Last-In, First-Out

In accounting, last-in, first-out (LIFO) is a method of recording inventory. It is used to manage earnings in inflationary times. A last-in, first-out inventory system records the most recent price of materials as the cost, thereby making earnings reflect current prices. As a result, the older items, purchased earlier when prices were lower, remain on the books. This can have some impact on taxes as well, as the net inventory value is lower under LIFO. LIFO’s impact is most pronounced when there is large inventory. In Lean systems, with low inventory, LIFO has lower impact.

In Lean, though, last-in, first-out is contrary to flow. In LIFO, the most recently added inventory is used first. Unlike in accounting, where LIFO is planned, a last-in, first-out system in production work is unintentional and generally thought of as undesirable. It is nearly always the result of excessive inventory with the oldest stuff buried under new items, batching, or poorly designed work areas. Most people see the value in using up old stock first. Systems just don’t always make this easy.

The opposite of LIFO is FIFO, or first-in, first-out.

In the office, a last-in, first-out system tends to require active management to avoid missing deadlines. Consider a pile of expense reports that get dropped into an inbox for processing. The accounting person who will work on the reports should pull from the bottom of the stack to make sure the files are addressed in order.

When customers are involved, the process is self-policing. If an item lays too long in a queue, the customer will normally call to question the delay. This helps keep items from stagnating, but there is obviously waste in having a secondary process to manage the delays. First-in, first-out processing prevents this issue.

On the shop floor, LIFO is the result of batching and excess inventory. Big batches require space to store them, and it is often easier just to put the new stuff on top of the old. This happens frequently when items are piled up, or when they are stored in large bins or hoppers.

Last-in, first-out systems are most problematic when the items have a shelf life. Obviously, it would be bad to use this for lettuce sales. The bottom of the pile would be filled with an old, rotting mess. It is less pronounced with most materials, but things like batteries will discharge over time, and some materials lose potency. Even with a moderate number of inventory turns, unless there is an occasional stock out or an active purge of old materials, items can sit untouched for months or even years in a LIFO system.

Words of Warning

• Be careful of metrics systems that use “% on time” as a measure of success. It can create pressure to choose work on more recent items that still have a chance of meeting the deadline over older items that have already failed.
• LIFO creates situations where old revisions of a part can get mixed in with new revisions. In first-in, first-out, the transition can be easily managed. With LIFO, there is no clear boundary between new and old.
• Large amounts of inventory mean more to move around when new items arrive. Most people choose less work over more work, so they won’t want to pull all the old stock out of storage to put the new stock in the back.
• Inboxes are notorious for disrupting flow of office work. An alternative is a lazy Susan style of file organizer, or some other method that clearly defines the sequence of work.
• With LIFO accounting, you may still see FIFO on the shop floor. LIFO doesn’t mean you have to use a specific item first. It just means that account for its cost first.