By: Andrew Frazier, MBA, CFA
Many manufacturers are taking unnecessary risk by not focusing enough attention on WIP (Work In Progress). Although there is a certain amount of WIP that is necessary within all manufacturing operations, not managing the how much WIP there is and the dollar value that it represents can result in your company getting “WIPPED” in the following ways…
- Unexpected Losses
- Lower Productivity
- Tied Up Working Capital
Let’s look at a real world example. I was hired to help a midsized manufacturing company with cash flow issues. Excess WIP exacerbated the situation. They had hundreds of thousands of dollars invested in excess WIP when they really needed it for paying suppliers. Suppliers started cutting them off which led to inefficiencies and inability to deliver products on-time. Lack of enough raw material reduced productivity of the workforce causing lower profitability and less cash flow from operations. This was a vicious cycle that could only be overcome by external financing. To make things worse, the company had to make a significant inventory adjustment due to excess waste and damaged WIP. The adjustment wiped out all of their profits for the year making them un-bankable, requiring them to seek alternative financing with significantly higher fees and interest rates.
Fortunately, they hired a better production manager, upgraded their ERP system, implemented LEAN manufacturing processes, and systematically counted actual inventory on a weekly basis. The financing gave them room to breathe by providing the necessary funds to purchase inventory, increase productivity, and ship more products. The experience required them to actively manage orders and inventory levels weekly to minimize excess WIP or raw materials.
Nobody likes unexpected losses on WIP that could have been avoided resulting from increased waste, damages, and shrinkage. Having too much WIP laying around increases the likelihood of these things happening by creating a cluttered environment and lower accountability. Don’t get WIPPED with unnecessary losses!
Excess WIP tends to lower productivity. Lower productivity costs manufacturers billions of dollars annually. It increases costs and reduces profitability. That reduction in profitability has a significant negative impact on the value of a business. Plus, it decreases output and capacity which increases lead times, negatively impacts customers, and hurts growth. Don’t get WIPPED with lower productivity!
The cost of maintaining unnecessary levels of WIP is two-fold. First, WIP takes up valuable production space that could be used for other purposes which may result in leasing additional space. Second and most importantly, working capital tied up in extra WIP reduces liquidity and can cause cash flow issues at a time when customers are taking longer to pay. Don’t get WIPPED with tied up working capital!
The following techniques can be used to eliminate excess WIP so that you are able to avoid getting WIPPED…
- Forecasting and Tracking WIP Levels with ERP systems
- Implement LEAN Manufacturing Processes
- Adding Machines and Cross-Training Workforce
The practices outlined above not only increase productivity, they also improve profitability. Adding extra machines and providing lean training for the workforce will improve quality, improve production output, and drastically reduce defects. In addition, lowering WIP levels makes it easier to identify bottlenecks quickly and rectify them in a timely manner. Not only will managing WIP reduce risks, it will increase capacity and improve profitability. Plus, there can be other ancillary benefits of reducing WIP such as less clutter leading to a better work environment and fewer accidents. Implement these methods today to enhance and grow your business and avoid getting WIPPED!
Andrew Frazier, MBA, CFA is President and COO of A&J Management and a NJMEP Business Growth Services (BGS) Resource providing Outsource CFO advisory services. He also wrote “Running Your Small Business Like A Pro – The More You Know, The Faster You Grow” a guide for helping small business owners create a sustainable enterprise that can run without them.