BUSINESS TOOLS FOR SERVICE MANAGERS

Work in Process or Service Inventory.

Maurizio Bonacchi Caterpillar

Geneva 1

Module 5
WIP ( Work In Process )
“Service Inventory” of Non-invoiced work
Combination of :
The cost of incomplete jobs
The cost of complete but not yet invoiced
jobs
Labor, parts, miscellaneous

Cat Goal: WIP < 15 days

((P,L,M) cost to be Invoiced for the month– Cash Advance) x 30 days

WIP(Days) =
Total cost of sales (P,L,M) for the month

Maurizio Bonacchi Caterpillar

Geneva 2

1
 Module 5
WIP ( Work In Process )
• Specific formulas:

((P,L,M) cost to be Invoiced for the month– Cash Advance) x 30 days

WIP(Days) =
Total cost of sales (P,L,M) for the month

Hours to be invoiced x 365 days

WIP (Days)=
Hours Invoiced last 12 months

WIP (Days)= Hours to be invoiced x 30 days

Hours Invoiced

Carrying cost
Interest = (Average cost found pending to be invoiced – Cash Adv) x annual rate %

Maurizio Bonacchi Caterpillar

Geneva 3

Module 5
WIP ( Work In Process )
Cat Goal: WIP < 15 days

Total non- Inv Month: € 7,500,000

WIP: 140 days
Total Invoiced Month: € 1,600,000 Assuming that these WIP
Total non- Inv Month: € 4,000,000 belongs to the same dealer.
WIP: 50 days
Total Invoiced Month: € 2,400,000
Total non- Inv Month: € 1,000,000
which are the best & worst
WIP: 18 days situation for WIP days & € and
Total Invoiced Month: € 1,660,000
Total non- Inv Month: € 1,000,000
WIP: 15 days
why?
Total Invoiced Month: € 2,000,000
Total non- Inv Month: € 500,000
WIP: 15 days
Total Invoiced Month: € 1,000,000
Total non- Inv Month: € 400,000
WIP: 12 days
Total Invoiced Month: € 1,000,000

((P,L,M) cost to be Invoiced for the month– Cash Advance) x 30 days

WIP(Days) =
Total cost of sales (P,L,M) for the month
Maurizio Bonacchi Caterpillar
Geneva 4

2
 Module 5
WIP ( Work In Process )
WO Profit or Cost WO profit
WO Cost
WO actual profit
Customer First Last Close/Inv Customer
Call. WO Labor Labor W.O Pays
open day day
MAX
(-)
Interest

Customer
dispute

Last WO
Profit

WIP Days Days

Maurizio Bonacchi Caterpillar

Geneva 5

Module 5
WIP ( Work In Process )

Maurizio Bonacchi Caterpillar

Geneva 6

3
 Module 5
WIP ( Work In Process )

Maurizio Bonacchi Caterpillar

Geneva 7

Module 5
WIP ( Work In Process )

Additional WIP metrics or Indicators

One of the factors that affects WIP is the

administrative time from the last labor day in the W.O
to close and invoice.

During this time there is no added value to the W.O.

This problem generally takes place in the process of

opening of the W.O.
Problems of Quote <> Invoice, Parts returns,
hours pending to charge in the WO, etc.

Maurizio Bonacchi Caterpillar

Geneva 8

4
 Module 5
WIP ( Work In Process )
Additional WIP metrics or Indicators
1- Last Labor to Close & Invoice/Claim
•Is the difference, between two dates.
•Ideally it should be <7 days per work order.
•The average should be weighed based on the amount invoiced per WO.
2- Last Labor @ today
•Based on a stratification of opened days and pending amounts to invoice.
•<7days & amount of P.L.M @ cost
•>7 days to 15days & amount of P.L.M @ cost
•>15 days to 30 days & amount of P.L.M @ cost
•>30 days to 60 days & amount of P.L.M @ cost
•>60 days to 120 days & amount of P.L.M @ cost
•>120 days & amount of P.L.M @ cost
Maurizio Bonacchi Caterpillar
Geneva 9

Module 5
WIP ( Work In Process )

@ risk of customer's acceptance of invoicing

Maurizio Bonacchi Caterpillar

Geneva 10

5
 Module 5
WIP ( Work In Process )
• Example:

• Total Parts, Labor & Miscellaneous invoiced: € 65,000

• Total Parts, Labor & Miscellaneous pending to be invoice: € 150,000
• Annual money market interest rate: 10%
• Month of analysis “March”: 30 days

• WIP Days: (€ 150,000 x 30 day)/€ 65,000 = 69.2 days

• Carrying cost interest %: € 150,000 x 0.1 = €15,000 x year.

• Monthly average of carrying cost, €15,000/12= 1,250

Maurizio Bonacchi Caterpillar

Geneva 11

Module 5
WIP ( Work In Process )

Maurizio Bonacchi Caterpillar

Geneva 12

6
 Module 5
WIP ( Work In Process )

Can a high WIP days influence in low or

negative profit or low cash flow?

Yes. We will have a GP% constant, but insufficient GP to

support all service direct expenses that always exist and are
independent of WIP.

Maurizio Bonacchi Caterpillar

Geneva 13

Module 5
WIP ( Work In Process )
• Example:

• Total Labor invoiced: € 35,000

• Cost of sales invoiced: € 5,000
• Direct expenses hours referred with hours: € 5,000
• Direct expenses not referred with hours: € 23,000
• PADE: € 2,000
• PADE %: 5.7 %
• Total Labor pending to be invoice: € 50,000
• Cost of sales pending to be invoice: € 7,142

• WIP days: (€ 7,142 x 30 day)/€ 5,000: 43 days

• If Labor invoiced (increment 50%) is: € 25,000
• WIP days (€ 3,571 x 30 day)/€ 8,571: 12.5 days
• PADE: € 35,000+25000 - € 5,000-€3,571 – € 5,000 - € 23,000: € 23,429
• PADE%: 39%

Maurizio Bonacchi Caterpillar

Geneva 14

7
 Module 5
WIP ( Work In Process )
Balance Sheet =0
Cash Short term debits

Current Accounts Payable

assets Accounts Receivable Liabilities

Long term debit

Inventory
Capital
Equity
Plant
Fixed assets
Machinery Retained earnings

Service: Work in Process & Accounts

Receivable
Maurizio Bonacchi Caterpillar
Geneva 15

WIP Recommendations

Maurizio Bonacchi Caterpillar

Geneva 16

8
 WIP Recommendations
Control Work in Process

High WIP days affect PADE. It can be low or negative.

High WIP days affect GP volume. It can be small and
Direct expense high.
Reduce WIP and Last Labor to Close invoice/ claim.
A Work order in WIP can finish in a bad debit,
(other financial cost)
A warranty Work order in WIP can finish in high warranty
cost. After 60/90 days of last labor the dealer lost the claim.
Repair options- P.O help to close and invoice fast the WO.
If the customer pays in advanced the WIP days should be re-
calculated.
Parts participate in WIP when are physically in the
warehouse. (in stock)
Maurizio Bonacchi Caterpillar
Geneva 17

WIP Recommendations

Control Work in Process

Change the process of Work Order handling.

Sequential or serial process. WO volume constant.

Add data
Open Work In the Work Close the Work
Order by Order by Order-Claim or
admin 1 admin 2 Invoice by admin 3

Maurizio Bonacchi Caterpillar

Geneva 18

9
 WIP Recommendations
Control Work in Process

Change the process of Work Order handling.

Parallel process. WO volume /nr. of admin.
Open – Manage &
Close the Work
Order by admin 1

Open – Manage &

Close the Work
Order by admin 2

Open – Manage &

Close the Work
Order by admin 3

Maurizio Bonacchi Caterpillar

Geneva 19

WIP Recommendations
Control Work in Process

Change the process of Work Order handling.

Parallel process. WO volume /#. of admin.

W.O/ Quantity of Work Order open & closed in the month

Admin =
Pers. Quantity of administrative person dedicate to Invoice

Calculate the quantity of W.O to invoice per day and per

hour and to analyze if it is feasible.
Verify if the WIP problem start in the opening or in the
closing process of the WO.

Maurizio Bonacchi Caterpillar

Geneva 20

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