For a manufacturer, the Bill of Materials (BOM) is the recipe (the ingredients and their amount, with the preparation instructions) that drives the business. The accuracy of the BOM is critical to ensure a profit is made, guide procurement when ordering the items, and prevent having insufficient or wrong inventory. If the BOM is inaccurate, labour and components that comprise the production jobs will be wrong, and therefore capacity planning for the factory will be wrong. So how should businesses build, manage and maintain their BOM to ensure none of these problems occurs?
Building and maintaining a BOM
Typically, a BOM is built by two people — an engineer and a cost accountant. The engineer defines the quantities and routing — the product manufacturing steps. This can initially be at a high level. The cost accountant is responsible for the values of the items in the BOM, which also includes labour.
The engineer’s job is sometimes easier if a CAD system is used to design products. This is because the components can be uploaded from the CAD system into the ERP system. That’s why the ERP application should have built-in integrations for CAD software.
The cost accountant has the vital task of assigning costs. Usually, prices need to be reasonably precise, but there will be times when some cost buffering will be required to cover uncertainties. Once the product specifications are finalised in the BOM, it is the cost accountant’s job to maintain it. The role of the BOM is critical because when a production job is run, the BOM details are put into the job. At the end of the manufacturing process, the ERP system should be able to compare the estimated costs, materials and labour of the job with the actual values. The cost accountant should monitor the variance, and if there is constantly a significant variance, then an engineering change can be requested to review and change the BOM.
The review process ensures the ongoing accuracy and profitability of the BOM.
If the BOM is the recipe that drives the business, then its components should be kept secure and confidential. It is the secret sauce. The only people who should have full access are the engineer — who has access to material quantities and routings — and the cost accountant, who can see material quantities and values.
Sometimes, aspects of the BOM can be disclosed for regulatory reasons or to provide selected customers with product quality information. But this is usually done at a high level, and only overall costs are disclosed.
In an ERP system, BOMs are centralised; therefore, the access controls within the ERP solution can be applied. These include restrictions on viewing fields like cost, part name, quantity, and where a part fits into the BOM hierarchy. Depending on their role or permission level, people will have access to different elements of the BOM.
Any updates to a BOM, either base on customer feedback or product revision a BOM change must be requested. On request approval, a copy of the BOM is created, which the engineer can access to complete the updates. Changes to the BOM will need to go through quality control and approval. Finally, the new BOM is secured and released.
How detailed should a BOM be?
In most manufactured goods, there are items like screws, nuts and washers. These items don’t need to be tracked at a detailed level. However, they can be classified in the BOM as a catch-all category called shop floor items. The shop floor items can be allocated as a percentage cost in the BOM. Then, as needed in the production job, they can be taken from a bin in inventory and replenished as a standard Kanban process as the bin empties.
Many ERP systems also use the concept of a kit. A kit is a collection of items packaged under a parent item. Although to reduce BOM complexity, kit items are used, kits can be linked to a BOM or to enable variations in a BOM.
Another way to remove complexity from a BOM is with phantom items. These are typically included in a multilevel BOM where sub-assemblies are used. The phantom part is a set of components included as a single unit within the BOM. When a production job is created, the phantom part disappears, and the sub-items are included in the job.
The importance of accuracy
If a BOM is a secret sauce, then the accuracy and precision in which it is defined and used are essential. The reason is that the BOM is a critical component in the calculation of material requirements for the business — together with production schedule and sales orders or forecast demand. If the BOM is not very accurate, this can create severe problems for requirements planning. For example, if each component is 85% accurate, the overall accuracy of requirements (BOM x Schedule x Forecast) is about 60%. However, the calculation means that 40% of items procured for production will be wrong. That has profound profitability implications. Therefore, the need to have an accurate BOM, and a precise production schedule, can raise the accuracy of the requirements plan, even if the forecast is not entirely correct.
An inaccurate BOM has other knock-on effects for the business:
- can affect the time taken for jobs production,
- orders may not be fulfilled on time,
- which adversely affects customer satisfaction;
- inventory may be wrong, with associated problems of cost and wastage.
Why accounting packages don’t work for manufacturers
As their business grows, a manufacturer’s accounts management often moves from spreadsheets to an accounting package. And that’s where it stays. The problem is that accounting packages are usually not dynamic to adapt and grow as the manufacturing product and process develop.
An accounting package can create a list of materials, but that is all it is — just a list of parts. The way the consumption of parts in stock is then calculated in the ledger (usually monthly) is opening stock, plus what is purchased, less manufactured, so month-end closing stock is calculated. Based on this, manufacturers who use accounting packages are constantly doing stock counts because they have to confirm the accuracy of the stock for the ledger and manufacturing and procurement requirements.
With an ERP application that includes a BOM, that problem goes away. However, the ERP system still records opening stock and adds stock purchases. The difference is that when a production job is run, using specifications from the BOM, the job records actual inventory consumed. Therefore, the closing stock value is an accurate measure of what is in the warehouse; it is not a calculated figure—significant financial implications in terms of cash flow, costs and return on assets. In fact, with an ERP system, businesses can frequently reduce inventory.
The value of a BOM
Building the first BOM is a significant project when manufacturers implement an ERP system. It can take some time and require the work of key individuals. But the initial cost is soon overtaken by the value that the BOM brings in terms of improved inventory management, production timing and costing, and improved customer satisfaction.