As far as inventory management best practices go, stock rotation is right near the top. It’s alongside other methods such as product lifecycle management or employing a POS system that monitors what comes in and goes out of your store. Why? Because at its core, stock rotation is an approach that helps you to ease the problem of stock loss.
Of course, in this context, we are not referring to stock loss by way of customer and staff theft or vendor fraud. Instead, it concerns having better control of the movement of products into and out of your store. In short, it's about organising your stock in a way that allows you to avoid loss by way of expiration or obsolescence.
For that, there are two main stock rotation or inventory replenishment methods that are worth noting. The first is First-In, First-Out (FIFO) while the second is First-Expired, First-Out (FEFO). As for which process best suits your store and products, that’s what we intend to explore below.
Understanding the First-In, First-Out method of stock rotation
What is First-In, First-Out?
Before we look at the reasons why you should choose the First-In, First Out method of stock rotation, it’s worth explaining it.
Here it is: Following the FIFO method means that you aim to sell the products that arrive first in your store. In other words, you’ll place your slightly older products at the front of your shelf with the newer products near the back. In this way, it's about replenishing your shelves from the back. Moreover, you’re hoping that shoppers who walk into your store will choose those products facing them.
You might even expect or assume that the first items in will be the first items out.
In most cases, you can expect that to happen. That’s especially true if customers are in a rush and want to grab the first product off the shelf. Of course, discerning shoppers may know what you are attempting to do - placing the oldest inventory at the front and they’ll reach further back.
While it’s not necessarily a problem when done sporadically - regardless of the product customers will reach to the back. However, it does pose an issue if all customers do that, which could leave you with dead stock. Of course, that’s where visual merchandising comes in. A pleasant looking shelf can go a long way to persuading your shoppers that all of your products are worth buying.
What are the benefits of following the FIFO method?
Now that you understand the FIFO method, the next step is to consider the benefits of choosing it. It’s better as a question: why should you follow the FIFO method?
There are many reasons. The first is that it allows you to avoid the problem of deadstock.
As we’ve noted in a previous article, dead stock can cause considerable damage to your business. By implementing a FIFO method, you avert the problem of dead stock by selling the inventory that arrives first in your store. So long as you arrange it accordingly on your shelf, you shouldn’t need to worry about facing dead stock.
A second benefit is that it reduces the impact of inflation. How? FIFO can reduce the impact because you’re selling your oldest items first. If you were to assume that inflation is constant, the purchase price of older inventory is lower than that of the stock you bring in thereafter.
There are, of course, negatives to following this method. The main one relates to cost. While inflation may lead to higher profits for your business, it can also lead to higher tax, which can decrease your cash flow and growth opportunities.
Who should follow the FIFO method?
When it comes to choosing when to use this method, one of the deciding factors is the type of products you sell.
For example, it’s best if you stock seasonally categories, fresh food or have a policy of displaying and selling older stock first.
It also works well if you stock products that have short demand cycles. A typical example here is clothes where styles can quickly become obsolete.
Understanding the First-Expired, First-Out method of stock rotation
What is First-Expired, First-Out?
While First-in, First-Out is the most commonly used stock rotation method, a second well-known method is First-Expired, First-Out (FEFO).
FEFO is an organised approach to dealing with perishable products or those with a specific expiry date that begins at your warehouse and ends at your store. It’s the expiry or sell-by date of a product that triggers this process.
For example, when products enter your store, instead of putting them at the back of your shelf, you’d first check the expiry dates. You then place those products with the shortest shelf-life near to the front of your shelf, if not at the front, so customers see them and buy them first.
It helps if you’ve assigned expiry dates to your various batches so that everyone in your supply chain knows what’s happening right up to when your product reaches the shelf. If you have a robust inventory management system in place that tracks the information, you’ll know exactly when to push stock from your warehouse to your store so that it doesn’t become obsolete.
What are the benefits of following the FEFO method?
The first benefit of following the FEFO method is that it allows you to guarantee product quality. That. in turn, leads to another benefit - customer satisfaction and a boost in reputation.
Let’s say, for example, that you sell Dairy products. Following the FEFO method means you ensure that you sell these products either by their sell-by date or before. If you follow it correctly and you have the correct checks and balances in your inventory management system, the expiry date shouldn’t even come into consideration.
Your customers will know that when they buy products from your stock, they will receive products of high quality.
Similar to the benefit of FIFO, following the FEFO method also allows you to avoid dead stock. While FIFO refers to dead stock at a store level, in this context, its about avoiding obsolete inventory at a warehouse level, which is just as if not more devastating to your business.
A third benefit relates to cost. More specifically, it relates to the costs that you can reduce. For example, by following it, you can reduce the cost of stock expiring on your shelf, the cost of the damage to your brand image and the cost of customer returns.
Who should follow the FEFO method?
While your FIFO method doesn’t place an importance on your expiry date, it’s precisely what drives FEFO. The ‘E’ in FEFO - Expired - gives that away.
Thus, you’ll find its best to use the FEFO method if you sell perishable goods, are in the food and beverage industry or are a pharmacy, where offering a product past its expiry date can have serious consequences for your business.
At DotActiv, we offer specialist category management software and services that can help your retail business to improve inventory efficiency and stand out from the crowd. Interested in delving deeper into inventory replenishment and how best to manage your inventory in-store?