What Is a Work In Progress Unit in Supply Chain Management?

Stacks of shipping containers lined up outside.

As a business owner, your production cycle is where you can make or lose money. That’s why it’s so important to track your production costs throughout the cycle and not just when you buy raw materials or sell finished products. An important term to understand if you want to ensure you’re making a profit is “work in progress,” also sometimes referred to as “work in process,” or WIP for short.

A work in process unit can be defined as inventory that’s not finished and therefore, isn’t quite ready to be sold yet. WIP units are inventory that still requires work, assembly, inspection, or processing before they’re completed. Since work in process inventory is included in your production costs, it’s important to keep an eye on this inventory, know the number of units, and set strict limits.

What Is WIP and Why Does It Matter?

WIP is an important term for inventory and asset tracking since it refers to the inventory that isn’t quite ready to be sold but is still an investment for your business.

WIP DEFINITION

Some business owners assume that WIP can stand for “work in progress” or “work in process” and that these terms are interchangeable. However, these two terms actually refer to different things within the production or manufacturing process.

Work in progress inventory refers to the costs of the unfinished goods in the manufacturing process. Work in process refers to the materials in your inventory that can be turned into sellable goods in a short period of time.

IMPORTANCE OF WIP

A “work-in-process” unit is a unit of inventory that’s waiting to be finished and still needs some work. Not only does the cost of this unit represent the materials it’s made up of, it also represents the labor and other overhead costs that were spent to create it. Knowing your business's WIP can help you to calculate how much has been invested so far and how much the production for a product truly costs you.

When it comes to your manufacturing platform, this information should be included in the bill of materials. If you’re analyzing your business’s accounting, your WIP units are referred to as “assets.” When these units are complete, they’re referred to as the finished goods inventory.

FROM WIP TO FINISHED GOOD

Even if all work is completed on a WIP unit and it becomes a finished good, it doesn’t necessarily mean the unit is ready to hit the shelves and be sold to consumers. In some cases, a finished good still needs other components to go to market.

For example, a company that produces electrical parts for other businesses may consider these parts finished goods when their production process is complete. However, these parts will simply be added to another business’s production cycle to eventually create goods that can be sold to consumers, such as lamps or toaster ovens.

WHY WIP REPORTS MATTER

Knowing how many WIP units you have and how much they cost you is important so you can track your production costs. Your production costs tell you a lot about your business, especially if your business is involved in decentralized manufacturing and you have multiple locations to keep up with. When you have a good grasp of your production costs, you can determine your return on investment (ROI) more accurately.

Your ROI is essential for determining the extent to which you’re actually profiting from certain products. You can also use your WIP reports and your ROI numbers when creating strategies to reduce your manufacturing costs. By knowing how many WIP units you have waiting for finishing touches, you can better understand whether you should back off on inventory and save money.

Additionally, your WIP reports may be important for your investors. Before investing in your company, your investors will want to review the details of production costs and inventory to ensure you can produce your goods efficiently and profitably.

Best Practices for Tracking WIP

Now that you know how important it is to track your WIP, there are a few best practices you should follow when implementing a tracking system.

MINIMIZE WIP BEFORE REPORTING IT

Since there are different stages of production and various resources invested in your inventory, it can be tough to accurately assess exactly how much is total WIP inventory cost. Before you create your WIP report, finish as many units as is practical for your business. This will minimize the number of WIP inventory you need to claim on your report.

SET WIP LIMITS

Since WIP units aren’t making your company any money as they sit waiting to be completed, it’s important to set WIP limits. These limits are constraints on how many work projects you can have open at any one time. When your production process takes months to complete, unfinished inventory costs you money. With WIP limits, you can reduce waste and optimize productivity.

Some inventory management solutions allow you to set WIP limits so you can ensure you never have too many units at once. When deciding on your WIP limit, use your inventory turnover ratio to determine how long it takes you to sell your entire inventory.

USE WIP DATA TO STRATEGIZE COST REDUCTION

If you’re attempting to lower your manufacturing cost or production cost, your WIP data will be paramount in creating actionable strategies to save you money. With WIP data, you can better focus on where your manufacturing money is going and where the inefficiencies lie so that you can ultimately streamline or change the process to make your business more profitable.

If you find your WIP units often exceed the total cost and the limits you set, you’ll need to figure out how to reduce these manufacturing costs fast. To make your manufacturing more inexpensive, consider tweaking your product design or removing certain elements of your packaging. You could also try to negotiate with manufacturers to lower your production costs.

Knowing how many WIP units you have at any given time is important when analyzing your production costs. You can use WIP reports to increase productivity and create strategies to reduce your manufacturing costs.

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