Do you know what WIP is? No? You must have fallen asleep in business school!

Work in Process, also known as WIP inventory, is all the work and products created on the path to making something of value that is to be sold. For manufacturing, this could be bent metal that needs to be welded together and painted before someone can buy it. In this unfinished state, it has no real value. The formal definition (Little’s Law) is

WIP Inventory = Throughput Rate  x  Throughput Time

You can decrease the WIP by decreasing the time needed to go through the process, and by increasing the rate of which things are done.

Also, inventory can go bad or becomes obsolete–you don’t want to be holding a lot of orange cloth when orange clothing goes out of style. Food spoils, fashions go out of date, designs change, the market moves on. If you remember your Accounting 101, inventory consumes cash. That’s why companies improve their cash positions by reducing inventory. Why is cash important? Well, it’s useful for doing little things like paying mortgages and payrolls. A company can be very profitable but still go out of business if it doesn’t have cash when it’s needed.

When you analyze a balance statement, you know that inventory is considered an asset, but the reality is that WIP has little value outside the company at any point in time. When you liquidate a company and sell the assets, WIP is a write-off. Get the point? Too much inventory is bad, WIP should be minimized.

WIP in IT is a fairly new concept, but here it is. Think of all the work after a project is conceived until it is implemented: all of that work is WIP. JAD sessions, requirements documents, status reports, review and sign-off sessions, even coding and testing are all WIP. Until it is ready to ship, sell or use, it is WIP. Long development cycles, with months of requirements and status meetings, months of analysis, development and testing consume lots of cash. Bureaucracy has to be created to store and move the knowledge along. Some of the intermediate products become obsolete. The longer the process takes, the more cash is consumed.

So what should we do? Let’s learn from manufacturing: shorten production cycles, reduce inventory, and you free up cash. Shorten the time from concept to delivery. Minimize obsolescence, be responsive to the market. Have direct communications between people working on the process, and get to real results quicker. This reduces the need for cash, and improves cash flow.

In the ideal world with minimal WIP, an idea is conceived, developed and marketed in hours, not days or months. Think about this: you could generate revenue from the product before you have to pay for the WIP. Crazy? See “Eight Days to Cash,” a talk proposed for this year’s Agile 2009 conference in Chicago.

Directly related to WIP is Finished Goods Inventory. For IT, these are features completely developed. But wait, didn’t the Chaos report tell us that many features are never used? That means a part of these assets should be written off. And the economic gremlin that makes it worse is called opportunity cost: the value of the next best alternative foregone as the result of making the decision to develop these features. Bang! Pow! Ouch!

Tags: Agile, Lean, Waste

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