When it comes to inventory management, many business owners may be familiar with the term “work in process” (WIP) but may not completely understand what it means. In a nutshell, WIP is an estimate of the number of unfinished units that are in production. It helps you track and manage the flow of work through your production process to optimize efficiency and avoid bottlenecks. This blog post will explore precisely what WIP is and how it can benefit your business. Stay tuned!
What Is Work In Process Inventory (WIP)?
Work in process inventory (WIP) is an accounting term that refers to the value of unfinished work. The portion of work has been started but not yet completed. The work-in-process inventory formula is the beginning work in process + manufacturing costs incurred during the period – the cost of goods sold.
Related: 5 Ways Poor Inventory Management is Hurting You
How To Calculate WIP
To calculate work in process, you will need to know three things: the beginning of work in process, the manufacturing costs incurred during the period, and the cost of goods sold. You will then use this information to fill in the following equation:
Work in Process = Beginning Work in Process + Manufacturing Costs Incurred During Period – Cost of Goods Sold During Period
As you can see, the work-in-process inventory equation is relatively simple. However, it is essential to note that work in progress can be a bit more complicated to calculate in practice. This is because you will need to track several factors, such as the number of unfinished units and the cost of raw materials used.
Examples Of How To Calculate WIP
Let’s say that Company A starts the month with $5,000 in work in process inventory. During the month, they incur $15,000 in manufacturing costs and sell $10,000 of products. This means that their work in process at the end of the month would be:
Work in Process = $5,000 + $15,000 – $10,000
Work in Process = $10,000
As you can see, work in process inventory can fluctuate from month to month. This is why it is so important to keep track of your work in progress regularly.
Advantages And Disadvantages Of Having High Or Low WIP
There are advantages and disadvantages to having high or low work in process inventory levels.
Some of the advantages of having high WIP levels include:
Completed on time
When you have a lot of work in progress, you are likely to complete projects on time. This is because you will have more resources to work on the project and finish it quickly.
When you have high WIP levels, it can also lead to increased efficiency. This is because there will be less downtime between projects as workers always have something to do.
When you have low WIP levels, it can lead to reduced costs. This is because you will not need as many resources to complete the work, and you will also have less work in progress that could be defective.
When you have low WIP levels, it can also lead to increased quality. This is because there are fewer opportunities for defects to occur, and the work that is completed is likely to be of a higher quality.
Some of the disadvantages of having high WIP levels include:
Tying Up Capital
High WIP levels can tie up a lot of your capital. This is because you will need the resources available to complete the work, which can be expensive.
Increased Risk Of Defects
When you have more work in progress, there is also an increased risk of defects. This is because there are more opportunities for something to go wrong during manufacturing.
Longer Completion Time
One of the biggest disadvantages of having low WIP levels is that it can take longer to complete projects. This is because you will have fewer resources available to work on the project, and it will take longer to get the work done.
Another disadvantage of low WIP levels is that they can lead to decreased efficiency. This is because there will be more downtime between projects as workers will not always have something to do.
How To Optimize Your WIP Levels
Now that you know the advantages and disadvantages of having high or low work in process inventory levels, you may be wondering how you can optimize your WIP levels.
Here are a few tips:
1. Determine The Right Level For Your Business
The first step is to determine the right level of work in progress for your business. This will vary depending on your business type and the products you manufacture.
2. Monitor Your WIP Levels Closely
Once you have determined the right level of work in progress for your business, it is important to monitor your WIP levels closely. This will help you to avoid having too much or too little work in progress.
3. Make Adjustments As Needed
If your work in progress levels are too high or too low, it is essential to make the necessary adjustments. This may involve changing the way you manufacture your products or the way you manage your inventory.
Work in process inventory is an important part of any business. By understanding what it is and how to manage it, you can keep your business running smoothly and efficiently. In addition, by using the right tools, you can make managing WIP a breeze. At Conveyr, we build the tools 3PLs use to not only compete but to win new business. Contact us today to learn more about our innovative software and how it can help streamline your operations.
Recommended: 3 Best Practices To Increase Your Conversion Rate With Warehouse Inventory Management