In order to minimize the cost of and speed up the pace of manufacturing, you must understand the concept of WIP (Work-in-progress). WIP describes a product’s manufacturing cost at various different points throughout its creation. It includes not only the cost of materials but of labor and overhead as well.
Looking to learn more about WIP. Then read on. We’re going to cover everything there is to know below.
Understanding WIP Units of Production
To assess WIP, you must find a way to assess units of production. Generally speaking, this is done by taking into account how much labor, material, and overhead have been used.
Units will begin to be counted upon the purchase of raw materials. Then, labor will be added to the equation as it’s carried out. Finally, overhead costs will be factored in as well.
The Purpose of WIP
Now, you might be wondering: why is WIP important? Simply put, WIP helps ensure that manufacturing processes are running as efficiently as possible. It assists in identifying bottlenecks in the system, allowing manufacturers to make educated changes to processes over time.
By failing to assess WIP, you will almost undoubtedly lose money that you otherwise could have kept. In assessing WIP, you allow for as little waste as possible.
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Job Costing vs Process Costing
WIP can be used to assess both goods and services. When goods are assessed, they’re done so through process costing. When services are assessed, they’re done so through job costing. We’ll discuss the specifics of each below.
Let’s say that you run a home remodeling company and are responsible for installing new siding on a house. In this case, you would utilize the job costing method.
When doing this, you would tally up the cost of materials (siding, nails, tools, etc.), labor (contractor’s wages), and overhead (transportation, advertising, office costs, etc.). These entities would comprise your WIP and could be assessed carefully to determine whether their costs could be minimized in any way.
In this case, let’s say that you manufacture yo-yos. If so, you would utilize the process costing method.
Start by listing your materials (plastic, metal, string, etc.). Then, add up your labor costs (employee’s wages/salary). Next, you’ll take overhead into account (factory-associated costs, marketing, other employees’ wages, etc.).
By adding the costs of these entities up as they’re used, you can gain a clearer picture of the manufacturing process. Then, you can take measures to minimize costs.
What’s the Difference Between WIP and Finished Goods?
Now, you might be wondering: how are WIP costs any different than the costs of finished goods? In truth, they’re not. The cost of WIP eventually adds up to the cost of a finished good.
The difference is in the way they’re inventoried. WIP costs are inventoried over time, allowing you to assess their costs in real-time. Finished good costs, on the other hand, are inventoried at the end of the manufacturing process; They’re final and don’t allow for any meaningful examination of the product’s production.
The Benefits of WIP
Though the primary endgame of WIP is optimized workflow efficiency, it comes with a number of other benefits as well. Those benefits include the following.
Quicker Customer Feedback
Because WIP limits ensure that products are hitting the shelves in a timely and consistent manner, they are able to reach as many customers as possible in as short a time as possible. The result of this? Quicker customer feedback.
The more customers who are able to provide feedback on your product in its early days, the quicker you’ll understand its high points, its limitations, and otherwise. This will enable you to make changes early on in the manufacturing process, ensuring that your products are as customer-friendly as possible.
Greater Focus on Product Quality
Another benefit of WIP is a greater focus on the task at hand. Because WIP requires the constant monitoring of the manufacturing process, it ensures that we’re assessing said processes in real-time.
The result of this? Greater attention to quality and a better product overall. As such, by the time a product has made it through the manufacturing process, it possesses the greatest amount of quality possible.
Optimal Manufacturing Speed
While attention to WIP might seem to slow down the manufacturing process, in truth, it actually speeds it up. How? By ensuring that products are being manufactured in an optimal manner, and optimizing their success rate.
Sure, you could just blindly send through 1,000 units. However, by failing to assess them during the manufacturing process, you could end up losing 300 of them to poor quality. You will have essentially wasted 30% of your time.
Assessing WIP, on the other hand, ensures that every product is of high quality. So, while the manufacture itself might take a longer time to complete, the overall process actually ends up being shorter.
Perhaps the biggest benefit of WIP is that it saves money. Because it requires you to assess products’ qualities at different stages of their production, and because it ultimately increases manufacturing speed, it allows you to churn out as many high-quality products at as low a cost as possible.
Truthfully, cost savings are at the core of WIP. They’re why it exists as a concept in the first place. Manufacturers are trying to identify areas in which they’re losing money and WIP helps them to identify those areas.
Looking to Learn More About Manufacturing?
When it comes to taking inventory, WIP is of utmost importance. Monitoring WIP over time can have a seismic positive impact on your manufacturing processes.
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