Efficient warehouse organization is crucial for productivity and profitability. Yet in many companies, unsuitable storage strategies cause high inventory holding costs, complicate planning, and lead to loss of value. Especially for perishable goods or bulky materials, it is vital to choose the right principle.
With LIFO (Last In – First Out) and FIFO (First In – First Out), there are two fundamental approaches that significantly influence how companies move and value their inventory. But how exactly do LIFO and FIFO differ? And which method suits which industry?
Difference between LIFO and FIFO
The inventory flow methods LIFO and FIFO are among the most important fundamentals of warehouse logistics. Both determine the order in which you move, value, and sell goods.
FIFO explained: How “First In – First Out” works
The FIFO principle (First In – First Out) states that the goods stored first are also the first to be removed. The process is therefore time-ordered: older stock leaves the warehouse before more recent arrivals. This helps companies avoid goods becoming outdated or remaining unused.
In industries with perishable products, FIFO is essential to prevent losses. Particularly in the food or pharmaceutical industry, it ensures that older goods are sold first. A typical example is the supermarket: staff deliberately place new deliveries at the back of the shelf and push older products to the front. This “rotates” the stock so that products with a shorter remaining shelf life leave the warehouse or shelf first.
Flow racks are particularly suitable for this type of storage because they provide a clear structure and good visibility. While FIFO is indispensable above all in sectors with expiry dates, LIFO follows a completely different logic. Let’s take a closer look at this method.
LIFO explained: How “Last In – First Out” works
LIFO (Last In – First Out) as an inventory flow method means that the most recently stored goods are also the first to be removed. The process follows a “stack logic”: employees preferentially pick newer stock because it lies on top or at the front, while older stock remains in the background.
This method is particularly suitable for industries where products are not perishable or where rapid availability of new batches is paramount. Typical examples include the building materials trade or metal trade, where materials such as steel beams, pipes, or precast concrete elements must be stored flexibly and robustly.
In practice, LIFO is often implemented with dynamic racking systems such as push-back racks. Pallets are pushed one behind the other on movable carts or roller tracks so that with each pick the next pallet automatically moves to the front. In this way, the stack logic can be realized efficiently and in a space-saving manner.
Inventory valuation with FIFO and LIFO
To report inventory correctly, companies must regularly record opening stock, closing stock, and the resulting remaining stock. They need these figures to value inventory properly and to enable clean financial statements.
In addition to the LIFO and FIFO flow methods, there are others such as HIFO (Highest In – First Out) or LOFO (Lowest In – First Out). These play little role in practice but are discussed theoretically in connection with the valuation of purchase prices.
In times of fluctuating purchase prices, the choice of inventory flow method can change profit and thus the tax burden. Therefore, companies should consider this decision not only from a logistics perspective but also from a business and accounting standpoint.
Legal & tax aspects
In the discussion about choosing between LIFO and FIFO, the German Commercial Code (HGB) plays a central role. According to Section 256 HGB, both LIFO and FIFO are permissible as simplified valuation methods under commercial law, provided they comply with generally accepted accounting principles.
For tax purposes, however, only the LIFO method is explicitly recognized in Germany (Section 6 (1) No. 2a EStG). The FIFO method does not apply under tax law but is commonly used in commercial practice—especially by companies with international business relationships, since FIFO is common practice under the International Financial Reporting Standards (IFRS).
Because the choice of inventory valuation method has a direct impact on reported profit and tax liability, it is advisable to seek professional support from tax advisors or auditors at an early stage. They can help implement the appropriate method in a legally compliant and economically sensible way.
FIFO and LIFO in metrics & controlling
The choice between LIFO and FIFO also directly affects key metrics that are crucial for assessing and managing inventory. These metrics form the basis for correct inventory valuation and for deriving managerial decisions.
| Metric | FIFO | LIFO | Effect on the company |
| Average inventory value | rises more slowly when prices increase, since older (cheaper) stock is used first | rises faster, since newer (more expensive) stock remains in the warehouse longer | influences equity ratio & total assets |
| Material consumption (COGS) | based on older prices → lower reported expense | based on higher prices → higher reported expense | direct impact on profit and tax burden |
| Inventory turnover | tends to be higher, as old stock does not remain “stuck” | tends to be lower, as old stock can block movement | indicates efficiency of warehouse management |
| Liquidity | more capital tied up when prices are rising | less capital tied up, because lower profits → lower tax burden | important for financial planning |
These values are indispensable for controlling, planning, and management. Only on the basis of reliable metrics can companies optimize inventory, reduce costs, and ensure supply security. Having examined the methods and their effects, the practical question arises: How do companies find the right strategy?
Practical tips for choosing the right method
The choice of the appropriate storage strategy depends on several factors—from the type of product to the warehouse structure and legal requirements.
Product type
For products with limited shelf life, FIFO is the only sensible choice. Food, pharmaceuticals, or cosmetics must be stored according to the “First In – First Out” principle to avoid quality losses and legal issues (e.g., expired best-before dates).
For durable and robust goods such as building materials, metals, or machine spare parts, LIFO is often more practical. Since shelf life is not an issue here, the priority is quick retrieval of the most recently delivered goods, which are usually stored near goods receipt.
Warehouse size and structure
In smaller, clearly arranged warehouses with clearly labeled shelves or flow racks, FIFO can be implemented very efficiently. There, staff or automated systems can easily pick the older stock first.
In large-scale warehouses or with block and stack storage, as is common in the building materials trade, FIFO reaches its limits. LIFO is more practical here because new goods are often stacked in front of old ones—reorganizing would entail significant time and cost.
Capital tie-up
FIFO ensures that older goods are dispatched first. This reduces the risk of overstock, write-downs, or even disposal costs. Capital is not needlessly tied up in the warehouse, which eases the balance sheet.
LIFO can offer tax advantages in times of rising purchase prices. Because the last—and therefore more expensive—goods purchased are used first, a higher material expense is recorded. Reported profit decreases, and with it the tax burden. This creates short-term liquidity that can be used elsewhere in the company.
Legal requirements
While the Commercial Code (HGB) permits both FIFO and LIFO, German tax law expressly recognizes only the LIFO method (Section 6 (1) No. 2a EStG). FIFO is not relevant for tax purposes but is frequently applied in an international context—such as under IFRS. The IFRS (International Financial Reporting Standards) are a globally recognized set of accounting rules.
Companies with international business relationships must therefore check which rules are decisive for their financial reporting. An incorrect approach can not only bring tax disadvantages but also cause issues during audits.
In addition, companies should pay attention not only to the method but also to the condition of the racking systems used. Regular rack inspections ensure efficient implementation. But what happens if the wrong method is chosen? A look at the risks makes this clear.
What risks arise from the wrong strategy?
Choosing the wrong storage strategy has direct effects on costs, efficiency, and customer satisfaction. In the food industry, for example, incorrect implementation can have fatal consequences. If, say, a pallet of yogurt is repeatedly pushed to the back of the refrigerated shelf, the older cups will expire before they even reach sales. This means not only product loss but also disposal costs and, in the worst case, reputational damage if customers complain about spoiled products.
The building materials trade also shows how problematic an incorrect storage strategy can be. If LIFO is not used there, but mistakenly FIFO is implemented, older pallets of bricks or metal profiles often remain deep in the stack. This ties up capital for a long time and blocks valuable storage space. In addition, employees must invest extra time and effort to access this stock. It is therefore a clear loss of efficiency that impairs the entire warehouse logistics.
Conclusion
The decision between LIFO and FIFO is not a question of “better” or “worse,” but of suitability. Depending on the industry, product, and warehouse structure, one of the two methods plays to its strengths—be it in protecting against spoilage, optimizing key metrics, or achieving tax advantages. Those who consider these factors lay the foundation for efficient warehousing and a sustainable corporate strategy.
Would you like to know which racking systems are optimal for your LIFO or FIFO strategy? Our specialist advisors are happy to help—contact us now for personal advice.
