Work in Process Inventory & How to Factor it Into Warehouse Operations
Originally published on November 8, 2022 by Logiwa Marketing, Updated on November 3, 2023
An informed understanding of work in process (WIP) inventory and a work in process inventory (WIP) formula is crucial for DTC logistics and warehouse operators today. There’s a chance your operations work as the extension of a major manufacturer or are working closely with a supplier as well as your ecommerce partners and retail supply chain network.
Work in process, also known as “work in progress” inventory, is any inventory in a state of “incompleteness,” and it can wreak havoc on supply chain and logistics operations when not tracked properly. Like all forms of inventory, WIP inventory needs to be tracked efficiently to ensure end-to-end fulfillment success and avoid costly shortages.
No business owner can know everything… Not even logistics professionals. But this is especially true when it comes to running complex fulfillment networks and distribution centers alongside manufacturers, ecommerce brands, and major retailers. One thing you can do to manage WIP inventory is to help maintain visibility and control over it – with a robust warehouse management system (WMS) and inventory management solution.
Because the only way to be a truly successful DTC warehouse operator is to have total clarity on what you have inside your facility.
What Is Work in Process Inventory?
When we think of materials that are turned into goods in a rather short period, that’s work in process inventory. You could also think of it as inventory that is in a state of incompleteness. Work in process (WIP) inventory is most common in the food and beverage industry, construction, CPG, chemical, textiles, and other markets.
Another way to define work in process inventory is in reference to partially-completed materials or inventory in a specific part of a production cycle. It may include raw materials, developing said raw materials, overhead costs associated with production, and, of course, labor costs.
WIP inventory is common in supply chain management, and when you’re trying to budget your books, it is considered an “inventory asset.” This cost accrued from WIP inventory will then be transferred to the “cost of sales” column of your inventory balance sheet, but that’s a different topic we’ll save for another day.
An accurate work in process inventory count reflects the value of products that are in incomplete/intermediate stages of a production cycle. However, raw materials that have not yet been used are not counted. For example, if you are working with a couch-crafting company, your costs may be broken up in the following manner for work in process inventory:
- Cost of wood framing, metal framing, and cushions for the couch that have currently been combined to form an incomplete couch
- Labor costs associated with putting together kit items appropriately
- Overhead of warehousing (storing these materials before, during, and after construction)
- Raw materials (such as fabric that has not yet been used to cover the cushions and wooden couch frame) are not included in your work in process inventory.
To be clear, if the wood, metal, and cushions had not yet been combined, they would still be raw materials, not work in process inventory. Work in process and work in progress inventory are typically used interchangeably in the manufacturing field. However, some businesses differentiate the two.
How Does Work in Process Inventory Work?
The easiest way to define how work in process inventory works is to give an example.
Let’s say you or your client are in the business of pots and other crockery. Once you your manufacturer begins the specific production cycle that will turn your raw materials into pots/crockery. This process is referred to as work in process (WIP) inventory.
As soon as the process begins, the materials that go into the pot/crockery can no longer be considered raw materials – because of this, they, in combination with the employee labor and the cost of operations for putting the pot/crockery together – including storing it.
Whether a work in process or finished good, these statuses have costs attached to them, and both sets of costs fall under your inventory account. Once the pots or crockery items are sold, those same costs are moved from the inventory account to the cost of goods sold (COGS) account.
Important Work in Process Terms / Process Inventory Cost
If it’s part of your fulfillment model, assessing how much work in process inventory is on hand is critical to ensure shortages are avoided and fulfillment deadlines are reached. It’s more difficult to calculate than the value of finished products and goods.
It requires you to look at the last accounting period’s asset section, take the last WIP inventory amount, and move it to the present period. The inventory carries over to the new production and accounting cycle.
Calculating Work in Process – Work in Process Inventory Formula
As a warehouse operator or third-party logistics operation, it is unlikely you are overseeing the manufacturing yourself. However, a full end-to-end fulfillment process may include housing work in process inventory at various stages and depending on your unique operation. If you assist with account management for work in process inventory, there are two crucial concepts to understand:
- Manufacturing expenses or cost: This is the total cost behind manufacturing a finished product, including the raw materials and resulting labor costs. It also includes overhead costs like facility expenses, utilities, maintenance and repair, and storage.
- Cost of Manufactured Goods (COGM): This is the total cost to make a final good or product. Take the total manufacturing expense from the previous definition and add it to the current value of your WIP inventory. Then minus the ending work in process inventory from the total. You will be left with the cost of manufactured goods.
The work in process formula is Beginning WIP Inventory + manufacturing cost – cost of manufactured goods (COGM).
Making a Work in Process Inventory Work for You
Getting a handle on how to optimize work in process inventory and calculate its value correctly can be a challenge for any fulfillment operation – especially direct to consumer (DTC). Managing warehouse operations based on production cycles that are happening at other facilities, or on ongoing manufacturing stages, can be extremely complex. As an operator, must consider the following:
- Raw materials
- Lead times
- Environmental factors
- Sub-tier suppliers
- Labor costs
An in-depth understanding of each of these factors is required to optimize production flow and keep production cycles profitable.
Smart Inventory Management
No matter what type of inventory you’re overseeing, or what type of fulfillment center setup you have, you need a warehouse management system (WMS) with flexible inventory management functions capable of supporting your unique operations. With a Cloud-based fulfillment platform, you gain end-to-end live visibility into your inventory, operational efficiency and business data all from one seamless control center.
Automate inbound logistics and optimize inventory locations in each of your warehouses with directed put-away algorithms. You can optimize the placement and movement of inventory based on velocity, volume, fragility, temperature requirements, cross-dock, zone, or any other criteria important to your warehouse efficiency.
For more insights on optimizing your inventory management, check out: “WMS Software Inventory Management – Why Your Business Needs It.”
Pros And Cons Work in Process Inventory
- Can give you a more accurate assessment of how much profit you have/can expect.
- Helps inform you on the efficiency of a production process.
- Can reduce the size of your total inventory.
- It disconnects the various stages of production so that they all don’t have to be performed at the same time or within the same production cycle for a manufacturer
- If anything happens during the warehousing or manufacturing processes, those rates that you were forecasting as future profits will then turn into immediate losses.
- You can’t include other important aspects of the production process in the cost, such as raw materials, any costs associated with product sourcing, or shipping costs to eventually get the product to the customer, for example.
How do you calculate work in process inventory?
If you wanted to have a specific and 100% accurate accounting of your work in process inventory, you would have to count every single specific element that is important to work in process inventory by hand.
However, because that would take forever, realize that you can use the following formula for a close estimate:
Beginning Inventory + Manufacturing Costs – the cost of manufactured goods = ending work in process inventory.
What does work in process inventory mean?
Work in process refers to the goods in your business that are partially completed, and it can cover anything and everything from raw materials, overhead costs, and anything else that is used/required to form whatever end product you are going for (at a specific stage within the cycle of production).
How do you optimize the work in process inventory?
One way to optimize or improve the work in process inventory is to turn your products into finished products. When you do this, they turn into completed goods, which are then sold for a profit (which is an increase to your business). Otherwise, the raw materials and the usage of these raw materials count as “losses” for your business.
What is the difference between “work in process” and “work in progress inventory”?
Many people use them interchangeably; however, for those businesses that believe they are different, the breakdown typically acts as follows:
Work in process = this is used to reference products that can be completed in a short period
Work in progress = this is used to reference larger products and items that will likely take a long time to complete (this term might be used by companies in the construction industry)
Can a 3PL system help me calculate and manage work in process?
Yes! Using a solution like Logiwa takes guesswork and manual calculations out of work in process.