What Is Work in Process Inventory? [2023 Guide]
In this article, we explain what work-in-process (WIP) inventory is and why it’s important. We also share our step-by-step framework for optimal WIP inventory flow. Read on to learn more.
What Is Work in Process Inventory?
Work-in-process (WIP) inventory refers to the materials and partially finished goods that are still undergoing the production process. It sits between raw materials and finished goods in the production cycle.
Example: WaveCrest Automotives sourced raw materials worth $1 million for a new car model. By the end of the month, cars worth $600,000 were ready for sale. However, components and half-assembled units valued at $200,000 remained as work in process inventory."
Importance of WIP Inventory
There are several key reasons why WIP inventory is crucial for efficient business operations. Some of these include:
Cost Management: Monitoring WIP helps control production costs and avoid wastage.
Operational Efficiency: Timely tracking ensures production runs smoothly and meets deadlines.
Cash Flow Insight: Evaluating WIP aids in predicting cash flow needs and bottlenecks.
Quality Control: Continuous WIP assessment allows for quality checks and rectifications.
Supply Chain Transparency: WIP provides clarity about the stages of goods, ensuring transparent supply chain operations.
Work in Process Inventory Formula with Example
To ensure effective production management, it's vital to understand the WIP inventory formula:
Work in Process Inventory = (Starting WIP + Added Manufacturing Costs) - Costs of Goods Produced
Example: Let’s say Stellar Electronics starts with a WIP of $10,000, incurs an additional $50,000 in manufacturing, and the cost of goods produced during the period is $40,000. Using the formula:
WIP Inventory for Stellar Electronics = ($10,000 + $50,000) - $40,000 = $20,000
5-Step Process to Manage Work in Process Inventory Flow
Here's our simple step-by-step process to streamline your WIP inventory flow for efficient production and cost management:
Step 1: Analyze Current Workflow
Review your production processes to identify bottlenecks and inefficiencies. Streamline steps, remove redundancies, and prioritize tasks for smoother flow.
Example: Delta Manufacturing noticed that 15% of their daily production time was spent on redundant quality checks. By streamlining, they saved 2 hours daily, boosting overall output.
Step 2: Set Clear Production Targets
Define daily or weekly production goals. By knowing expected outputs, you can better manage resources and prevent overproduction or underproduction.
Example: ClearTech Electronics aimed to produce 500 units daily. After setting this clear target, they adjusted their workforce and machine hours, reducing idle time by 20%.
Step 3: Implement Just-In-Time (JIT) Production
Align production closely with real-time demand. This minimizes excess inventory, reduces holding costs, and ensures timely product delivery.
Example: AutoDrive Cars shifted to JIT and started producing 100 cars per day, in line with dealership orders. This move reduced their WIP inventory costs by $1 million annually.
Step 4: Leverage Technology
Adopt advanced inventory management systems. Automated tracking, real-time data access, and predictive analytics can drive optimal inventory levels.
Example: Fashion Flow Textiles integrated a real-time tracking system. Within months, they identified and reduced surplus raw materials worth $200,000, preventing potential wastage.
Step 5: Continuously Monitor and Adjust
Regularly review your WIP levels against set benchmarks. Adjust strategies as needed based on performance metrics and changing business conditions.
Example: Tasty Treat Bakeries set a WIP limit of 1,000 pastries. On surpassing this benchmark thrice in a month, they expanded their oven capacity, meeting increased demand without compromising quality.
Case Study
ElectroNet Industries is a leading smartphone producer. They identified a pressing need to streamline their production with a WIP surge from $100,000 to $250,000.
Here's how they implemented our 5-step process for optimizing WIP inventory below:
Step 1: Analyze Current Workflow
Through systematic weekly audits, ElectroNet Industries discerned that their excess components in storage amounted to approximately $50,000, highlighting the inefficiencies in their current workflow.
Step 2: Set Clear Production Targets
Realizing they were overproducing certain components, ElectroNet Industries adjusted their production targets. By doing so, they saved an estimated $40,000 in potential overproduction costs.
Step 3: Implement Just-In-Time (JIT) Production
Adopting JIT principles, ElectroNet Industries curtailed the manufacture of less popular components, leading to a direct reduction of $60,000 in their WIP inventory.
Step 4: Leverage Technology
ElectroNet Industries' adoption of a state-of-the-art inventory system led to the immediate identification and rectification of a $30,000 discrepancy in their inventory valuation.
Step 5: Continuously Monitor and Adjust
By setting a firm WIP benchmark of $150,000, ElectroNet Industries could regularly adjust their production metrics, ensuring they consistently met demand without excessive inventory buildup.
We hope this article has given you a better understanding of what work in process inventory is and how to optimize it to improve overall efficiency.
