Beginner’s Guide to FIFO vs. LIFO Inventory Strategies for Construction Supply
If you’re in the construction supply business, managing inventory is about more than just knowing what’s in stock. It’s about controlling how inventory flows in and out of your yard—especially when dealing with high-value materials, fluctuating prices, or products that degrade over time.
That’s where FIFO and LIFO inventory strategies come in. These two methods define which stock gets used (or sold) first, and they can impact everything from profit margins to product quality.
If you’re new to the concept, here’s a simple guide to understanding FIFO vs. LIFO—and when to use each in a construction supply environment.
What is FIFO?
FIFO (First-In, First-Out) means the inventory that was received first is the inventory that gets used or sold first.
When to Use FIFO:
For products that expire or degrade over time (e.g., sealants, adhesives, bagged concrete)
When it’s important to keep materials fresh or structurally sound
For warranty-sensitive or climate-sensitive goods
Example:
You receive a shipment of insulation rolls in January. Another shipment arrives in March. Under FIFO, your team will pull the January stock first—ensuring older inventory is used before newer inventory.
What is LIFO?
LIFO (Last-In, First-Out) means the most recent inventory that came in is the first to be used or sold.
When to Use LIFO:
For products that don’t degrade or expire (e.g., steel beams, rebar)
In times of price inflation, to match higher costs to current sales
When your accounting strategy is built around recent cost basis
Example:
You bought rebar in January at $600/ton, and again in April at $720/ton. Under LIFO, when you sell in May, your system will “sell” the higher-cost April batch first—reporting lower profits, but reducing taxable income.
Why This Matters in Construction Supply
In the building materials industry, inventory is diverse. You might be stocking:
Materials with a shelf life (adhesives, sealants, insulation)
Bulk items that sit in outdoor yards for months (timber, steel, concrete)
SKUs affected by price volatility (metal, cement, imported goods)
That means choosing the right inventory flow strategy is critical—both for financial accuracy and for operational performance.
Pros and Cons of FIFO
✅ Pros:
Reduces inventory aging and waste
Matches physical flow of most materials
Easier to track in ERP and WMS systems
Preferred for perishable or sensitive products
⚠️ Cons:
In rising markets, may show higher profits (and higher taxes)
Can undervalue inventory if replacement costs have increased
Pros and Cons of LIFO
✅ Pros:
Useful for managing margins during inflation
Matches recent costs to current revenue (closer profit reporting)
May reduce tax liability in certain regions
⚠️ Cons:
Not allowed under IFRS (international accounting standards)
May leave older materials sitting unused
Requires tight controls to avoid product degradation
How ERP Systems Handle FIFO & LIFO
Your ERP should allow you to:
Assign FIFO or LIFO logic at the SKU level
Track batch or lot numbers for FIFO compliance
Calculate cost of goods sold (COGS) accurately
Flag slow-moving or aging inventory based on usage rules
With the right system, your team doesn’t have to manually track which item to use—it’s all handled behind the scenes through smart inventory workflows.
Which Strategy Should You Use?
Choose FIFO when:
Material condition and shelf life matter
You sell a lot of packaged goods, liquids, or adhesives
You want clean, logical product flow in the yard
Choose LIFO when:
You’re managing non-perishable bulk stock
Prices fluctuate regularly
Your accounting strategy prioritizes tax management
Many companies use a hybrid approach: FIFO for sensitive items, LIFO for stable commodities. Your ERP should support this flexibility.
Final Thoughts
Understanding FIFO and LIFO isn’t just for your finance team—it’s for your warehouse supervisors, yard staff, and salespeople too. The strategy you choose affects how you buy, sell, store, and report on every item in your yard.
📊 Not sure which strategy fits your operation? We can help you build a FIFO/LIFO plan that matches your inventory profile—and set it up inside your ERP for complete control.
