Types of Inventory Rotation Policies
Inventory consumes a significant percentage of a business’ working capital requirements. Having to dispose of old, worn or obsolete inventory by discounting, donating or by throwing it out can have a major impact on financial health. An inventory rotation policy that considers both the inventory items and needs of the business can go far in preventing products from getting to this stage and is essential to good inventory management.
A first-expired first-out inventory rotation policy works for perishable food items, over-the-counter medications, hygiene products and any other products that come with an expiration date. FEFO helps minimize price discounting and waste that can occur as inventory items approach or go past their expiration date. FEFO is most effective when expiration dates are verified upon delivery, products are stored with their expiration dates visible and adjustments are made with each delivery to ensure products expiring first remain in front of products with a later expiration date.
First-in first-out is one the most common inventory rotation policies. Although FIFO works for most nonperishable inventory items, it is especially common in manufacturing and warehouse inventory systems. A FIFO inventory rotation policy works according to the theory that the first items produced or received on delivery – the oldest – should be the first ones to go out for processing or sale. Because the newest items are always start in back, FIFO is effective in reducing the chance that inventory items will become obsolete.
A last-in first-out inventory rotation policy works under the assumption that the last or newest products are also the first to go out for production or for sale. Although this type of an inventory rotation policy won’t work for most businesses, it will for businesses that store heavy, durable goods such as concrete blocks or other building materials where age or the chance of becoming obsolete are rare. In a LIFO system, new items are placed on top or in front of those items already in inventory and conversely removed from the top or front.
The two-bin inventory rotation system is similar to a FIFO rotation, except that it is fluid and most often used in a just-in-time manufacturing environment. Just-in-time provides for little to no shelf-based inventory and what inventory is on hand is most often required to keep an assembly line moving. With a two-bin rotation, one is the active bin and one is a safety net. As the active bin empties and the line worker switches to the safety bin, a supply associate removes, refills and returns the original bin back to the line.