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Work-in Process (WIP) Efficiency

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How can having more work-in-process (WIP) inventory improve the efficiency of a process? Conversely, how can it decrease the efficiency of a process?

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RESPONSE:

1. How can having more work-in-process (WIP) inventory improve the efficiency of a process? Conversely, how can it decrease the efficiency of a process?

Let's look at a definition and equation of work-in-process (WIP) first, and then some examples of the effect of increasing or decreasing work-in-process to increase the efficiency of the process.

DEFINITION AND EQUATION:

In manufacturing, WIP is the inventory at a stage between raw materials and finished goods. Work-in-process must be accounted for when valuing inventory for accounting purposes (1) Thus, WIP is the amount of inventory in the process. (2) An operation is composed of processes designed to add value by transforming inputs into useful outputs. Inputs may be materials, labor, energy, and capital equipment. Outputs may be a physical product (possibly used as an input to another process) or a service. Processes can have a significant impact on the performance of a business, and process improvement can improve a firm's competitiveness. Operations managers are interested in process aspects such as cost, quality, flexibility, and speed. (2)

According to Little's Law:

The inventory in the process is related to the throughput rate and throughput time by the following equation:

W.I.P. Inventory = Throughput Rate x Flow Time

This relation is known as Little's Law, named after John D.C. Little who proved it mathematically in 1961. Since the throughput rate is equal to 1 / cycle time, Little's Law can be written as:

Flow Time = W.I.P. Inventory x Cycle Time (2)

Thus, increasing WIP can either improves efficiency (or not) depending on the relationship between the throughout rate, flow time and the bottleneck.

EXAMPLES:

For example, fulfillment of cash orders received and cashiered (see cashier) but not entered to the fulfillment system at the time reports are generated. Work-in-process creates an imbalance between cash-deposit reports and order-volume (production) reports. (1) Thus, more ...

Solution Summary

By examples and discussion, this solution explains how having more work-in-process (WIP) inventory can improve the efficiency of a process Conversely, it explains how it can decrease the efficiency of a process. Supplemented with an article on process analysis for other considerations.

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Efficiency and Value of Processes

For this assignment you will be required to assess the performance of two processes and evaluate their efficiency and value.

A government office processes two types of applications, Basic and Special, for an agency responsible for awarding funds for projects. Separate departments within the office process the two types of applications. The office manager is interested in finding out whether it is possible to reduce the processing times of each application and has asked you to evaluate each process. He would like each process to be 50% efficient. After reviewing both processes you have found the following information:

1. For each application type, compute the cycle time, throughput rate, and throughput efficiency.

2. According to your calculations, which process appears to be more efficient? Why do you think this is? What suggestions would you provide the manager for improvement? What areas seem to be non-value adding and why?

3. Suppose that you have identified an improvement that would reduce the work-in-progress (WIP) for Basic applications to 4 and for Special applications to 7. What effect does this have on throughput rate and throughput efficiency (show your calculations)? If these are the absolute lowest levels of WIP possible, what implications does this have for increasing efficiency to reach the office manager's goal?

Prepare your assignment in the format of a professional business report addressed to the office manager. You should assume that the office manager has knowledge of the measures that you will be using to evaluate the processes. Your calculations should be included in an appendix to the report and are not included in the word count.

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