The LIFO method (Last In, First Out) defines an inventory management system where the last goods to enter the warehouse are the first to leave. Unlike the FIFO system, rotation prioritises the most recent stock.
As a supply chain manager, you know that choosing the incorrect valuation and dispatch criterion leads to unnecessary operating costs. We analyse the real-world operations of this method, its risks and its suitability for industrial warehouses.
How the LIFO warehouse system works
The physical flow of goods under LIFO requires a specific arrangement of racking and aisles. Operations are simplified when the loading point coincides with the unloading point.
Compatible storage systems
Implementing LIFO requires making the most of cubic capacity. The most common systems are:
- Drive-In pallet racking: They allow a single entry and exit. The fork-lift truck driver enters the structure to deposit the pallet.
- Push-Back Racking: The pallets slide along trolleys or rails by gravity. When a new one is introduced, it pushes the previous one backwards.
- Block stacking: Stable loads stacked directly on top of each other without racking.
Operational advantages of the LIFO method
The main benefit lies in the optimisation of physical space. By reducing manoeuvring aisles, you increase the available storage capacity in square metres.
In sectors with high stock density and rapid turnover of identical SKUs, it speeds up initial placement. You do not need to reorganise the back of the racking to locate new merchandise arriving on the lorry.
To better understand how to optimise workflows in different industries, you can review our experience in our centres logistical.
Risks and disadvantages to control
The main critical point of the LIFO method is the obsolescence of old stock. The pallets located at the back of the structure can remain immobilized indefinitely if rotation is not perfect.
The impact on accounting and taxation
In terms of inventory valuation, LIFO assumes that the most recently costed units are the first to be sold. This directly affects the calculation of gross margin depending on the inflationary context. However, international accounting standards such as IFRS limit or prohibit its financial use because they do not reflect the actual cash flow in many industrial sectors.
If you manage goods with a strict expiry date, as happens in the food logistics or in environments regulated by blog › iso 22716 complete guide, LIFO is strongly discouraged compared to the FIFO method.
When should you use LIFO in your supply chain?
This system proves efficient under very specific conditions:
- Homogeneous raw materials: Bulk products, minerals or aggregates that do not degrade over time.
- No expiration date: Durable goods with no best-before date.
- Critical space optimisation: Warehouses where the cost of a square metre forces maximum vertical and horizontal space utilisation.
If your operatives handle complex goods or you require advice on specific workflows, you can contact our team via the page of contact to study your case.
Preguntas frecuentes
What does the acronym LIFO stand for?
It corresponds to Last In, First Out. It indicates that the last unit received is the first one to be dispatched from the warehouse.
Is it legal to use LIFO for financial accounting?
International Financial Reporting Standards (IFRS) do not permit the use of LIFO for inventory valuation in financial statements because it can distort the true value of accumulated stock.
What is the difference between FIFO and LIFO?
FIFO (First In, First Out) issues the oldest stock first, ideal for perishables. LIFO prioritises the newest stock, focused on maximising storage density in non-perishable products.
Which racking systems are required to apply LIFO?
Mainly Drive-In pallet racking, Push-Back dynamic systems and direct floor block stacking are used.
