FEFO, FIFO and PEPS: Which Stock Rotation Method Fits Your Inventory?

It is the last week of October, and your warehouse is preparing a grocery line's orders for Buen Fin, Mexico's biggest shopping weekend. For two months, the system picked by date of receipt: first the lot that arrived in August, expiring in March, and then the one that arrived in September. No one recorded that the supplier's September shipment was a lot manufactured much earlier, expiring in November. Now that lot is the only one left on the rack, and a supermarket chain's distribution center rejects the first delivery because the product's remaining shelf life falls below what its trade agreement requires. Your company pays the return freight, sets aside several pallets no one is going to buy and reschedules an order that had a committed date for the most important season of the year.

FIFO and PEPS name the same method: what came in first goes out first. FEFO ships first what expires first and takes priority for products with lots and expiration dates. The choice depends on how your product ages.

Three acronyms that decide which pallet goes out first

When a picker reaches a location holding several pallets of the same product, the rotation rule decides which one they take. That rule is summed up in acronyms many teams use interchangeably, and mixing them up costs you in shrinkage and customer claims.

FIFO and PEPS: one method with two names

FIFO stands for first in, first out, and PEPS is its Spanish name: primeras entradas, primeras salidas. Both acronyms describe the same rule, in which the merchandise that entered the warehouse first is the first to leave. Its criterion is age, which is why it protects against obsolescence. In Mexico, PEPS is used in two senses worth keeping apart: as a physical picking rule in the warehouse and as an inventory valuation method in accounting.

FEFO: the expiration date outranks the date of receipt

FEFO stands for first expired, first out. Here the criterion is each lot's expiration date, regardless of when it arrived at the warehouse. Most of the time, FIFO and FEFO coincide, because what comes in first usually expires first. The difference appears when a lot arrives out of order, as in the opening case, and at that point only FEFO keeps the lot closest to expiring from being left behind.

LIFO: the last in goes out first

LIFO, last in, first out, is known in Mexico as UEPS (últimas entradas, primeras salidas). As a physical rule, it appears where the storage method imposes it: bulk material that is piled up and taken from the top, or drive-in racking loaded from one side, where only the last pallet in can be reached. As an accounting method, Mexico's current Income Tax Law (Ley del ISR) no longer includes it among the inventory valuation methods, so in Mexico its practical use is limited to physical storage.

It pays to define in writing which rule applies to each product, before the picker on shift decides it by habit.

The mistake of confusing the picking rule with the accounting method

The most common confusion appears when the warehouse and accounting use the word PEPS for two different decisions. One defines which pallet the picker takes; the other defines at what cost each issue is recorded in the kardex. The two can coincide, and they can also differ without that being an error.

PEPS in the kardex: what each issue costs

As a valuation method, PEPS assigns each issue the cost of the oldest units still in stock and leaves ending inventory valued at the most recent purchase costs. Mexico's Income Tax Law allows several valuation methods, including PEPS, specific identification and average cost, and requires that the one your company chooses be applied consistently. In our article on the kardex, we explain how that cost is recorded movement by movement. The method is defined with your accountant, because changing it has its own tax rules.

The physical rule: which pallet the picker takes

The picking rule answers a different question: which of the available pallets goes out in this order. A company can value inventory at average cost and pick by FEFO, because valuation is calculated on purchase costs and physical rotation is decided on the lot and its expiration date. The problem arises when the physical rule is left undefined: each picker takes the easiest pallet to reach, and rotation depends on how goods were put away that day.

That is why it pays to document the two decisions separately: accounting's in your valuation policy and the warehouse's in your system configuration, product by product.

When picking by date of receipt lets merchandise expire

FIFO works well for products that age evenly. With perishable products, the clock that matters starts at manufacturing and ends at expiration, and the date of arrival at the warehouse stops being a good reference. There are three situations where FEFO has to take priority.

Lots that arrive out of order

A supplier can ship a lot manufactured earlier than the previous delivery because it had been sitting in its own warehouse. The same happens with customer returns that go back into available inventory, with transfers between branches and with imported goods that spent weeks in transit. In all of those cases, the date of receipt no longer reflects the product's real age, and only each lot's expiration date shows which one should go out first.

The shelf life your customer requires

Many supermarket chains and distributors set, in their trade agreements, a minimum shelf life the product must have left when it reaches their distribution center. Under that condition, the system has to compare each lot's expiration date with the shelf life each customer requires before assigning it to an order. That assignment is decided at picking time, because a rejection at the customer's dock comes after the freight has been paid.

Lot recalls and quarantined product

FEFO also requires traceability. If a supplier reports a defect in a lot, your company needs to know which locations still hold it and which orders it shipped in. With the lot recorded on every movement, the held lot is blocked from picking and the list of customers who received it comes from a single query. A well-applied FEFO rule reduces shrinkage and shortens your response to a recall.

Which method fits your inventory, product by product

The rotation rule is decided for each product family. A single warehouse may need several, and the most useful classification starts from how each item ages.

Different rules in the same warehouse

A logistics provider that stores goods for several clients lives with this mix every day: a food client demands FEFO with a minimum shelf life, an auto parts client picks by date of receipt and a third asks for issue by serial number. The rule has to live in the system configuration, tied to the product, the client or the warehouse, because no picker can remember every client's policy during a peak season shift.

What your warehouse needs for the rule to be met on every order

Lot and expiration date captured at receiving

The FEFO rule starts at receiving. If the lot and expiration date go unrecorded when goods come in, the system only knows the date of receipt and applies FIFO even if the policy says otherwise. That is why it pays to capture both with a scanner at the dock and hold the receipt when the supplier's label arrives without that information.

Storage that lets pickers reach the right lot

The rule also depends on the rack. In selective racking, every pallet has direct access and the picker can take the lot the system indicates. In high-density systems, such as block stacking or drive-in racking loaded from one side, the accessible pallet is the last one in, and FEFO only works there if each lane is dedicated to a single lot.

The system indicates the lot and the scanner confirms it

On the pick order, the WMS indicates the location and the lot that correspond under the product's rule. The picker scans the location and the pallet label, and if the lot does not match, the system catches it before the goods reach the dock. With that confirmation, the rotation rule no longer depends on the picker's memory and is recorded on every order line.

Rotation and traceability on an integrated platform

At Oasys, we have spent more than 30 years developing management systems for companies in Mexico. Our platform integrates ERP, WMS, TMS and Production on a single database, and its WMS keeps traceability by lot, serial number and expiration date from radio frequency receiving through shipping. Stock is updated in real time, picking follows optimized routes and physical, cycle and full inventories are recorded in the same system.

For perishables, the platform handles scales, variable weight and lots, with operations configurable by customer, supplier or warehouse. Every warehouse movement generates its journal entry with quantity and cost, so rotation and valuation start from the same data. Everything runs on our own servers, in a data center.

Frequently asked questions

Can I pick by FEFO and value inventory at average cost?

Yes. The picking rule decides which lot goes out, and the valuation method decides at what cost that issue is recorded, so each one is defined separately. Many companies with perishable products combine FEFO in the warehouse with average cost in accounting. What matters is that both policies are documented and that the system records the lot on every issue.

Does FEFO work for products without an expiration date?

It works when the product has another date that limits its use, such as a best-before date or the retest date of some chemicals and raw materials. If the product has no expiration date of any kind, FIFO serves the same purpose with less data capture.

If the lot that leaves your warehouse depends on the pallet the picker reaches first, shrinkage from expired product only comes to light at the count or when your customer rejects a delivery. At Oasys we integrate ERP, WMS and TMS on a single database, on our own servers, so every lot keeps its expiration date from receiving onward and every issue is recorded with the lot it carried. Find out how at https://www.oasys.com.mx/en