LIFO warehousing method
The LIFO method (last in, first out) is a warehousing method or simplified inventory valuation procedure that assumes that the goods delivered last leave the warehouse first. The new goods are placed in front of or on top of the existing ones. Goods are stored and retrieved from the same side of the storage rack. This stands in contrast to the FIFO (first in, first out) method in which the goods that enter the warehouse first leave it first and the racks are loaded and unloaded from different sides.
Normally, a company must value each item individually. This cannot be done easily with liquids such as heating oil or with bulk goods such as sand and gravel since different deliveries are stored together and thus mixed. These items can therefore be valued collectively. This method is also often used by companies that do not employ a particular warehousing method.
Difference between perpetual and periodic LIFO
Different methods can be used to calculate the value of goods: About perpetual and periodic LIFO.
Perpetual LIFO is fairly involved since inventories are valued every time inventory is issued. That is why this method is rarely used in practice.
In periodic LIFO, inventories are valued at the end of a period (e.g. financial year). Since the new goods leave the warehouse first, the closing stock is valued at the price of the opening stock; the oldest goods receipts are also included if necessary. If the remaining stock is less than the opening stock, the unit price of the opening stock is used to value the inventories. If the remaining stock is greater than the opening stock, the oldest goods receipts are added to the opening stock. Both calculation methods produce the same result at the end of a period.
LIFO application areas
The LIFO process is often used for homogeneous, non-expiring goods. This includes liquids (fuel oil, natural gas), building materials (wood, metal, glass) or bulk materials (sand, gravel, coal) whose deliveries are all stored in the same place. For example, if oil is stored in a tank and purchased at different prices over a period, it is not possible to distinguish which oil comes from which delivery. That is why oil is valued collectively. Collectively valued goods should not corrode and should retain their value over a long period of time. Perishable or expiring goods such as food or pharmaceutical products are managed using another method, such as FIFO, so that the goods that were delivered first also leave the warehouse first.
Reasons for using the LIFO approach
With the LIFO method, it does not matter which goods leave the warehouse first. Its purpose is to save on space and costs. Other reasons for using the LIFO approach:
- More efficient use of available storage space
- Reduced administrative effort
- Lower costs for storage and personnel
If a company stores a wide variety of goods and has enough space, it can use FIFO and LIFO methods together. The corresponding racks are then usually located in different areas of the warehouse.
Racking types in LIFO warehouses
Last in, first out warehouses use several types of racking:
- Shelf-type racking: Goods are stored on the racks, e.g. in cages or on pallets.
- Drive-in racking: Forklifts drive into the rack from one side for storage and retrieval. (If used for FIFO, the rack must be accessible from both sides).
- Slide-in racking: There are channels with support and guide rails in the racks. If a new pallet is added, the existing one slides to the back. If a pallet is taken out, the rear one slides forward again.
Racking types in LIFO warehouses
There are storage methods other than LIFO, too. They include FIFO (first in, first out) and HIFO (highest in, first out).