When companies manufacture something, they also need to manufacture the parts required for the product or purchase them from other companies. This is where the work-in-progress inventory comes into action. All the products currently in production but not yet completed are stored in these work-in-process inventories.
In this article, we have discussed all the basics of work-in-process inventory and how it benefits a company. So, let’s jump right into the article.
Part 1. What is the Work in Process (WIP) Inventory?
Work in progress inventory, also called WIP, is the term that is used for the products that are not completed and are still undergoing the production process. Work in process in the production comes in the total cost of the unfinished goods that are currently experiencing the manufacturing process.
Any type of raw material that is being used to complete the final but is not yet finished will come in the work in process inventory. In simple words, this is an inventory where everything is present and cannot be sold to the customers yet. Hence, this makes this inventory the manufacturing inventory.
It is seen that small businesses or businesses that work on custom orders have these work in progress inventories. Meanwhile, the bigger businesses usually purchase finished products that they can use in their products immediately instead of keeping them in the inventory
Part 2. Work in Process Inventory Formula
The work in progress inventory has different parts. You can find two products here: the ending work products for the final piece and the starting work products.
If you want to calculate the manufacturing costs, you need to know the beginning cost of the WIP inventory. There is also a work in process inventory formula that will help you get the ending amount of the WIP inventory.
Below we have mentioned the work in process formula.
Beginning WIP Inventory + Manufacturing Costs – COGM = Ending WIP Inventory
We have also mentioned some examples that can help you understand the WIP inventory formula better.
Example 1:
A company has a beginning WIP of $110,000 for the new year, and during the new year, the business spends about $150,000 on manufacturing costs. The total cost of the finished goods is about $250,000.
Thus, according to the formula, this means:
$110,000 + $150,000 – $250,000 = $10,000.
This means that the ending work in progress inventory is about $10,000.
Example 2:
Let’s take an example of a clothing company with a starting WIP of $100,000. In the new year, they spent about $150,000 on the manufacturing costs. The manufacturer was able to produce about 5,000 pairs and each piece cost around $30. The cost of the finished goods is.
$30 x 5000 = $150,000
This gives you the manufacturing costs, which you can add to the work in progress inventory formula to get the ending WIP costs.
$100,000 + $150,000 – $150,000 = $100,000
Part 3. Why WIP Is Important in the Supply Chain?
Now, the main question is why this WIP inventory is important in the supply chain and what its role is. Many people don’t consider it an important asset to the company. However, this is not the case.
Cost control
The major benefit of the work in progress inventory is that it is beneficial in cost control. When you know the things that are present in your inventory, it will help you order everything in the right manner. You will know the things that are excess in the inventory and the things that are in shortage. This means that you reduce the cost of waste and order the raw material accordingly.
Production Planning
The WIP inventory is also known to improve the company’s production. This means that when you have the right products in the inventory, you will be able to ensure that the flow of production is going in the right manner.
Customer Satisfaction
Customer satisfaction is also a benefit of using work in process inventory. With this, customers will get their products on time because there will be a proper flow in the manufacturing. You will be able to deliver the items on time and also ensure everything is of high quality. Hence, it makes your customers happy and creates a good reputation for your company.
Allows Balance Between Supply and Demand
Another reason WIP is important in the supply chain is that it helps the company understand the ratio of supply and demand. You will know the raw material that is present and order the material that is not yet available so that you can fulfill the customer’s demands on time without overburdening or stopping the company’s production.
Quality Control
Having the right level of work in process inventory means that you can also manage the quality of the products. By going through the inventory, you will know the quality of the raw materials beforehand, and this will allow you to reduce any defects later on in the manufacturing of the products.
Part 4. How to Optimize Work in Process Inventory Flow?
If you are a company that is working with the work in progress inventory, then you need to understand the process and the flow of the inventory. This is important so that you can efficiently manage the supplier and the manufacturer. By closely understanding this, you will be able to optimize the work and increase your company’s production rate.
The following are a few things that you can keep in mind when it comes to optimizing the flow of the work in progress.
Source the Right Supplier
The first and most important thing is having the right supplier. This means that you need to work with a supplier who will deliver high-quality products consistently and on time. This will reduce the delays in the production of the product, and the quality will not be compromised.
You should also choose a supplier who is flexible about the number of orders. This means that they can easily accommodate overstocking and even product shortages so that there is no disturbance in the flow of the work in progress inventory.
Using Just-In-Time Production
Another way to optimize the work in progress inventory flow is to use just-in-time production. This means that you only order the raw materials when you need them. It can help reduce excess inventory and save you shortage costs. With this, you can even reduce material wastage while minimizing expenses.
Monitor Inventory Levels
You can also use different software and even 3PL companies to help you monitor inventory levels. The software can help you track the WIP in real-time. It will tell you everything from the production process to the control over the stock levels. It is very effective and can also help in decision-making. With real-time monitoring, you will have a better understanding of everything, and then you will be able to make the right decision.
Have Proper Inventory Audits
The regular audits can really help you understand the position of the WIP inventory. This means you will know what stock is in excess, the material that not used and the things that are short in the inventory. Routine audits will also improve the accuracy of the inventory and help you identify different patterns and insufficiencies.
Use NextSmartShip for Smooth Customs
Now that you know what work in process inventory is and how it can benefit you, are you trying to find a way to smooth out the custom process? Customs are important, especially if your company is trying to get products from international companies. Those orders need to clear the customs in order for you to get them.
However, sometimes it can be very hard to clear the customs. This is where NextSmartShip comes into action. It can help you with the entire customs process and make it very quick and smooth.
This means that now you won’t have to wait months for the orders to clear customs, and you will get everything way faster, which will also enhance the production of your company.
Conclusion
There are a lot of different aspects of a company, and one of them is work in process inventory. With the help of work in process inventory, you can keep all the info she’d products in it till they are done with the manufacturing process and ready to be sold to the customers. This is an important part of the companies that make custom objects according to the needs of the customers, and special materials are needed to make them.
Hence, we hope this article was beneficial for you and that you now know everything about work in progress inventory. Also, make sure to check out NextSmartShip for their amazing services and to make your orders much more smooth.
