Production & Operations

WIP (Work in Progress)

Materials currently being processed on the shop floor but not yet finished goods.

Work in Progress (WIP) refers to raw materials that have entered the production process but are not yet finished products. In manufacturing, tracking WIP is crucial for understanding production bottlenecks and valuing inventory correctly.

Understanding WIP in Detail

WIP represents the intermediate stage of manufacturing where materials have undergone some transformation but haven't reached their final state. This inventory category is one of the three main types alongside Raw Materials and Finished Goods.

In accounting terms, WIP carries value because it includes the cost of raw materials plus the labor and overhead costs incurred during processing. This makes WIP valuation critical for accurate financial reporting and cost management.

Real Factory Examples

Example 1: Steel Furniture Manufacturing

If you are manufacturing steel chairs, the cut steel pipes that are welded but not yet painted are considered WIP. They are no longer "Raw Material" (pipes) but not yet "Finished Goods" (chairs). At this stage, the WIP value includes the cost of steel pipes + cutting labor + welding labor + electricity consumed.

Example 2: Garment Factory

Fabric that has been cut into pattern pieces but not yet stitched is WIP. Once stitching starts but before quality check and packaging, the partially sewn garments remain WIP. Only after final inspection and packaging do they become Finished Goods.

Example 3: Automobile Parts

A machined engine component waiting for heat treatment, or a painted body panel waiting for assembly, both count as WIP. Each subsequent process adds value and cost to the WIP inventory.

Why WIP Matters

Identifies Bottlenecks: High WIP at a particular workstation (e.g., 200 units waiting for painting while only 10 waiting for welding) clearly indicates that the painting department is your bottleneck.
Cash Flow Impact: WIP inventory holds cash value that cannot be sold. Reducing WIP frees up working capital that can be invested elsewhere in the business.
Production Efficiency Indicator: Low WIP with high output suggests efficient production flow. High WIP with low output indicates inefficiencies and delays.
Quality Risk: Materials sitting as WIP for too long may deteriorate, get damaged, or become obsolete, leading to scrapping losses.
Space Utilization: Excess WIP consumes valuable factory floor space that could be used for productive activities.

How to Calculate WIP Value

WIP Value = Raw Material Cost + Direct Labor + Manufacturing Overhead

For example, if a chair in WIP stage has consumed ₹500 in raw materials, ₹200 in direct labor, and allocated manufacturing overhead of ₹100, the WIP value for that chair is ₹800.

Best Practices for Managing WIP

Implement Kanban Systems: Visual signals that trigger production only when needed, preventing excessive WIP buildup.
Balance Production Lines: Ensure all workstations have similar capacity to avoid WIP accumulation at slower stations.
Track WIP Daily: Monitor WIP levels daily or even shift-wise to spot issues early and take corrective action.
Set WIP Limits: Define maximum allowed WIP at each stage. If limit is reached, stop feeding more material into that process.
FIFO Discipline: First In, First Out ensures older WIP gets processed first, preventing material aging issues.

Common Mistakes to Avoid

Not Tracking WIP Location: Knowing you have 500 units in WIP is useless if you don't know which process stage they're at.
Ignoring WIP Age: Some WIP has been sitting for days while new batches move ahead. This creates FIFO violations and quality risks.
Over-producing to "Keep Machines Busy": Running machines at full capacity when downstream processes are slower creates WIP mountains.