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?© BrainMass Inc. brainmass.com September 21, 2018, 11:46 pm ad1c9bdddf - https://brainmass.com/business/accounting/work-in-process-wip-efficiency-130052
Let's take a closer look.
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.
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 ...
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.