Inventory Logic in ERP: FIFO, Batches, Best-Before Dates and Variants

Why inventory logic is an ERP decision, not a configuration decision? 

Inventory logic describes the rules by which an ERP stores, picks, values and reserves goods. It's built into the system's data structure. It comes into play when you want to know, for example, which batch is affected by a recall because of a problem with the best-before date (BBD).

An ERP that doesn't know batches as a data object of their own won't become batch-capable even with an add-on module. This is what's meant by a first-class data object. In the system, the batch has the same standing as the item or the order. It doesn't hang off to the side as a free-text field. The same goes for variants.

Ideally, you should clarify your inventory logic before choosing your ERP. Three questions let you test whether a system is suitable:

• For a batch, does the system show the BBD and all the orders it was delivered in?

• Does it have variants with their own stock under a shared item master, or only individual items?

• Does the system separate total stock, reserved quantity and the quantity you report per channel?

FIFO and FEFO: the operational ERP foundation 

FIFO (First In, First Out) means the oldest goods leave the warehouse first. The rule makes sense across industries and is permitted for balance sheet purposes in Germany.

FEFO (First Expired, First Out) is the variant for goods with an expiry date. Here, the goods with the shortest remaining shelf life leave the warehouse first. The age of the goods no longer plays a role.

An example from cosmetics shows the difference: Batch A of face cream arrived in the warehouse in February and expires in December. Batch B arrived in April and expires as early as September. A pure FIFO pick sends out batch A while batch B expires on the shelf. FEFO reaches for batch B first.

Xentral controls FEFO directly in the picking logic, that is, when goods are put together for shipping. Your warehouse staff don't have to compare remaining shelf lives themselves. For how to set up storage locations and picking overall, see Xentral warehouse management.

So which goods go out first depends on your range. The value you use to account for them on the balance sheet, on the other hand, is a matter of choice that you settle together with your tax advisor (more on that in the next section).

Method comparison: FIFO, FEFO and moving average 

Picking and valuation are two separate decisions. FIFO and FEFO determine which goods leave the warehouse first. The valuation method determines the value at which inventory appears on the balance sheet.

So you can pick by FEFO and still value by FIFO. FIFO valuation assumes that the goods bought first were also sold first. What happens on the shelf doesn't matter for that.

Another inventory valuation method is the moving average. The ERP calculates a new average value per item with every goods receipt. That works if your goods are uniform and purchase prices barely fluctuate.

Which picking method you need depends on your range. Valuation is a matter of choice and affects your result: when purchase prices fluctuate, each method produces a different inventory value.

The table compares the three methods directly:

Valuation methods are governed by the German Commercial Code in Section 256 HGB. Which method suits your business is something you settle together with your tax advisor. Once chosen, you generally stick with a method. Your tax advisor usually already values your inventory in the annual financial statements using a particular method. Your ERP has to match that method.

Batch and BBD management: When are they mandatory in an ERP? 

A batch is a lot of goods produced or delivered together, and therefore with the same origin. The BBD hangs on that batch as a field of its own.

Batch management is mandatory in an ERP when traceability is required by law or for liability reasons. That applies to food, pharma, cosmetics, pet food and safety-relevant toys. Even without an obligation, batch management pays off for quality checks, because you can trace a complaint directly to a delivery.

The benefit shows in the event of a recall. Without batch assignment, you may have to recall an entire batch across the board, with all stock and all customers. With batch assignment, you find the affected orders and approach customers in a more targeted way. That protects your margin and your brand.

The BBD is closely tied to the batch, but it follows a logic of its own. It controls three things:

• FEFO picking: The goods with the shortest remaining shelf life go out first.

• Recall management: You see which orders contain a batch.

• Price markdowns: You can sell goods close to expiry at a lower price before they expire.

In Xentral, you maintain batches and serial numbers with BBD fields in the item master, as described by Xentral item management. From goods receipt to shipping, the batch accompanies the item through logistics and fulfillment in Xentral.

Managing variants and bundles in an ERP: What separates true variants from similar products? 

A T-shirt in five sizes and four colors is 20 items in the warehouse, but only one product in the shop.

A variant is a version of a product. That includes, for example, size, color, material, dimension or configuration. All variants share the same description, the same images, the same brand and the same category. But each variant has its own SKU and its own stock.

• Variants are a must for fashion, home & garden, electronics and toys. Here, you sell the same product in many versions. Stock has to be right per version.

• Similar products aren't variants. Two garden chairs from different manufacturers look alike, but have their own description, their own images and their own brand.

The rule of thumb: if you maintain description and images for both products together, they're variants. Otherwise, you create separate items.

Bundles are a third case. A bundle or set combines several items into one item for sale, for example a grill set made up of a grill, a cover and tongs. The bundle has its own SKU and its own price. Its available stock, however, comes from the items it contains. If you create a bundle as a normal item with its own stock, you sell the grill set even though the tongs are missing. So when choosing an ERP, check specifically how the system handles bundles.

That's exactly what an item master with variants delivers. You maintain master data once and keep stock separately per variant. Xentral Connect for shop and marketplace integration reconciles the stock of each variant with your sales channels.

Reservation rules and pseudo stock in an ERP: absolutely essential for multichannel 

A reservation ties stock to an order as soon as it's accepted. The goods are still on the shelf, but no longer available for sale. Pseudo stock levels go one step further. They control per channel which quantity you report at all, independent of physical stock.

An example: There are 10 units in the warehouse. Of those, 4 are reserved for accepted orders and 6 are free. You report 3 to the marketplace, 2 to your shop and keep 1 unit as a buffer. Without reservations, both channels would keep seeing 10 units and sell them twice.

Every oversale ends in a cancellation and costs margin and trust. With multichannel, reservation logic is therefore a must. It prevents the problem structurally, instead of your team reconciling stock by hand.

In Xentral, reservations are set when an order is accepted. You control pseudo stock levels per channel and manage several warehouses in one system. You can also build your own processes for this with Xentral Flows for automated inventory processes. Xentral Connect continues to handle the connection to your channels.

Sallys Shop shows what this looks like at high volume. The company sells baking and cooking supplies, so batches and BBD are relevant. Sallys Shop ships around 200,000 parcels a year, up to 2,000 on peak days.

At this volume, inventory logic has to hold up every day. It decides whether goods can be picked quickly and correctly, or whether your team double-checks every line.

Which inventory logic does which industry need? 

Batch and BBD management are a must in an ERP for anything that expires or is liability-relevant. Variants are a must for anything with versions. You need reservations as soon as you sell across several channels. The matrix below sorts this by industry (the matrix is guidance, not legal advice).

Legend: ✓ = mandatory, ○ = useful, – = optional

* Mandatory for safety-relevant products with a recall obligation, otherwise optional.

Food retail, cosmetics and pet food need batches and BBD in the ERP, because traceability and remaining shelf life shape everyday work there. Electronics is the only industry with serial numbers, because you track individual devices for warranty and service. Fashion and home & garden don't need batches, but they do need variants in the ERP.

Rule of thumb: the 4-question check for choosing an ERP 

Four questions tell you what your ERP has to bring:

Conclusion: inventory logic decides recalls, catalog upkeep and overselling 

Inventory logic in ERP operations decides margin and risk: batch and BBD management protect you in a recall. Variants keep your catalog manageable. Reservations prevent overselling in multichannel.

So check your ERP up front with the 4-question check. How Xentral implements variants, batches and stock, you can see in item management and warehouse management. Both pages show you the functions in detail.