Cost-Saving Strategies in FIFO vs LIFO Inventory for Construction Supply Distributors
FIFO (First In, First Out) and LIFO (Last In, First Out) are more than accounting methods — in the building materials industry, they influence how products are stored, picked, and priced every day. Whether you’re managing pallets of cement, treated lumber, or galvanized pipe, choosing the right strategy — and managing it efficiently — can have a direct impact on your margins.
While both methods have their place, many distributors miss key cost-saving opportunities by treating FIFO and LIFO as passive rules instead of strategic tools.
Here’s how to maximize cost control using FIFO and LIFO — and how ERP and process automation make it easier than ever.
Understanding the Cost Drivers Behind Each Method
FIFO (First In, First Out) prioritizes using or selling the oldest inventory first. It’s ideal when:
Products have a shelf life (adhesives, insulation, treated lumber)
Material quality degrades over time
You want inventory to reflect current physical stock accurately
LIFO (Last In, First Out) uses the most recently received inventory first. This can be beneficial when:
Commodity prices are volatile (steel, copper, cement)
You want to match rising purchase costs with current revenues (for tax strategy)
Stock isn’t perishable or time-sensitive
The strategy you choose — or blend — will affect not only how materials are moved, but how your costs are recognized and inventory is valued.
Cost-Saving Strategy #1: Mix FIFO and LIFO Intentionally
Instead of defaulting to one method across all products, segment inventory by:
Product type (e.g., fasteners = FIFO; structural steel = LIFO)
Turnover rate
Shelf life or degradation risk
Storage requirements (indoor/outdoor)
Your ERP system should allow SKU-level assignment of FIFO or LIFO logic, so you’re not sacrificing cost savings or risking waste by applying the wrong method to the wrong product line.
Cost-Saving Strategy #2: Automate Picking Based on Strategy
Incorrect picking order causes:
Material aging (when FIFO is ignored)
Margin loss (when higher-cost LIFO stock is skipped)
Recounts and adjustments that waste labor
Use ERP-linked mobile apps or scanning tools to:
Guide warehouse staff to the correct lot or bin based on the strategy
Enforce pick order automatically
Prevent manual overrides without supervisor approval
This reduces costly inventory errors — especially in fast-paced yard operations.
Cost-Saving Strategy #3: Use FIFO to Reduce Write-Off Risk
Products like sealants, adhesives, or moisture-sensitive boards can spoil or degrade in long-term storage. By enforcing FIFO:
You reduce aging inventory
You avoid last-minute scrambles to move nearly expired materials
You cut down on product disposal and lost revenue
Add aging reports and expiry alerts to your ERP dashboards for better oversight.
Cost-Saving Strategy #4: Use LIFO for Tax Efficiency During Cost Surges
In periods of inflation or commodity spikes, LIFO can reduce taxable income by recognizing the most recent, higher-cost inventory first.
Be sure to:
Sync accounting and operations to ensure alignment
Track material cost changes per batch
Model tax scenarios inside your ERP to understand the bottom-line impact
This strategy is especially useful for metal goods, structural steel, and bulk dry mixes — where purchase costs can swing significantly quarter to quarter.
Cost-Saving Strategy #5: Monitor and Compare FIFO vs LIFO Margins Over Time
Use ERP dashboards to compare:
Gross margin by inventory strategy
Shrinkage or disposal rates under FIFO
Inventory holding cost by method
Turnover velocity for FIFO vs. LIFO products
These insights help you refine your strategy, phase in seasonal changes, and negotiate smarter with suppliers.
Final Thoughts
FIFO and LIFO aren’t just accounting methods — they’re inventory levers that, when applied strategically, can protect margins, reduce waste, and optimize taxes. With the right ERP tools in place, building materials distributors can automate the execution of each strategy — and continuously refine them as market conditions change.
The key isn’t choosing one method. It’s choosing the right one for each product — and managing it with precision.
