by Adam Juda on Monday, April 22, 2019
It was more than two years ago that I told my readers to stop badmouthing hourly pricing. I'll admit that the system of hourly billing is far from perfect, but it has its time and place.
Today I'd like to step forth to protect another unfortunate victim of economic disdain: work in process.
What Is Work in Process?
Fortunately for us, the concept of work in process isn't that hard to figure out. In fact, it's exactly what it sounds like. All of the goods that companies develop, construct, and manufacture but haven't yet sold are considered work in process. To many business people these unfinished goods might look like profit in the making. Students of business schools the world over, however, have been trained to see work in process as an enemy that must be vanquished at all costs.
Why Is Work in Process so Hated by so Many?
Work in process is a drain on resources. Not only do these goods in the making have to be stored and safeguarded, but they also have to be paid for. Like ending a sentence with a preposition, this is cause for serious concern. Resources that are tied up in work in process can't be put to other productive uses. They can't be invested in marketing, hiring, or efficiency upgrades.
It's bad enough that these resources can't be reallocated until the work in process has been sold. Far worse is the fact that the resources are at constant risk. Sometimes work in process can go bad. Should demand go slack, a vendor with significant work in process may find his investments lose value precipitously. Worse yet, his work in process may literally go bad - as in the case of a restaurant with a faulty refrigeration system.
So What's Good About Work in Process?
If work in process ties up resources and opens companies up to risk, why the heck would someone like me defend it?
I'm not - not exactly. I just want to challenge the naive assumption that work in process is a universal misallocation of resources. Yes, reducing it is often a good idea, but there are reasons why even well-run companies have come to terms with a certain level of work in process.
Some products and product lines, by their very nature, require far more work in process than others. There are a great many goods that take a long time to build or can only be built in spurts. Aged whiskey, for instance, cannot simply be willed into existence without letting it sit as a work in process. Skyscrapers, sailboats and jets require significant work before they can be released to customers. Without the acceptance of significant levels of work in progress, none of the above could ever be built at all - let alone in great quantities.
In addition, many seem to forget that the prices of resources fluctuate. Sometimes the costs of inputs drop precipitously; the price of pork bellies may fall, the price of wheat may flatline, and the cost of oil may hit the skids. As the prices of product inputs drop, businesses may have good reason to accept increases to the quantity of work in process in return for significant long-term savings.
Please, stop badmouthing work in process. Yes, as a general rule, it's a good idea to keep one's level of work in process relatively low. Nevertheless, work in process is hardly something that need be (or even can be) completely stamped out from the workings of a modern firm. Rather, one should consider acceptable levels for work in process when formulating an overall corporate strategy.
Shameless Commercial Plug
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