Updated May 04, 2024
When customers receive a product—like a bag or a jump rope—in the mail, they see one product. However, most of the goods sold have more than one component that is often produced separately. It’s important for brands to track how much of their inventory is in the production process.
Metrics to Know Before Calculating WIP Inventory
Calculating Work in Process (WIP) inventory can be a complex process, but having a clear understanding of the key metrics involved simplifies it significantly.
Beginning Work In Process Inventory
The beginning WIP inventory is a snapshot of the unfinished goods at the start of an accounting period. This figure is essential as it serves as the baseline from which all additions and subtractions of WIP are measured during the period. To determine the WIP inventory value at the beginning, you need to consider all the materials, labor, and overhead costs that have been invested in the goods that have not yet completed the manufacturing process. Keeping accurate records of your beginning WIP inventory ensures that you have a clear picture of your production efficiency and inventory status.
Manufacturing Costs
Manufacturing costs encompass all expenses related to the production of goods. These include materials, direct labor, and manufacturing overhead. Total manufacturing cost is a critical metric for calculating the WIP inventory cost, as it directly affects the valuation of inventory still in production at any given time. Understanding manufacturing costs helps managers make informed decisions about pricing, budgeting, and manufacturing efficiency. It is also vital for calculating the accurate cost of goods manufactured, which in turn influences the overall financial health of the manufacturing operations.
Cost of Goods Manufactured (COGM)
The Cost of Goods Manufactured is the total manufacturing cost of goods that have been completed during the accounting period. This metric is pivotal for understanding the efficiency of the manufacturing process and for evaluating how well resources are being utilized. COGM includes all costs from the beginning WIP inventory levels up to the final finished goods. By analyzing COGM, businesses can better manage their cash flow, pricing strategies, and overall financial planning.
What Is Work in Process Inventory?
Work in process inventory is a metric that measures how much inventory—in sales—is currently in the manufacturing process, or unfinished. However, work in process inventory is different from raw material. Work in process does not measure any finished product, only products that have begun production.
Along with other key supply chain KPIs, work in process inventory is especially important for businesses that buy lots of raw materials or create custom goods, rather than brands that purchase finished products to sell from manufacturers.
Work in Process Inventory vs Work in Progress Inventory
While these two KPIs are often used interchangeably, certain industries use them in different ways. Work in process refers to raw materials that are processed into finished goods inventory, while work in progress often refers to the progress of a project in the construction and service industries. The production cost for these goods factor in the labor cost, overhead cost, and material cost to create the total cost. However, the terms are interchangeable when we’re talking about brands selling physical products.
Why Does Work in Process Inventory Matter?
Although the work in process inventory isn’t sitting on a shelf waiting to be sold, the products in process are counted on a business’ balance sheet for the given accounting period. Thiswhich is why it’s important for brands to understand how much in process inventory they have at any given time, so they have the most accurate cash flow. It is also important to keep tabs on these numbers when calculating the inventory to sales ratio, which is just one of many inventory KPIs.
Work in process inventory can also indicate bottlenecks in the supply chain, pausing the number goods manufactured. For example, if a brand notices they have a lot of raw materials inventory sitting and waiting for a specific part consistently, that brand would want to look into how to remove that delay and get those goods finished and ready for sale quicker.
While work in process inventory isn’t sitting on a shelf waiting to be sold, it does need to be stored somewhere. And brands need to pay for that storage. Paying to store too much unsellable inventory can seriously impact a brand’s bottom line—and not in a good way.
How to Calculate Work in Process Inventory
In order to calculate work in process, a brand first needs to determine its beginning work inventory for the next time period. A brand also needs to determine its manufacturing costs and the cost of manufactured goods (COGM). Once the company has those metrics, it can calculate the work in process inventory with the formula below.
Work in Process Inventory Formula
The work in process inventory formula is:
WIP Inventory = Beginning WIP Inventory + Manufacturing Costs – COGM
Let’s look at an example in the fashion industry. A brand has a beginning work in process of $100,000. That same brand spends $200,000 on manufacturing costs and produces $225,000 worth of finished goods. Let’s input those numbers into the work in process formula to determine the work in process inventory:
WIP Inventory = $100,000 + $200,000 – $225,000
That means this brand has $75,000 of work in process inventory.
How to Optimize Work in Process Inventory
Many ecommerce brands rely on manufacturers for raw materials or finished parts to create finished products. That means that optimizing the supply chain and the work in process inventory KPI involves working closely with manufacturing partners.
That also means that using the right manufacturing partner is critical for any business looking to improve its work in process inventory. Depending on how the process works for each individual brand, they may not have much visibility into the work in process inventory, the direct labor, and how it’s managed, which is why it’s even more important to ensure the right manufacturing partner.
As with most inventory management KPIs, ensuring an efficient inventory management process is critical to optimizing the work in process inventory. One of the best ways to do that is to work with a third-party logistics partner to manage inventory.
Optimize WIP Inventory with Flowspace
Flowspace pairs powerful software with a flexible nationwide order fulfillment network to support growing ecommerce brands as they optimize their supply chains and improve work in process inventory levels.
Flowspace improves product inventory management by providing complete inventory visibility of inbound logistics, outbound logistics, and in-progress stock. Brands can ensure an optimal stock level with real-time inventory tracking, low inventory level alerts, and a predictive view of the remaining product. With accurate customer analytics like demand insight, brands can better manage inventory by having safety stock to avoid low inventory count situations while also avoiding excess inventory cost. This can help brands increase ARPU by reducing inventory costs.
Flowspace’s fulfillment software powers the entire post-purchase experience and provides brands seamless integration with online stores and every other sales channel, so they can see inventory levels, manage orders and reporting, and monitor fulfillment and delivery activity, all in one dashboard. Real-time visibility allows brands to stay ahead of low inventory and provide visibility from fulfillment through shipment with platform-level transparency.
Flowspace is the best way to optimize your work in process inventory levels and support successful partnerships with manufacturers. Contact us today to get more information.
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