Warehouse Order Picking: An Expert Evaluation of FIFO, LIFO, FEFO, and More

9 minutes

Warehouse inventory management and order picking are complex processes with a range of methods and strategies employed to ensure efficiency, accuracy, and safety. Each approach has its advantages and disadvantages and can be tailored to the specific needs of your facility.

In this blog post, we’ll evaluate several common inventory management and warehouse picking strategies to determine which is best suited to your warehouse. We’ll explain FIFO (first in, first out), LIFO (last in, first out), FEFO (first expiry, first out), and other potential methods such as FEMAL, HIFO, and LOFO. We’ll also explore the implications for just-in-time inventory management and inventory valuation methods such as the Average Cost Method.

What is Picking in Warehouse Operations?

Warehouse order picking is the process of product allocation and preparing products for shipment. It’s a critical part of any warehouse operation, as it impacts your company’s delivery times, customer satisfaction, and profitability.

Common warehouse picking methods include Discrete, Batch, Wave, Zone, and others. However, the picking method you use depends on your warehouse and inventory management system, as well as the specific needs of your business.

What Are the Different Order Picking and Inventory Management Strategies?

When it comes to order picking strategies, several common methods can be employed by warehouses. Depending on your business needs and the type of goods you store, different strategies may be more appropriate. For example, a method like FIFO is often used for perishable goods, while some methods may be preferred for tax and accounting purposes. Warehouse allocation methods are often independent from accounting methods.

FIFO (First In, First Out)

FIFO stands for “First In, First Out” and is one of the most widely used order picking strategies. With the FIFO method, you pick from the oldest inventory first, ensuring that products don’t become stale or outdated. This is often the preferred method for items with a short shelf life, such as food and beverages, pharmaceuticals, and medical supplies.

• Advantages: FIFO is a simple system to understand and manage, and it ensures that all items in your warehouse are moved regularly. It also minimizes any risk of wastage due to expiration dates, as the products with the closest expiry date will be used first.

• Disadvantages: As FIFO moves all products through the system at roughly the same rate, it may mean that the most profitable items are not shipped first. This can lead to delays in receiving payment for those high-margin products, reducing overall profitability.

LIFO (Last In, First Out)

LIFO stands for “Last In, First Out” and is another popular order picking strategy. With this method, you pick from the most recently received inventory first. This approach is often used in warehouses with a large variety of items that have similar shelf lives, as it can help reduce obsolescence costs by ensuring products are moved out quickly.

• Advantages: LIFO is often the preferred option for companies that have high turnover and seasonal products, as it allows them to prioritize their freshest items. It also ensures that high-margin goods are shipped first, increasing profitability.

• Disadvantages: LIFO can lead to problems with expiry dates, as products that are closest to their expiration may be shipped first. This could result in wastage and additional costs for the company.

FEFO (First Expiry, First Out)

FEFO stands for “First Expiry, First Out” and is a variation of the FIFO approach. With this method, you pick from the items that are closest to expiration first. This ensures that products don’t expire before they can be sold, reducing waste and ensuring customers receive products in the best condition possible.

• Advantages: FEFO helps you manage your inventory more effectively and prevents wastage due to expired items. It also allows you to prioritize the freshest items for shipment, ensuring customer satisfaction.

• Disadvantages: FEFO can be difficult to manage and track, as you’ll need to keep detailed records of product expiration dates.. This can add additional costs in terms of time and resources.

Other Strategies

In addition to the three primary strategies outlined above, several others could potentially be used in a warehouse setting. These include:

FEMAL (First Expiry Minimum Available Lifetime):

The FEMAL approach is similar to FEFO, except it takes into consideration the minimum available lifetime of the products. This ensures that the items are shipped before they reach their expiration date, while still allowing them to remain on the shelves for as long as possible. Often, this is dictated by customer and may only apply to that customer.

HIFO (Highest In, First Out):

The HIFO strategy prioritizes picking the items that had the highest cost to purchase first. This will cause the company’s financials to reflect the highest possible cost of goods sold (COGS) for any period as well as a minimum cost of ending inventory.

LOFO (Lowest In, First Out):

This is the opposite of HIFO, and it prioritizes picking items with the lowest cost first. This will help to keep COGS as low as possible and can generate a higher net income being reported.

First One Found:

This isn’t really an inventory or order picking strategy, but it involves simply selecting the first item that can be found. As you can imagine, this isn’t an organized approach. Rather, it is sometimes used in lieu of having a proper order picking strategy. However for warehouses that are using primarily floor storage without racking, this may be valid.

It’s important to note that not all of these strategies are commonly practiced, appropriate, or compliant with regulations. We’ll briefly discuss accounting compliance later in this article.

Comparing FIFO, FEFO, and LIFO in Practice

Understanding each method individually is just the starting point. The real value comes from comparing them across the dimensions that affect daily operations: the products you store, the space you store them in, and the technology that tracks them.

Product Suitability

Different inventory types demand different rotation strategies:

• FIFO works best for: Non-perishable goods with consistent pricing, electronics and technology products, and any inventory where age affects desirability.

• FEFO works best for: Food and beverages, pharmaceuticals and supplements, cosmetics and personal care items, chemicals with stability concerns, and any product with regulatory expiration requirements.

• LIFO works best for: Raw materials with fluctuating costs, non-perishable bulk commodities, items stored in deep-lane racking where the newest stock is most accessible, and operations prioritizing tax considerations over inventory freshness.

FEFO matters most for food and beverage operations and pharmaceutical warehouses, because products don’t always arrive with expiration dates that match receipt order. A supplier might ship older stock, or different product lots might have varying shelf lives based on manufacturing conditions.

Storage and Space Requirements

Physical warehouse layout heavily influences which method makes practical sense:

• FIFO demands accessible storage where older inventory remains reachable. Flow-through racking, narrow aisle configurations, and careful slotting strategies support FIFO operations. Your putaway processes must consider how today’s receipts affect tomorrow’s picking efficiency.

• FEFO requires similar accessibility plus strong lot tracking. Every location must clearly identify expiration dates, and your system needs visibility into shelf life across the entire facility.

• LIFO allows simpler storage configurations. Deep-lane bulk storage, block stacking, and drive-in racking all work naturally with LIFO because the newest inventory sits in the most accessible positions.

Technology and Tracking Requirements

The complexity of your warehouse management system varies significantly by method.

FIFO requires date-stamping all receipts and directing picks based on receipt date priority. This demands barcode scanning at receiving and systematic pick path optimization.

FEFO adds another data layer: expiration dates must be captured at receiving, stored accurately, and used for pick direction. Many operations also need expiration alerts and reports showing inventory approaching end of life.

LIFO requires less sophisticated tracking since you’re always pulling the newest inventory. However, accurate inventory valuation for accounting purposes still demands good receipt date data.

How Does Order Picking Impact Your Inventory Valuation Method?

The order picking strategies you use will have an impact on your inventory valuation methods. For example, using FIFO or FEFO could result in the cost of goods sold being lower since the oldest items are shipped first. On the other hand, using the LIFO method may result in a higher cost of goods sold because newer items tend to be more expensive than older ones. This is true in an inflationary environment with rising prices, however, if the price of goods is falling, LIFO could result in a lower cost of goods sold than FIFO.

It’s important to note that the inventory valuation method you use for accounting purposes should be in line with the order picking strategy you’re employing. For example, if you’re using a FIFO approach for order picking, you should also use the corresponding FIFO inventory valuation method in your accounting records.

FEFO doesn’t represent a distinct accounting method, since it’s purely operational. Companies using FEFO typically apply either FIFO or average cost accounting while managing physical inventory based on expiration dates. LIFO also carries its own accounting considerations: it can leave older cost layers on the balance sheet that understate current inventory values, and many countries, including those following International Financial Reporting Standards (IFRS), don’t permit LIFO accounting.

Average Cost Method of Inventory Valuation

The Average Cost Method, commonly referred to as AVCO, of inventory valuation is another method used to determine the value of inventory items based on their average acquisition price. This method helps businesses keep track of their inventory costs and ensure accurate financial reporting.

Under the AVCO, the total cost of an item is divided by its quantity to arrive at the average acquisition price. This value is then used to calculate the cost of any new items added to the inventory, which helps with pricing and sales decisions. The AVCO also adjusts for price changes over time, which is beneficial in cases where the cost of goods varies throughout a period.

Calculating Accurate Inventory Value

When using the average cost method, businesses should take into account any discounts or additional costs associated with the purchase of an item. This helps to ensure that the costs are accurately reflected when calculating inventory value. Additionally, businesses may choose to include freight and shipping costs in their calculations, as these can have a significant impact on the cost of goods.

The AVCO is beneficial for businesses looking for an accurate way to track inventory costs over time. By taking into account price variations and discounts, businesses can ensure that their financial statements accurately reflect the value of their inventory. Additionally, the AVCO is easy to use and can be adjusted as needed.

Other Order Picking Considerations

When it comes to order picking, there are a few other considerations that businesses must keep in mind.

Efficiency and Workflow

Businesses should look for ways to optimize their workflow and find ways to reduce the time it takes to pick, pack, and ship orders. Businesses should also ensure that they are adequately stocked on all items to minimize wait times for customers.

Warehouse Picking Methods

Some of the most common order picking methods include batching, zone picking, pick-to-cart, and wave picking. Batching is a strategy in which orders are grouped based on common characteristics, such as customer location or product type. Zone picking divides the warehouse into zones, with each worker responsible for items within their assigned zone. Pick-to-cart is an automated system where workers use carts to quickly move items from one location to another. Wave picking is a system where workers are assigned specific tasks that are completed in waves throughout the day.

What is Case Picking in a Warehouse?

Case Picking is a type of order picking used in warehouses that involves selecting, packing, and shipping items in their original boxes or cases. This practice helps minimize the risk of damage or loss during storage and transit, especially when it comes to fragile items. Case picking also helps speed up the overall workflow as it reduces the human labor needed for individual item picking. Additionally, it helps in reducing storage costs as multiple items can be stored together in one box or case.

Equipment and Technology

To optimize for case picking or any other picking strategy, warehouses must have the right equipment and set up processes that ensure accuracy and efficiency. Utilizing automation technologies like pick-to-light systems, RF technology, and voice recognition systems can help warehouses speed up the order picking process and reduce errors. Furthermore, warehouses should also adopt a cycle counting system that allows them to easily track their inventory levels regularly.

When selecting an order picking strategy, warehouses should consider factors such as warehouse size, number of orders, SKU types, and item locations. Additionally, warehouses should evaluate the capabilities of their current warehouse management system (WMS) and technology, then invest in a solution that can support their chosen strategy. By selecting the right order picking strategy for their environment, warehouses can ensure efficient operations and maximize inventory value.

Ensuring Accurate Financial Reporting

inventory management features is essential for creating an accurate balance sheet and financial statement. The AVCO inventory valuation method is an important accounting method that helps businesses track the cost of goods sold over a given accounting period. By taking into account variations in price and discounts, this inventory method allows businesses to accurately record the value of their ending inventory on their balance sheets. Additionally, order picking strategies can have a significant impact on inventory value, as they can help to reduce costs and ensure that customers receive their orders promptly.

Complying with Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP) are a set of accounting rules and regulations established by the Financial Accounting Standards Board (FASB) to ensure that financial statements are prepared in accordance with accepted accounting standards. The AVCO valuation method is one way to ensure that businesses comply with GAAP, as it provides an accurate way to track inventory costs over time.

Common FIFO, LIFO, and FEFO Problems and How to Solve Them

Implementation rarely goes smoothly. Understanding the typical problems before they occur helps you develop preventive strategies rather than reactive fixes.

FIFO Implementation Challenges

Problem: Physical access to older inventory. When newer products block older ones, FIFO becomes impossible without excessive product handling. Workers either ignore the system or waste time moving inventory to reach the correct items.

Solution: Implement flow-through racking where loading happens from one side and picking from another. For floor storage, establish clear lanes and rotation schedules. Configure your system to direct putaway to locations that maintain FIFO accessibility.

Problem: Mixed lots in single locations. Combining different receipt dates in one bin makes FIFO tracking unreliable. Pickers grab whatever’s convenient rather than following proper rotation.

Solution: Enforce single-lot putaway rules or use location subdivisions that keep receipt dates separate. Regular cycle counting helps identify locations where mixing has occurred.

Problem: Receiving timestamp inaccuracies. If goods sit in staging areas before formal receiving, timestamps may not reflect actual arrival dates. This creates downstream picking errors.

Solution: Establish receiving cutoff times and same-day processing requirements. Consider using arrival timestamps rather than processing timestamps for FIFO calculations.

LIFO Implementation Challenges

Problem: Inventory obsolescence and quality degradation. Older stock continuously gets pushed aside as new inventory arrives. Eventually, you’re left with aged products that may no longer be saleable.

Solution: Implement periodic inventory reviews that flag items exceeding age thresholds. Schedule intentional older-stock picks during slower periods to prevent permanent burial.

Problem: Balance sheet distortion. LIFO can leave old cost layers on your books that don’t reflect current market values. This complicates financial analysis and can trigger problems during audits.

Solution: Maintain supplemental FIFO tracking for financial reporting purposes even while operating LIFO physically. Work with accounting to understand LIFO reserve requirements and disclosure obligations.

Problem: International compliance restrictions. Countries following IFRS don’t permit LIFO accounting, which creates complications for companies with global operations.

Solution: Evaluate whether LIFO benefits outweigh the complexity of maintaining dual systems for international reporting. Consult with tax and accounting advisors before committing to LIFO.

FEFO Implementation Challenges

Problem: Inconsistent expiration date capture. Different product formats display expiration information differently. Some use “best by” dates, others show manufacturing dates, and some require calculation based on lot codes.

Solution: Establish standardized date interpretation rules. Create product-specific receiving instructions that guide workers on where to find and how to interpret date information.

Problem: Short-dated inventory discovered too late. Products approaching expiration get identified during picking, forcing last-minute decisions about whether to ship or scrap.

Solution: Generate daily expiration reports showing inventory within defined windows (30 days, 14 days, 7 days). Create workflows for proactive disposition decisions rather than reactive crisis management.

Real-World Implementation Scenarios

Theory becomes useful only when applied to actual warehouse situations. Consider how different operations might approach these decisions.

Scenario: Food Distribution Center

Imagine a regional food distributor handling both ambient and refrigerated products. Their perishable inventory, such as dairy, produce, and fresh proteins, demands FEFO management. Products arrive with varying remaining shelf lives depending on supplier schedules and manufacturing dates.

Their cold storage operations capture expiration dates at receiving and automatically direct picks to the shortest-dated inventory. The system generates daily reports showing products within seven days of expiration, triggering markdown or donation workflows.

For ambient products like canned goods and dry pasta, the same distributor uses FIFO. Expiration concerns are minimal, but maintaining fresh stock rotation still matters for customer perception and inventory turnover metrics.

Scenario: Electronics Assembly Warehouse

Consider an electronics manufacturer managing component inventory. Their situation illustrates why FIFO often makes sense even for non-perishable items. Electronic components don’t spoil, but they do become obsolete as technology advances and product designs change.

FIFO ensures older components get used before design changes make them worthless. The company maintains strict receipt date tracking and directs production picks based on inventory age. Components exceeding six months in stock trigger engineering reviews to determine continued usability.

Scenario: Building Materials Supplier

A lumber and building materials company might find LIFO operationally appealing. Their yard stores products in deep stacks where the newest deliveries naturally rest on top. Strict FIFO would require unstacking and restacking, which is expensive and potentially unsafe with heavy materials.

However, they must balance operational convenience against inventory quality. Lumber at the bottom of stacks may suffer moisture damage or warping over time. Their solution combines LIFO for normal operations with scheduled rotation events that cycle older inventory to accessible positions.

Visual Tools, Training, and Monitoring

Successful implementation requires clear communication and consistent processes. Visual aids and documented procedures help ensure everyone understands and follows your chosen method.

Creating Effective Visual Systems

Color-coded labels provide instant visual cues about inventory age or expiration status:

• Monthly color rotation: Assign colors to receipt months. January arrivals get blue labels, February gets green, and so on. Pickers quickly identify the oldest stock by color.

• Expiration zone marking: Use color-coded floor tape or rack labels to designate areas by expiration window. Red zones hold short-dated inventory requiring immediate attention.

• FIFO flow arrows: Mark racking with directional arrows showing the load side versus the pick side. Visual reminders reinforce correct rotation behavior.

Staff Training Essentials

Effective training covers both the “how” and the “why” of inventory rotation:

1. Explain the business impact. Workers follow procedures better when they understand consequences. Share examples of spoilage costs, customer complaints, or compliance issues that result from poor rotation.

2. Demonstrate correct procedures. Walk through actual picks showing how to identify the correct inventory, verify dates, and handle exceptions.

3. Practice exception scenarios. What should workers do when system-directed inventory isn’t accessible? When dates don’t match expectations? When they discover damaged or short-dated stock?

4. Establish feedback channels. Create easy ways for workers to report system issues or process problems without feeling blamed for raising concerns.

Monitoring and Continuous Improvement

Implementation isn’t complete once procedures are documented. Ongoing monitoring ensures sustained compliance:

• Track picking compliance rates: how often do workers pick the system-directed inventory versus making substitutions?

• Monitor spoilage and obsolescence metrics. Increasing waste may indicate rotation failures.

• Review customer complaints about product freshness or expiration dates.

• Conduct periodic warehouse reporting reviews to identify trends and outliers.

Matching the Method to Your Operation

With a clear understanding of each inventory method, you can make an informed choice. Here’s a practical framework for the decision.

Start with product characteristics. If expiration dates matter for safety, compliance, or customer satisfaction, FEFO is non-negotiable. If products don’t expire but age affects desirability, FIFO makes sense. If products are truly stable and physical access favors the newest inventory, LIFO deserves consideration.

Evaluate your storage infrastructure. Does your racking support the required access patterns? Flow-through systems enable FIFO and FEFO. Block storage and deep-lane racking naturally support LIFO. Changing storage configurations may cost more than the benefits of a particular method.

Assess technology capabilities. Does your current system support the tracking and pick direction your chosen method requires? Can it handle multiple methods if you need different approaches for different products?

Consider financial implications. Discuss inventory valuation methods with accounting. Tax considerations may influence the decision, particularly for companies with significant inventory investments and fluctuating costs.

Plan for change management. Any rotation method only works if people follow it. Consider training requirements, supervision needs, and ongoing compliance monitoring before finalizing your approach.

Picking Warehouse Strategies Conclusion

Order picking is an essential function of warehouse management, and by selecting the right strategy, warehouses can optimize their processes and ensure accurate financial reporting. Common warehouse inventory and picking strategies include FIFO video tutorial, LIFO, FEFO, as well as others.

Warehouses need to evaluate their current technology, consider factors such as warehouse size, type of goods, and order volume, and then invest in solutions that can support the chosen strategy.

To see how a WMS supports FIFO, FEFO, and LIFO operations, request a demo.

Frequently Asked Questions

Can I use different picking strategies for different product categories in the same warehouse?

Yes, you can implement multiple picking strategies within the same warehouse based on product categories. Many warehouses use FIFO for perishables, LIFO for seasonal items, and FEFO for pharmaceuticals simultaneously. This hybrid approach requires robust inventory management systems to track each category separately and ensure proper allocation methods are followed for optimal efficiency.

How do I choose between FIFO and FEFO for perishable goods?

Choose FEFO when products have varying shelf lives and expiration dates are your primary concern, as it prioritizes items closest to expiry regardless of arrival date. Use FIFO when products have consistent shelf lives and you want simpler inventory rotation. FEFO provides better waste reduction but requires more detailed tracking, while FIFO offers easier implementation with good results for most perishable items.

What technology do I need to implement FEFO effectively?

FEFO implementation requires a warehouse management system (WMS) with expiration date tracking, barcode or RFID scanning capabilities, and automated picking guidance. You’ll need systems that can sort inventory by expiration dates, generate pick lists based on urgency, and provide real-time visibility into product shelf life. Many modern WMS platforms include these features as standard functionality.

Does my accounting method have to match my warehouse picking strategy?

For accurate financial reporting, your accounting inventory valuation method should align with your actual physical picking strategy. If you pick using FIFO, use FIFO accounting; if you pick LIFO, use LIFO accounting. Misalignment can create discrepancies between your physical inventory flow and financial records, potentially causing compliance issues and inaccurate cost of goods sold calculations.

How does warehouse layout affect which picking strategy I should use?

Warehouse layout significantly influences picking strategy effectiveness. FIFO works well with flow-through layouts and conveyor systems that naturally move older stock forward. LIFO suits block storage where newer inventory is more accessible. FEFO requires layouts that allow easy access to products with varying expiration dates, often necessitating smaller storage locations and more sophisticated tracking systems throughout the facility.

How does LIFO differ from FIFO in practice?

LIFO prioritizes shipping the most recently received inventory, while FIFO ships the oldest first. LIFO can reduce handling costs because workers pull the most accessible stock, but it may lead to outdated stock accumulating at the back of storage. LIFO is often chosen for financial benefits in certain tax environments, so the choice depends on your operational goals and the nature of the inventory being managed.

How do I handle returns under each method?

Under FIFO, returned items should typically enter inventory with their original receipt date, not the return date, which maintains proper rotation order. FEFO handles returns similarly, since the expiration date remains unchanged regardless of when items return to stock. LIFO returns are simpler operationally but can complicate LIFO layer accounting, because the returned items may need to recreate cost layers that had been considered sold.

What happens when I need to switch inventory rotation methods?

Changing inventory methods requires careful planning. Operationally, you’ll need to relabel or reorganize physical inventory, retrain staff, and reconfigure your WMS rules. Accounting changes may require restating prior periods and adjusting inventory valuations. Most companies plan method changes during low-inventory periods or at fiscal year boundaries to minimize disruption and simplify the transition accounting.

How do FIFO, FEFO, and LIFO affect picking efficiency?

LIFO typically offers the highest picking efficiency because workers grab the most accessible inventory. FIFO may require reaching past newer stock to access older items. FEFO adds complexity because the correct pick depends on data rather than physical position, so workers must verify that expiration dates match system expectations. However, efficiency differences shrink dramatically with proper slotting and system-directed picking, and a well-designed FIFO operation can match LIFO efficiency by storing inventory in ways that keep the oldest stock most accessible.

Do small warehouses need formal rotation methods?

Every warehouse benefits from intentional inventory rotation, though implementation complexity should match operation scale. Small facilities might use simple visual systems, such as colored labels by month received or clear date marking on cartons, while larger operations need systematic tracking and software enforcement. The cost of not having any rotation method typically exceeds the cost of implementing even basic FIFO or FEFO practices, because spoilage, obsolescence, and customer complaints from shipping old inventory add up quickly.