How to calculate and reduce your WIP manufacturing costs

Many a modern manufacturer has found themselves stuck trying to figure out their WIP manufacturing costs. Thankfully, there is a formula, and once you have a grasp it’s going to be easy sailing from there on in.

They say it’s the journey that counts, not the destination.

And though you might disagree, there can be no doubt that finding the best route is as vital to your success as getting to the destination itself.

In modern manufacturing that often means zoning in on your WIP manufacturing, aka Work-in-Progress manufacturing.

WIP manufacturing is made up of all the materials, overheads and labor costs involved in products that are still in the process of production.

By analyzing these details you can lay out a roadmap which allows your manufacturing to become far more efficient, whilst also reducing costs involved with it.

It might sound like a tedious job to take on, but the reality is that improving your WIP manufacturing is going to give you space to grow your business at a greater rate.

And once your processes are in place it will become second nature to start taking elements like your inventory management of raw materials seriously.

Question is, what is WIP in manufacturing?

WIP manufacturing definition

When we look at WIP in manufacturing we are essentially taking inventory of products that are still in the process of being made.

So as soon as a raw material is starting to be molded into an assembly item by means of labor then we can calculate it as WIP. Essentially, we’re looking at the all-important middle ground between material purchasing and landing with finished products.

For example, if you are a maker of good old-fashioned bicycles then you are going to start out by making the saddles, brakes, wheels, frames, handlebars and gear shifts long before you have the finished product.

Now the costs of all these items, the labor that goes into them and the manufacturing overheads involved add up to your current inventory assets on your balance sheet. Later they are transferred to your finished goods account and then to your cost of goods sold. 

But until they do, they are an area of cost which should be isolated from your finished products. There is a great benefit to doing this as you will find that a lot of your production bottlenecks and areas for improvement come in WIP manufacturing. 

Problems can occur when there are certain materials which are more prone to breaking for example, or when you simply don’t have a process in place for purchasing materials.

We’ll get to the solutions to these problems later.

But first, let’s look at how we can calculate our WIP manufacturing costs.

How to calculate WIP in manufacturing

Modern manufacturers like the guys at “Framed” know that focussing on their WIP manufacturing allows them to identify where their production processes are falling short. Just make sure that you include accurate labor and overhead costs so that you can make the most of this metric.

Alright, so we want to know how to get our numbers straight here.

Keep in mind that generally this is calculated over a monthly accounting period as well as annually.

The basic formula for your WIP manufacturing is as follows:

WIP = WIP inventory at beginning of period + WIP purchased during period – WIP inventory at end of period + Labor Costs + Manufacturing Overheads

Now that might seem a bit long-winded, but it’s not as bad as it looks on first glance.

If we take our fantasy retro bicycle business as an example, we can get a better look.

So here we have a table that shows the WIP costs over the month of June. This takes care of the first part of our equation before we get to labor costs and manufacturing overheads.

Each assembly item is being calculated separately to give the total WIP costs at the end of the month. If we zone in on handlebars, for example, we can see that the business started off with $323 worth of handlebars in June and ended up with $212 worth at the end of the period.

Within this period $543 worth of handlebar material was purchased, and presumably, much of it used in production.

323 + 543 – 212 = $654

And once the calculation is done for all the assembly items, we can add them all up to give our total material cost. Here it came to $1964.

Now we just have to add on the labor costs and manufacturing overheads.

For labor costs, we are taking into account any labor that is having a direct effect on production. These could be your workers, engineers, and welders or whoever is involved in assembling parts on the production floor.

It’s important to make a distinction between indirect and direct labor costs because indirect labor costs will be accounted for in your manufacturing overheads.

Manufacturing overhead costs include:

1. Indirect labor (such as security and cleaning personnel)
2. Indirect materials (glues, tapes, repair parts, etc)
3. Utilities (rent, water, gas, electricity, etc)
4. Depreciation (on equipment and machines)

So, let’s fast-forward our calculations and say that our total labor costs came to $1650 for June, whilst manufacturing overheads came to $750. Of course, your business accountant will be very happy if your numbers ever come out this round.

But anyway, now we can use our formula and bring all the pieces together.

And there we have it. The formula is run through and we have our WIP manufacturing cost for the month of June.

Even more importantly, we have split our costs into the varying materials and assembly items so that we can analyze them further. A great jumping platform for our scheduling production processes.

Because here comes the fun bit, melting our WIP costs down to size.

Reducing WIP manufacturing costs

There’s not much point in looking into your WIP manufacturing without analyzing your raw materials inventory. This is the foundation of your production and making sure that your material availability is optimized is vital to your entire manufacturing business.

Right, so we worked out the cost of our WIP manufacturing. But there’s not much point in doing that unless we also use the numbers to our advantage.

That means looking into how we can reduce these costs and smoothen out operations.

Because the truth is that many manufacturing businesses’ bottlenecks occur in the production stage where WIP lies. 

Here are a few techniques you can use to maximize efficiency through WIP manufacturing.

1. Identify faulty machinery

One of the keys to decreasing your WIP costs is to identify where your bottlenecks are occurring. And an often overlooked piece of the puzzle is equipment reliability.

If you find that a particular set of items that use the same machinery are racking up significant overheads, then you need to look into why that is. It may be that the machine is breaking too many parts and requiring replacement materials.

In which case you might need to repair or upgrade your machine. It might seem counter-intuitive, but the money and resources you save in the long run will be well worth it.

2. Plan for demand

Starting to properly analyze your sales forecasts will allow you to implement demand planning strategies and increase your awareness on the manufacturing floor.

Plenty of WIP manufacturing costs are simply a matter of blind planning. But knowing where your high and low seasons start will allow you to set the correct reorder points for your inventory and stay on the lean path to success.

3. Collaborate with your suppliers

Making sure that you are on the same wavelength as your suppliers cannot be underestimated when optimizing your WIP manufacturing. It may seem unrelated, but the fact is that faulty or inappropriate parts can slow down your production processes drastically.

This is an issue which touches even the greatest of mass manufacturers, as it was reported that Ford, General Motors, FCA US and Nissan collectively would have earned $2 billion more in operating profit had they improved their supplier relations.

In response, you should speak to your suppliers on good terms to establish what your needs are to the closest degree. Try to be clear about what the purpose of the materials are, and how they function as part of your processes.

They can help you order the right materials and get the most out of them as well.

Taking WIP manufacturing to the next level

Katana has been designed with a color-coded, visual platform so that modern manufacturers can have an easy-to-understand overview of their business in real-time. WIP manufacturing is only one cog in the machine after all.

Your WIP items are made up of an assortment of raw materials. But one of the main problems comes in managing your material availability.

Because as much as we would like to keep materials at optimal levels, it’s rarely that easy. The reasons for it are plenty and often it comes down to the fact that many products and assembly items make use of the same materials.

That’s why it can be difficult to maintain the correct inventory levels without overstocking, and inadvertently increasing your carrying costs.

By using Katana manufacturing ERP, you can make sure that your material and finished goods inventory are always at optimal levels. The smart auto booking engine will commit materials to your manufacturing and sales orders so that they never cross over.

This way your WIP manufacturing is always running smoothly, without incurring unnecessary costs.

But Katana isn’t just about keeping your inventory levels on point.

It’s an all-in-one solution that also manages your production and sales from a single, visual platform. From start to finish, you can follow your order fulfillment cycles effortlessly so that you can spend your time growing your business.

Here are just a few of the benefits:

1. On-demand access to your manufacturing costs
2. Finished goods and material inventory
3. Use as a production scheduling software
4. Integrate and synchronize your favorite platforms including e-commerce, accounting, reporting, and CRM
5. Plan your material purchasing efficiently
6. Ditch inefficient excel spreadsheets forever
7. Keep your entire business workflow on a single platform

But ultimately, the takeaway point here is that your WIP manufacturing is not to be taken lightly. The journey your materials take is as important to the growth of your business as the finished products themselves.

Because by identifying your bottlenecks and reducing your manufacturing costs, you might well find the road to growth becoming a whole lot clearer.