Introduction

Inventory management is a critical element in the pharmaceutical industry. It ensures medications are always available and minimizes waste, which keeps costs down. By properly managing stock, pharmacies can maintain financial health while ensuring patient safety.

Pharmacies commonly use three inventory methods: FIFO (First In, First Out), LIFO (Last In, First Out), and FEFO (First Expired, First Out). Each has its strengths and challenges. Understanding these methods will help pharmacy managers choose the best one for their needs.

What is FIFO (First In, First Out)?

FIFO is one of the most popular inventory methods. In this system, the oldest items are sold first. This is especially useful in the pharmaceutical industry, where medications often have expiration dates.

Benefits:

• Reduces waste: Ensures older products are used first.
• Accurate financial reporting: Reflects current market costs.
• Maintains profitability: Keeps inventory costs up-to-date.

For example, imagine a pharmacy buys products in January at $10, February at $12, and March at $14. FIFO ensures that products bought in January will be sold first, showing a more realistic profit margin.

Challenges:

• Higher taxes during inflation: FIFO can result in higher taxable income, as older, cheaper products are sold first, leaving more expensive items on the balance sheet.

What is LIFO (Last In, First Out)?

LIFO works differently. Here, the most recent products are sold first. This method is not commonly used in pharmacies but can be beneficial in certain situations.

Benefits:

• Lower taxes: LIFO can reduce taxable income by using higher-cost products to calculate the cost of goods sold.

Challenges:

• Distorted financial statements: Older, cheaper products remain in stock, making the balance sheet inaccurate.
• Not ideal for perishables: Since medications have strict expiration dates, LIFO might result in unsold, expired products remaining in inventory.

What is FEFO (First Expired, First Out)?

FEFO is a variation of FIFO, designed specifically for products with expiration dates. With FEFO, the product closest to expiring is sold first, ensuring the freshest products are always available.

Benefits:

• Minimizes waste: Ensures expired products aren’t sold to patients.
• Improves patient safety: Focuses on expiration dates to guarantee effective medications.

Challenges:

• Requires robust tracking systems: Pharmacies need technology to monitor expiration dates accurately.

Key Factors in Choosing an Inventory Management Method

Choosing the right method depends on several factors:

• Financial Impact: FIFO provides accurate financial reporting, while LIFO can distort it. FEFO ensures that only safe medications reach patients.
• Tax Considerations: LIFO offers tax benefits, but it may not suit pharmacies with many perishable items.
• Efficiency: FIFO and FEFO are efficient for managing stock rotation, while LIFO is better for tax reduction but requires careful use.
• Patient Safety: FEFO is the best choice for ensuring that expired medications never reach patients.

Conclusion

Each inventory method—FIFO, LIFO, and FEFO—has its pros and cons. FIFO helps with accurate financial reporting, LIFO offers tax savings, and FEFO ensures patient safety. The right method depends on the pharmacy’s specific needs.

Pharmacies should carefully consider how each method aligns with their operational goals. If you’re unsure which inventory system works best for your pharmacy, contact us for a free consultation.