generally results in higher COGS during inflation, lowering taxable income. FIFO results in a lower COGS, increasing taxable income but providing a more stable measure of profitability.
- Tax Implications: LIFO offers tax advantages during inflationary periods by reducing taxable income. FIFO, while simpler, may result in higher tax liabilities but offers more consistent financial reporting.
- Financial Reporting: LIFO can distort financial reporting due to outdated inventory values on the balance sheet. FIFO provides more accurate and transparent financial reporting, reflecting current market conditions.
- Compliance and Global Considerations: LIFO is accepted under Generally Accepted Accounting Principles (GAAP) but not under International Financial Reporting Standards (IFRS), limiting its use for international businesses. FIFO is accepted under both GAAP and IFRS, making it more universally applicable.
Factors to Consider When Choosing Between LIFO and FIFO
- Industry and Type of Products: As FIFO is best suited for inventory with a limited shelf life, this inventory management system is frequently used for foods, medication, and cosmetic products. Some businesses depend on the LIFO system for building materials, clothing, and automobiles.
- Economic Environment: The impact of inflation or deflation plays a role in which inventory management system is being used. With inflation periods, the gross profit margin can rise as older inventory that was cheaper than the latest inventory is priced up. Deflation can see less of a profit as lowering prices on all inventory sees a loss on the latest (and more costly) inventory received.
- Business Goals and Financial Strategy: In aligning inventory methods with broader financial objectives, the LIFO system helps to decrease tax liability. If accurate financial reporting is critical, FIFO may be the better option.
- Regulatory Compliance: As North American companies are required to comply with the Generally Accepted Accounting Principles (GAAP) for financial statements, it is important to ensure the chosen method is also in compliance.
Making the Decision: LIFO or FIFO?
Choosing between LIFO and FIFO is a critical decision that should align with your business model, market conditions, and financial goals. Consider the nature of your products, the economic environment, and your overarching business strategy.
Consulting with financial and supply chain experts can provide additional insights and help you make an informed decision.
Contact Lean Supply Solutions for Personalized Inventory Management Solutions
Lean Supply Solutions utilizes the latest technology and cloud-based software to optimize your supply chain management system. Our inventory management solutions can save you time and money by streamlining your business’s needs and staying ahead of potential issues.
Speak to one of our consultants for more information on how our inventory management systems and other 3PL/4PL services can help you!
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Stock Keeping Units (SKUs): The Unsung Hero of Inventory Management
With the upcoming holiday season fast approaching, retailers and e-commerce business owners must prepare for the influx in customer demand. One of the best ways to do that is to always know exactly what’s in stock and where it is. Enter Stock Keeping Units (SKUs), the unsung hero of inventory management. In this blog post, we’ll explore the significance of SKUs, their role in e-commerce, and how to create effective SKUs for your business.
What Are SKUs and Why Are They Important?
Stock Keeping Units, commonly known as SKUs, are unique codes to identify products within a retailer’s inventory. Featuring a sequence of numbers and letters, a SKU represents a product’s size, brand, colour, and/or other specific identifiers.
This alphanumeric code can vary from retailer to retailer; however, they are crucial for ensuring that products are accurately tracked, making the order fulfillment process smoother, and providing valuable insights into sales and inventory levels.
They allow retailers to manage their own inventory across various channels. Similar to a serial number in which a product is easily identified and located, a SKU system can be found in the retail, e-commerce, logistics, and manufacturing sectors.
The Benefits of SKUs
There are many benefits of SKUs, including:
- Improved Inventory Accuracy: A well-organized SKU system is designed to track inventory levels and avoid stockouts or overstocking. SKUs can be used to create automated reordering points along the supply chain to reduce the stress of maintaining inventory levels. When products are tracked in real-time, they improve inventory accuracy, which eliminates the need for full manual inventory counts each month.
- Enhanced Efficiency: SKUs help to streamline warehouse management processes such as order fulfillment, picking, and packing. Creating an organization system to identify available products and their location within the warehouse reduces the risk of errors. An enhanced efficient management system is key to avoiding lost or misplaced items.
- Better Data Analysis: A successful inventory management system demands the use of up-to-date and accurate data analysis. SKUs provide valuable insights into product performance and customer behaviour. By analyzing SKU-level data, business owners can identify trends, understand which products are popular, and make informed decisions about their inventory and marketing strategies.
- Simplified Reporting: SKUs make generating accurate reports on sales, inventory levels, and profitability a breeze. Businesses can easily track the performance of individual products, categories, and variations, helping them make data-driven decisions and optimize their business operations.
The Role of SKUs in E-Commerce
SKUs are essential for managing product listings, orders, and inventory online to streamline the management process. They help businesses track inventory across multiple sales channels and prevent discrepancies between physical and online stock levels.
Another important role of SKUs in e-commerce is the ability to link product data with e-commerce platforms like Shopify, Amazon, and WooCommerce. This integration ensures that a company’s product listings are accurate and up to date, reducing the risk of overselling or underselling and improving the overall customer experience.
SKUs also help with product search and recommendation algorithms for both the vendor and the customer. By using SKUs, businesses can improve the visibility of their products in search results and provide personalized recommendations to customers, increasing the likelihood of sales.
How to Create Effective SKUs for Your Business
While there is no standard SKU formula used across the board, there are ways to create effective SKU systems within an organization to enhance efficiency.
- Define a Clear SKU Structure: The SKU structure should have a clear structure that includes relevant product details, such as category code, product code, and size/colour code. This structure will help you quickly identify products and variations, making inventory management more efficient.
- Keep it Simple and Scalable: Only use short, clear, and concise codes that can be adapted to the changing needs of your business. Refrain from using spaces, special characters, and numbers and letters that can be interchangeable such as “0” and “O”.
- Standardize Across Your Business: For SKU best practices, ensure that all departments, including sales, marketing, and warehouse, use the same SKU system. Standardization prevents confusion and errors, making it easier for everyone to manage inventory and fulfill orders efficiently.
Basic SKU Structure and Variations
These codes are standard across most global SKU systems:
- CAT: Category code (e.g., TSH for T-shirts, SHT for Shorts)
- PROD: Product code (e.g., RT100 for Running T-shirt)
- VAR: Variant code (e.g., M for Medium, BLK for Black)
This basic structure can also handle different variations of a product, for instance:
- SKU: TSH-RT100-BLK (Black Running T-shirt, Medium)
- SKU: TSH-RT100-WHT (White Running T-shirt, Medium)
- SKU: TSH-RT100-LRG (Black Running T-shirt, Large)
Common Mistakes to Avoid When Creating SKUs
Below are some common mistakes to avoid when creating SKUs:
- Inconsistent Coding: Inconsistent coding across similar products can lead to confusion and errors. Businesses should ensure that their SKU structure is applied consistently to all products and variations, making it easier to manage inventory and track sales accurately.
- Overly Complex Codes: Overly complex codes can be difficult to understand and use, leading to errors and inefficiencies. Businesses should keep their SKU codes simple and straightforward, ensuring that they are easy to interpret and apply.
- Lack of Standardization: Businesses that fail to form a consistent SKU to use across various sales and inventory platforms could face challenges with tracking, demand forecasting, and inaccurate numbers within their supply chain management.
Implement a Well-Structured SKU System with the Help of Lean Supply Solutions
SKUs play a crucial role in efficient inventory management, especially for e-commerce businesses. By using a well-structured SKU system, businesses can improve inventory accuracy, streamline processes, gain valuable insights, and simplify reporting.
If you’re ready to take your inventory management to the next level, consider partnering with Lean Supply Solutions. Our expertise in inventory management and supply chain solutions can help you optimize your operations and achieve your business goals.
Contact us today to discuss how our inventory management systems and other 3PL/4PL services can help you create a consistent and streamlined system for your business.
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What Is Vendor Managed Inventory (VMI) and How Does It Work?
Efficient inventory management is critical in today’s competitive business landscape. It plays a significant role in maintaining smooth operations, satisfying customer demands, and minimizing costs. However, achieving the perfect balance can be challenging. Enter Vendor Managed Inventory (VMI)—a key component of supply chain management that can create a seamless, tangible relationship that benefits the vendor, retailer, and end customer.
What Is Vendor Managed Inventory?
Vendor managed inventory is a supply chain management system used between the vendor and retailer (or customer). It is a model approach where the supplier takes full responsibility for maintaining the inventory levels of their products at the customer’s location. This leads to cost-savings in planning, ordering, and storing products by both the vendor and the retailer.
How Does VMI Work?
Vendor Managed Inventory operates based on a few key components that ensure seamless operations and optimal inventory levels. The vendor owns the product and monitors the inventory levels and sales patterns once the inventory is handed over to the retailer. All replenishments are calculated through forecasting and provided to the retailer on time to prevent stockouts.
Inventory Visibility and Data Sharing
One of the critical aspects of VMI is the real-time exchange of data between the vendor and the customer. The vendor and retailer work together to develop accurate demand forecasts and establish optimal inventory levels.
For example, when sales data indicates high demand for a specific product, the vendor can proactively increase stock levels to prevent stockouts. Conversely, if sales are slow, the vendor can adjust the inventory to avoid overstocking, thus minimizing carrying costs.
Replenishment Process
In a VMI system, the vendor determines reorder points and triggers automatic inventory replenishment based on the shared data. This proactive approach ensures that inventory levels are always aligned with actual demand, reducing the risk of stockouts or excess inventory.
The vendor continuously monitors inventory levels and sales data to identify the optimal time for replenishment. This automated process not only saves time but also ensures that the customer always has the right amount of stock available.
Collaboration
Successful VMI requires open communication and collaboration between the vendor and the customer. Both parties must work together to plan inventory levels, share data, and address any potential issues that may arise.
Regular meetings and communication channels help in aligning goals, discussing forecasts, and making necessary adjustments. This ensures that the right amount of stock is available at the right time, reducing excess inventory and associated carrying costs.
Key Players in VMI
Various stakeholders play crucial roles in the successful implementation and operation of a VMI program.
- Suppliers and Vendors: The vendor is responsible for managing the inventory levels to ensure the timely delivery and supply of products and goods. This also gives the vendor accurate numbers for demand forecasting, production planning, and stock availability.
- Retailers and Customers: In a VMI system, retailers or customers provide essential sales data and forecasts and collaborate with vendors on planning. Their role is to share accurate and timely data, which allows vendors to make informed decisions regarding inventory management.
- Third-Party Logistics (3PL) Providers and Technology: Third-party logistics providers (3PLs) play a vital role in facilitating VMI by offering warehousing and transportation services. They act as intermediaries, ensuring the smooth flow of goods from the vendor to the customer.
Benefits of Implementing VMI
To understand the advantages and benefits of VMI, it is important to understand how the system can improve the relationship between the vendor and retailer.
With proper management, VMI reduces inventory carrying costs, improves stock availability, reduces stockouts, and increases efficiency throughout the supply chain. The vendor and retailer have better control over the branding and inventory disbursement.
A well-implemented VMI system results in lower inventory levels, carrying costs, inventory shrinkage, and stockouts. Accurate inventory management can also prevent cash flow restrictions by providing better control and promotion.
VMI reduces time spent on inventory planning since the stock is managed by the vendor. It also reduces unnecessary ordering and the need for excess storage space.
Common Challenges in VMI
While VMI offers numerous benefits, it also comes with certain challenges that need to be addressed. These challenges involve data sharing accuracy and timeliness, establishing trust and clear communication between partners, forecasting accuracy and potential for demand fluctuations, and the potential for vendor lock-in.
Without the proper data analytics system, it is difficult to present accurate numbers. Furthermore, as the VMI integration involves two parties, the partnership must be equally managed with confidence and trust. An inventory management system can only be successful if the data is reliable.
VMI vs. Traditional Inventory Management
Traditional inventory management involves the customer managing their inventory levels and placing orders when stock reaches a certain threshold. This can lead to frequent stockouts and overstocks. In contrast, VMI transfers this responsibility to the vendor.
Using VMI systems, the vendor has the means to track and manage the customer inventory with accurate forecasts for demand. Vendors can improve supply chain management efficiency by optimizing inventory control.
The Future of VMI
The adoption of Vendor Managed Inventory is expected to grow as businesses recognize its efficiency benefits. Emerging technologies like artificial intelligence (AI) and automation are poised to play a significant role in enhancing VMI systems.
AI-powered forecasting tools can analyze vast amounts of data to predict demand more accurately. This leads to better inventory management and reduced risk of stockouts or overstocking. Automation technology can further streamline the replenishment process, reducing the need for manual intervention. This enhances the overall efficiency of VMI programs.
In addition, integrating the Internet of Things (IoT) can improve real-time data on inventory, product usage, and consumer patterns to reduce stockouts.
Enhance Your Business with Lean Supply’s VMI Solutions
If you’re considering implementing VMI in your business, Lean Supply Solutions can provide the expertise and solutions you need. Our comprehensive VMI programs are designed to streamline your inventory management and enhance your supply chain operations. We use a combination of lean processes, leading IT systems, and world-class quality systems.
Contact us today to learn more about how we can help you optimize your inventory levels and achieve greater efficiency.
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How Automation Can Solve Labour Shortages (and Keep You Lean)
The global pandemic may have been officially downgraded last year by the World Health Organization but labour shortages in logistics and other industries continue to grow. In 2023, more than 58% of large Canadian organizations faced challenges related to a lack of qualified workers. The high physical demands of logistics jobs, combined with competition from other sectors offering higher wages, have created a challenging environment for logistics managers and supply chain professionals.
As a result, many businesses in the supply chain industry are turning to supply chain automation to fill the gap left by labour shortages, keeping operations lean and efficient.
This post will explore the concept of lean principles and how automation, specifically cobots (collaborative robots) and AGVs (automated guided vehicles), can provide practical solutions to labour shortages in the logistics industry.
The Problem: Labour Shortages in Logistics
Labour shortages are not new to the logistics industry, but they have become more pronounced.
The COVID-19 pandemic created a challenging environment, forcing many workers to stay home, slowing down logistics operations, and overwhelming supply chains. During that time, many of those involved in supply chain jobs chose other careers that would allow them the flexibility of working from home or working in safer environments.
Another factor that has led to a labour shortage is the aging workforce and a lack of younger workers entering the field. By 2030, more than 60 million Baby Boomers will retire, leaving a void greater than the Gen X, Millennial, and Gen Z workforce can fill.
Logistics jobs can be physically taxing and are not as appealing as careers that require technical skills. As a result, the logistics industry is faced with higher turnover rates as employees seek less strenuous work.
These shortages have significant implications. Delays in shipments can disrupt supply chains and increase costs. Decreased efficiency can lead to dissatisfied customers and lost business. Addressing these challenges is critical for maintaining competitiveness and profitability in the logistics sector.
The Solution: Automation with Lean Principles in Mind
As the labor market continues to shrink, companies are looking for solutions to address the shortage of workers. One such solution is automation, which has become increasingly prevalent in industries across the board due to the use of lean principles.
Lean principles emphasize the importance of minimizing waste and maximizing value in all aspects of supply chain management, from production and transportation to distribution and delivery. The goal is to eliminate any operation that is considered waste.
By using automation with lean principles in mind, companies can significantly improve their bottom line by reducing costs and increasing profits. This can be achieved with robotics, artificial intelligence, and software systems. Specifically, automation solutions such as cobots and AGVs can be used.
Cobots (Collaborative Robots)
Collaborative robots (cobots) are revolutionizing the logistics industry. Unlike traditional industrial robots, cobots are designed to work alongside human workers in an industrial setting such as a warehouse space and they respect the principles of lean operations. By integrating this technology, businesses can improve safety since cobots are equipped with sensors and safety features that allow them to work in proximity to humans, reducing the risk of accidents and injuries.
Cobots can be easily reprogrammed and adapted for various tasks, such as picking, packing, and sorting, making them invaluable in a dynamic environment. They improve accuracy, productivity, and efficiency, reducing labour costs.
AGVs (Automated Guided Vehicles)
Automated guided vehicles (AGVs) are a key component in implementing lean principles within a warehouse setting. These automated vehicles are driverless and can transport goods within a warehouse, freeing human workers from time-consuming and physically demanding tasks. AGVs also reduce unnecessary movement, optimizing space utilization and increasing overall efficiency.
While AVGs are not new to the logistics scene, integrating this technology with cobots can cut down on time and labour-intensive handling. AGVs help minimize waste by ensuring materials are moved efficiently, contributing to lean principles of eliminating waste and improving workflow.
When it comes to warehouse automation, automated guided vehicles, or AGVs, have proven to be a game changer. AGVs help streamline workflows and reduce manual transportation tasks, which minimizes waste and enhances efficiency in alignment with lean principles. In all,
Maintaining Lean Principles with Automation
Warehouse automation solutions require a delicate approach as many people may have concerns about job replacement with the technology. Automation should be viewed as a tool to enhance human capabilities rather than replace them.
When implemented correctly, supply chain efficiency can be improved as workers can focus on tasks that require the human touch such as problem-solving and critical thinking. Many positions require personalized customer service skills that cannot be matched by robots.
Automation reduces unnecessary movement of materials and optimizes warehouse space utilization, aligning with lean principles. In addition, automated systems improve accuracy and consistency in order picking and fulfillment, reducing errors and enhancing product quality. Data from automated processes can be continuously analyzed to identify areas for improvement, fostering a culture of continuous improvement.
Contact Lean Supply for Automated Solutions
The future of automation in logistics is promising. Automation is not a replacement for human workers but a powerful tool to empower them and achieve lean excellence. By integrating automation with lean principles, businesses can create a resilient and adaptable supply chain capable of meeting the challenges of tomorrow.
Ready to explore the benefits of automation in your logistics operations? Talk to the team at Lean Supply Solutions. With over 20 years of experience in the logistics industry, we can streamline your business operation with our supply chain management systems.
Contact us today to discover how our expertise can help you implement automation technologies that align with lean principles and drive your business forward.
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Liverpool Emerges as the UK’s Logistics Powerhouse: Unveiling the Competitive Edge
The logistics landscape in the UK is constantly evolving, driven by advancements in technology, changing consumer demands, and dynamic market conditions. Amidst this transformation, Liverpool has emerged as a major logistics hub, gaining attention for its strategic location, world-class port facilities, and robust infrastructure.
The Port of Liverpool is one of the best locations for growth as it ranks in the top 10% for skilled workforce, access to consumer markets, and port capacity. Because of this, Liverpool is on track to becoming a world leader in import and export logistic services.
Lean Supply Solutions, with its new fulfillment centre in Liverpool, is uniquely positioned to leverage this opportunity, providing unparalleled logistics services to businesses nationwide.
Liverpool’s Rise as a Logistics Powerhouse
According to research released by Knight Frank, a global real estate consultancy and estate agency, Liverpool has been named the leading UK port-centric logistics centre. This provides the port the opportunity to offer lower operating costs and reduced lead times. Businesses can benefit from a better supply chain management system by utilizing Liverpool as their distribution centre.
Knight Frank’s survey assessed various ports based on criteria such as connectivity, capacity, and investment. Liverpool excelled in these areas, thanks to significant investments like the completion of Liverpool2, a deep-water container terminal that has dramatically increased the port’s capacity and efficiency.
According to Stephen Carr, Peel Ports Group’s Commercial Director, “We’ve long argued that the Port of Liverpool is one of the UK’s best-located ports, and we have built on that with significant investment over many years to create jobs and enable more efficient supply chains.”
Moreover, the newly approved Freeport status for the Liverpool City Region promises to enhance its appeal further. The Freeport status is expected to attract even more investments, bolster trade, and create job opportunities, cementing Liverpool’s position as a logistics powerhouse.
Liverpool’s Competitive Advantages Beyond the Port
Dubbed the busiest port on the UK’s west coast, Liverpool’s maritime history continues to expand as major logistic players invest in the port, city, and the people.
While the location provides quick and efficient access to transportation such as roads, rail, and major airports, Liverpool also boasts a skilled labour force, with a rich pool of professionals specializing in various aspects of logistics and supply chain management.
With more than 30,000 people employed in the transportation field, the city of Liverpool has established education and training facilities to support this growing industry. The Liverpool John Moores University Maritime Academy, Lairdside Maritime Centre, Port Academy Liverpool, Maritime and Engineering College Northwest, and the City of Liverpool College provide world-class professional development courses and certification.
These key factors in Liverpool, in addition to the location, make the region cost-effective for distribution and warehousing facilities. Ongoing infrastructure developments and initiatives further enhance Liverpool’s logistics capabilities, making it a compelling choice for businesses seeking efficient and reliable logistics solutions.
Lean Supply Solutions: Your Partner in Liverpool’s Logistics Boom
Lean Supply Solutions is at the forefront of leveraging Liverpool’s strengths to offer superior logistics services. We understand the importance of warehousing location, which is why our state-of-the-art warehouse in Liverpool is strategically located to provide efficient and cost-effective solutions tailored to the needs of our clients.
With more than 47,000 square feet, the Liverpool facility has been refitted with 24/7 surveillance and advanced security systems for the protection of your products and our employees.
We specialize in a range of services, including warehousing and distribution, as well as supply chain management. Our expertise in handling complex logistics operations ensures that our clients benefit from reduced lead times, optimized inventory management, and streamlined operations. By choosing Lean Supply Solutions, businesses can capitalize on Liverpool’s logistics boom and gain a competitive edge in the market.
Contact Lean Supply Solutions for All Your Logistics Needs in Liverpool
Speak to the team at Lean Supply Solutions to see how our Liverpool facility can help take your business to new heights. Our 3PL, packaging, and supply chain management can streamline your processes for better success.
To learn more about outsourcing to our 3PL distribution team, or to ask any questions, email us at ukcsr@leansupplysolutions.com or complete our information request form here.
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