Bill of Materials explained

This week we went over information in planning resources and what goes into these processes. It’s a pretty broad topic, so I decided to focus on the bill of materials. The bill of materials is essentially a detailed list of instructions that has a list of all the parts, items, assemblies, and sub-assemblies that are required to build a complete product which can then be shipped customers. A vague or incorrect BOM will cause problems down the line, varying from small to massive in scope.  These issues can be extremely costly, whether that is in capital and labor resources or in time wasted. There are many different types of bill of materials, so I found three to explain that will show up pretty often.

Engineering Bill of Materials

The engineering BOM defines the finished product as it was designed. This BOM is often organized by engineers based on a computer-aided design drawing. It is entirely possible that there is more than one engineering BOM created. It will let anyone involved in the supply chain exactly what to purchase, how to purchase and where to purchase all the raw materials and part required for the product. The bill of materials will be used by many departments and not uncommonly at the same time. This requires the document to be as quality as possible. It has to be as detailed, clear, and accurate as can possibly be to ensure the efficiency and cost-effectiveness of the product.  Any problems in the document here could cause quantities of materials to be mis-ordered for example, which would lead to production halting. The company would then either have to wait on the missing parts or start on another production order.

Manufacturing Bill of Materials

The manufacturing BOM contains all the parts and assemblies required to build a complete and shippable product. Packaging materials that are needed to ship the finished product are included here as well. This BOM is where all the information required for manufacturing activities is stored. An MRP (material requirements planning) system would take the details from the manufacturing BOM and would calculate whether materials are needed to be purchased and when the manufacturing order needed to be started. This BOM can also have a validity date range. This means that if the company wanted to test a product, they would restrict the use of a specific BOM to a month or two. Then, if the product needs to be modified, they can change the current BOM and establish a new validity date.

Configurable Bill of Materials

The configurable BOM is for a finished product that needs to be changed for a specific requirement by a customer. This BOM contains all the components that are required to manufacture the material for a customer’s specifications.

These are some specific types of BOMs and there are many more out there, depending on what a business needs to accomplish. The level of detail required in these documents is immense, and so there are companies out there which provide services to help other companies create BOMs and more. SAP is one of those companies, and on this cite (https://blog.vision33.com/bid/90172/sap-business-one-production-4-types-of-bill-of-materials-explained) their types of BOM that they can create through their software SAP Business One are explained. The software costs about $1,400 as a one-time fee, then $410 per user/per year for a subscription. I wonder if this cost is too high for some companies to use, and if that’s the case what is their alternative? 

 

Source: https://www.thebalance.com/bill-of-materials-2221363

                 

12 thoughts on “Bill of Materials explained

  • April 5, 2018 at 7:21 am
    Permalink

    Layne,

    As an accounting major, it is interesting to see how operations management and accounting need to be able to work hand-in-hand. I remember learning about Bill of Materials in Managerial Accounting and even now in my Cost Accounting class. The accounting department must be able to account for items requisitioned and transferred out. As you stated, a vague or incorrect BOM will cause issues in the future, namely waste. But is having an official software to account for BOM necessary for a company to succeed? Is it a determining factor in which a company succeeds or fails? As you mentioned, the software from SAP costs $1400 for a one-time fee or $410 peruse/per year. For a large company, this is a minimal charge that will benefit the company greatly. For a smaller company this cost may be too high. A very competent manager that knows the inner workings of the company is an alternative to this software.

    • April 5, 2018 at 8:48 am
      Permalink

      Hi Mark,

      I really like what you said about a competent manager knowing the inner workings of their company. I completely agree that in smaller companies, managers and employees are so in tune with the processes that they are able to provide these services themselves.
      For example, my dad is a chef at a relatively small resort. His input materials consist of different food products and cookware items. He does not have a Bill of Materials but must plan in advance of each week what he will be producing (cooking) and what items he needs to order to fulfill his production schedule. As this is a smaller business and he is very in tune with the kitchen and the products in it, and he is able to create both a Bill of Materials and a Production Schedule in his head.
      Each week, a man from the food service company comes to take the food order. They begin the ordering with everything my dad has specifically said he needs. These may be necessary daily ingredients that are running low or custom ingredients for a specific dish he wants to make. This is a list he makes while working and while planning, and is flexible to a change in production schedule from one week to the next. It is also important that my dad is in tune with demand for that week, based off of experience and historical data. Next, the food service man will run through a list of ‘Suggest Products’. These are either (a) Popular items that my dad didn’t have on his list or (b) items that haven’t been ordered in a few weeks. This is helpful for my dad to be able to check on the inventory levels of these items and report back with either a ‘Yes’ or ‘No’. Sometimes, he will even write one of these items on his list for next week, instead of ordering it in that current week, based on demand and projected usage. Lastly, my dad will still go to the local grocery store about 2-3 times per week for his job. He will get items that need to be ordered in less than a week time span so they don’t go bad. This includes foods such as bananas and milk. With high demand during the breakfast period, usage of these products can be very volatile and they can also spoil easily.
      In this sense, it is easy to see that not all businesses need to invest in high tech software that plans for them. At the lower level, it is more logical for employees to do their own planning and ordering, and adjust for changes as needed. I’m sure though, with larger resorts such as Atlantis and places in Las Vegas, they have technology they use for reordering food each week on a much larger scale. It seems to me that this process is all about netting the costs and benefits.

  • April 5, 2018 at 1:18 am
    Permalink

    Layne,

    Thanks for diving into the Bill of Materials and giving us a more in-depth analysis of the topic. I thought it was particularly interesting how you outlined the costs involved with using the SAP software. You posed a question at the end that I thought was a really good question. For small firms, how much can they really afford to spend on this kind of software?

    I can say that for my dad’s company, this kind of software would probably be too costly and perform too few functions to be worth the $410/year. However, for large firms I would imagine that this software is actually pretty cheap and would definitely be worth the cost if the software was truly able to increase efficiency in planning resources.

    Thanks again for your insight!

  • April 5, 2018 at 12:16 am
    Permalink

    Layne,

    Thank you for your post and for exploring this topic of the BOM. It is clear through this post how important the BOM can really be. While engineering the BOM, it is important to make sure the different engineers are on the same page. Whenever there are multiple people working on a project there is always an opening for some sort of confusion. Since so many departments have the potential of using the BOM, it is extremely important that it is done correctly. In creating this BOM, it is also important to make it so that it is easy to understand because a variety of people have the potential to use it and you aren’t always sure who it will be. If it is not easy to understand, that leaves room for potentially more confusion. In the end, for a product to end up being as efficient and effective as possible, the BOM needs to be done nearly perfectly. In doing so, miscommunication and confusion about the product is kept at a minimum.

  • April 4, 2018 at 8:00 pm
    Permalink

    Layne,

    Thank you for your interesting discussion about the different forms and the importance of a Bill of Materials. In response to your question, I think it depends entirely on the nature of operations of the company. I think the costs of using software for specific BOMs are entirely worth it when a company’s operations require an immense amount of detail and require multiple steps. On the other hand, if the company has simpler processes that require a smaller amount of resources and steps, then the company should create their own BOM without the use of software.
    I am interested in the idea that small issues in a BOM can be very detrimental. Although a BOM is filled with countless small details that independently seem insignificant, they prove to be extremely essential in the overall success of a process. For example, commonly overlooked resources and steps, like wires, glue and other small parts may be unnoticed when creating a BOM. When considering the success in using a BOM, every detail is an equal contributor to the success of production. One missed detail can stop manufacturing machine and postpone production. Also, this results in a delay, a loss of money, and a waste of time. Because missing one component can be extremely negative, using computer software for more complex and detailed processes can be a lifesaver for the manufacturing company.

    https://www.unleashedsoftware.com/blog/bill-of-materials-important-for-manufacturing

  • April 4, 2018 at 5:04 pm
    Permalink

    Layne,

    Thank you so much for sharing this insight on bill of materials. Your post made me think of a recent new story I saw about Apple and their decision to stop using Intel chips. Apple could save a lot of money by producing their own chips. It would also cut down on the need to place orders to Intel. Instead they would be making chips in house which would make it easier to coordinate inventory. If Apple believes they can save $40 to $50 per computer the savings would add up quickly and then their bill of materials and master schedule would change.

    However Apple has to consider issues that may occur with producing in house. For example, they may have to hire additional engineers qualified to produce the chips. The chips may not be running as well as Intel’s. Intel has a lot of experience in the industry and produces chips for both Mac and PCs. If Apple wants to switch over to their own chips they are taking on the risk of the chips not working as well as Intel’s I wonder if Apple will be able to switch over all of the processing chips at the same time. If they are not able to they will have to have two separate bills of materials for their own chips and Intel’s.

    https://www.cnbc.com/2018/04/03/bank-of-america-says-apple-could-save-500-million-a-year-making-its-own-pc-chips.html

  • April 4, 2018 at 1:53 pm
    Permalink

    Layne,

    Thanks for this overview of the role of the bill of materials (BOM) in the sales-and-operations planning process. As I was reading your overviews of the different types of BOMs—and their respective levels of standardization and flexibility—I thought it was interesting how well it connected to a concept from earlier in the course: The Product-Process Matrix.

    Recall that the Product-Process Matrix is a means of matching the characteristics of a product and the characteristics of a process (Textbook p.54). Successfully matching the product to correct type of process helps firms excel at their competitive priorities. An example of the Product-Process Matrix diagram and the types of process (project, job, batch, line, and continuous) is attached for reference at the end of this post (Textbook p. 54).

    I think it makes sense to think of the BOM in the context of a product’s characteristics and the type of process needed to produce it most efficiently. For example, you discuss the Configurable BOM at the end of your post. You mention that the greatest merit of the Configurable BOM is that it has the flexibility built in to easily manipulate a product to meet customer specifications. This type of BOM would make the most sense to use in combination with project or job process in order to produce a highly customized, low volume product.

  • April 3, 2018 at 5:03 pm
    Permalink

    Layne,

    Thanks for your post. I honestly had no idea that SAP specialized in this area. Their beautiful American headquarters is located about 15 minutes away from my home in the Philadelphia suburbs, but I never knew they offered BOM services. Applying your post to my life right now, I am currently in the market for a new car, an end item. As a consumer, I only really think about that end item and the value it provides me. I never really think about all the children or component items that make up that end product. Because I’m in the market for a car, I decided to dig deeper into my decision and check out a generic BOM for a car found at the link below. It really makes you appreciate how much work is put into the end item and how much planning is necessary to complete processes for the production of millions of cars. After studying the attached BOM, I decided that some items were not represented in the diagram. For example, subassemblies for seats and the car interior could be added. There are many different components or purchased items that are used to complete a car seat. Even with the electrical branch already present in the diagram, more details on the stereo and sound system could be added as well as the air conditioning system. The list goes on. Being able to see and add to a BOM for something so applicable in my life has really made me appreciate the work put into end items.

    https://creately.com/diagram/example/heovdlsu/BILL+OF+MATERIAL+FOR+AN+AUTOMOBILE

    • April 3, 2018 at 5:46 pm
      Permalink

      Nick,

      Thanks for your comment! As I was reading, I realized that many customers already go through the BOM for products whether they are aware of it or not, for many of their purchases. For example, a customer who only purchases products that are “Made in the USA” might go through the BOM for a pair of Nike running shoes that they’re considering purchasing. If they see any components that are made outside of the U.S. (which most are) they wouldn’t purchase the pair of shoes. Another example would be someone with a peanut allergy who goes through the BOM for a particular food product to see if any of the components were made of peanuts or came in contact with peanuts.

      • April 3, 2018 at 9:53 pm
        Permalink

        Lily, this is a really good point regarding the things that we look at and apply a BOM to. Layne’s post outlines the different types of BOM and does a good job to better my understanding, but I would never have thought to look at my everyday items and apply concepts surrounding a BOM. I have a very applicable example from Winter break where my father did this. My dad prefers to buy American made sporting goods. In this instance, he was purchasing a knife which came packaged with a sheath and other accessories. Here, he elected not to purchase the knife. While the knife itself was manufactured on U.S. soil, the sheath and other components were made in China. It is interesting to see the real-life application of things like a BOM.

        • April 4, 2018 at 12:34 pm
          Permalink

          Wow these are all really interesting comments! Thank you all for your great takes on Layne’s post! During class I never realized how truly applicable the use of a Bill of Materials truly is to daily life and decision making. Something that I thought of was people with dietary restrictions, like Lily mentioned. My sister is vegan, which means she cannot consume animal products of any kind. This requires her to do a lot of research into various products’ bill of materials. There are a lot of things that she cannot eat because some component parts contain animal products. For example, one obscure animal product that many people never realize comes from animals is gelatin. Gelatin is made by boiling tendons, ligaments, skin, and bones in water. This is used in all sorts of products that you may have never known such as, shampoos, cosmetics, Jell-O, gummies, candies, and even on some photographic films. My sister has to look at the bill of materials for all of these products to avoid inadvertently consuming an animal product. It is incredible how my sister uses the bill of materials in her everyday life.

          Source:
          https://www.peta.org/about-peta/faq/what-is-gelatin-made-of/

          • April 5, 2018 at 12:05 am
            Permalink

            The comments made by my classmates above demonstrate how widely applicable this concept is to businesses and directly to consumers alike. As Layne mentioned in the original post, there are many different Bill of Materials used by manufacturers in the design and assembly of a product. These documents are essential for properly completing finished products and monitoring what inventory is necessary to keep in stock. A manufacturing or engineering BOM would be a standardized and professional form that would be most relevant to businesses selling the product.
            However, as many others have mentioned, the Bill of Materials and sourcing of materials used in finished goods is very important to a customer as well! A customer may have a preference of where their product was made, as with the many initiatives that support buying local goods. Many vegans and people with food allergies can confirm that sometimes the makeup of our finished goods can be the difference between life and death! For many reasons consumers are increasingly cognizant of what they are buying and holding companies to high standards of quality and ethics for their products.
            This topic highlights this trend towards transparency in the supply chain and reflects increasing awareness of customers in how they consume.
            http://spendmatters.com/2016/02/15/ethical-sourcing-do-consumers-and-companies-really-care/

Comments are closed.

css.php