Work in process (WIP) inventory is a type of inventory that tracks the progress of goods as they move through the production and supply chain process. It’s used to track partially-completed items still undergoing manufacturing or assembly. In short, your WIP inventory is any unfinished goods that need to be completed so they can be sold.
Read on to learn more about the importance of WIP inventory. We’re looking at how to calculate work in process inventory and walking through the benefits of using this powerful, informative component of managing your inventory.
What is Work in Process Inventory?
Work in process (WIP) inventory consists of all components, subassemblies, parts, assemblies, and products that have begun their journey through the production process but aren’t yet ready to be sold.
This includes unfinished goods at various stages within the supply chain. Think of: raw materials awaiting processing or semi-finished goods waiting for further assembly before being shipped.
Note that WIP can also refer to services started, like software development projects, or customer service tasks such as responding to emails or phone calls.
Work in Process Inventory Formula
The value of WIP inventory can be calculated with a simple formula. To calculate ending work in process inventory you plug in the following:
Beginning WIP Inventory + Cost of Goods Manufactured – Cost of Finished Goods = Ending WIP Inventory
Using this formula, you can accurately track how much money you’ve invested into creating new products over time and determine whether your operation and business model is profitable.
Components of the formula
The WIP formula involves components like beginning WIP inventory cost, the cost of manufacturing, and the cost of manufactured (finished) goods.
The beginning WIP inventory cost is determined using the asset section of your balance sheets from previous periods.
The cost of manufacturing can include costs like raw materials, overhead, and labor.
The cost of goods manufactured (COGM) is figured by assessing the total cost of making a product (so, the number of items produced X the cost per item).
Example calculation
A direct example of a WIP calculation is:
Your company sells hats. This quarter, your beginning WIP is $10,000, and it will cost you $75,000 to make your product. You had 1,000 hats manufactured, and they cost you about $25 each.
You need to figure out your cost of finished goods (COGM):
Determine COGM by multiplying the amount you pay per piece by the number produced, so: $25×1,000 = $25,000.
Then, you can determine the ending WIP inventory amount:
Beginning WIP Inventory + Manufacturing Costs – COGM = Ending WIP Inventory. So,
$10,000 + $75,000 – $25,000 = $60,000
Your ending WIP inventory is: $60,000.
Using this figure compared against other metrics, like sales figures or finished goods inventories, can offer insight into how efficiently resources are being managed within your organization.
Benefits of Effectively Managing Work in Process Inventory
By regularly calculating WIP inventory, you’ll be able to identify areas where you may need additional resources. You can also adjust processes by focusing on things like reducing waste or increasing efficiency, ultimately leading to increased profits over time.
Finally, having accurate data about your WIP inventory lets you plan better when you’re ordering. It means you’ll be able to keep the right amount of product on hand, at any given time, without overstocking items that may not sell quickly.
The ultimate benefit of tracking WIP inventory can culminate in increased customer satisfaction.
Improved efficiency
Streamlining manufacturing and production processes with WIP management helps increase your efficiency. For example, it can reduce the time required to produce a product or complete an order. It also might minimize delays due to unexpected issues or problems. By better understanding what’s happening at each stage of your production process, you can make more informed decisions about how best to allocate resources and maximize productivity.
Cost savings
Properly managing WIP inventory helps reduce costs associated with excess materials or wasted resources. It ensures that you purchase and use only necessary items during production. Companies that effectively monitor WIP levels can identify potential areas where they might be overspending on supplies or labor costs so they can adjust their budget accordingly.
Improved customer satisfaction
WIP inventory management can improve customer satisfaction by ensuring orders are completed on time and according to customer-needs. Tracking progress throughout your fulfillment cycle makes essential information accessible and easy to keep on top of – like accurate delivery time updates – so your customers’ experience is the best it can be, every order.
Challenges of Managing Work in Process Inventory
Despite its many advantages, managing work in process inventory can present some challenges for businesses depending on their size and complexity level. This is especially true when tracking data related to each production stage – such as raw material usage rates or employee productivity levels – over longer periods of time.
Risk of excess inventory
One of the biggest challenges when managing WIP inventory is the risk of having too much (or, for that matter, too little) inventory on hand.
Having too much WIP inventory can lead to increased costs due to storage fees, higher labor costs, and slower turnaround times for orders.
On the other hand, having too little WIP inventory can result in delays as you wait for more materials or components from suppliers, which could ultimately affect customer satisfaction levels.
Accurate tracking and forecasting
Without accurate data about current stock levels and future demand projections, you won’t be able to decide how much material you need to have on hand.
Not to mention, without proper tracking systems in place, there’s an increased risk that items may get lost or misplaced during production processes, leading to further delays or costly mistakes down the line.
Tips for Effectively Managing Work in Process Inventory
To ensure your business remains profitable while still meeting customer demands efficiently, here are some tips for effectively managing your work in process inventories:
- Establish clear policies regarding order fulfillment timelines, so everyone understands what needs to happen before products leave your facility
- Invest in reliable tracking software that allows you to easily monitor stock levels
- Regularly review forecasts and adjust accordingly if needed
- Utilize automated systems whenever possible, such as barcode scanners or RFID tags
- Implement regular quality control checks throughout production processes
- Have a plan for disposing obsolete items quickly but safely
- Maintain good relationships with suppliers so they’re more willing to reach out with production irregularities, updates, issues, etc.
Regular inventory counts
Regular inventory counts are essential for tracking WIP inventory. Without consistent checks, it can be hard to determine how much of a product is being manufactured or shipped. To ensure accuracy, you should conduct frequent physical counts and take advantage of technology (like barcode scanners and RFID tags).
Use of technology
Technology can streamline your WIP inventory management process. Inventory management software allows you to instantly track stock levels in real-time. Automated systems like RFID tags and barcode scanners make it possible to identify products almost instantaneously.
Additionally, cloud-based solutions enable multiple stakeholders across different locations to access data simultaneously. This can be critical in ensuring everyone is informed about changes in stock levels or production processes.
Effective communication and collaboration
Insufficient communication between departments can be problematic, too. There must be accurate and consistent contact about what’s happening at each stage of the production cycle. Without it, delays and higher overall costs are much more likely.
Conclusion
Work in process inventory is an essential part of any eCommerce business. Properly managing WIP inventory helps improve efficiency, reduce costs, and boost customer satisfaction.
By following best practices – like tracking progress regularly, setting realistic goals, and more – you can effectively manage your work in process inventory and reap the rewards that follow.
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