Businesses rely on a crucial tool known as the Bill of Materials, or BOM. The BOM is a comprehensive and structured list that enumerates every component, sub-assembly, and material cost required to manufacture a product. Its significance in the manufacturing process cannot be overstated, as it serves as the foundation for various crucial operations, including procurement, production planning, inventory management, and cost estimation. Let’s explore BOM including component costs, its fundamental role, its significance, and the various ways to optimize cost-effectively.
But first, what are the components of a BOM?
BOM Cost Components
Some common component costs are raw materials, labor, overhead, tooling and equipment, packaging, transportation and logistics, quality control, taxes and duties, supplier costs, R&D value engineering and research costs, waste or scrap, software and licensing, testing and compliance, as well as all the marketing and promotion costs.
Please note that not all of these will be relevant to every product or industry. The composition of the BOM and its associated cost components can vary widely based on the nature of the product and the specific requirements of the business.
Examples of Hidden BOM Costs
Hidden Bill of Materials costs are those that are not immediately obvious but can have a significant impact on a product’s overall cost.
Hidden BOM costs can include compliance testing, quality control inspections, and rework expenses.
If a product has a high rate of defects or malfunctions, the costs can be substantial. Storing excess inventory or slow-moving components can lead to hidden carrying costs. Faulty components and component shortages in product manufacturing affects the total cost, causing chaos for cost management.
The cost of maintaining specialized tools, molds, and equipment required for manufacturing processes can be overlooked, sometimes considered passive components because of how easily they are overlooked.
Hopefully, after reading this article, you, dear reader, will have insight on how to circumvent and account for these hidden costs. Let’s dive deeper into BOM Management and the supply chain.
Analyze the BOM
Raw Materials ARE NOT your ONLY Cost: Identify the Cost Drivers!
It is crucial to identify cost drivers when creating a Bill of Materials. Begin by thoroughly analyzing each component in the BOM. Understand the function of each part in the final product.
Identify material costs. Keep an eye out for material prices and any fluctuations in the market. Strategic sourcing is crucial for maintaining a competitive retail price on the market. Better pricing is often available.
Determine the labor costs required as they can vary based on skills, intensity, and even location.
Consider and evaluate overhead costs and supplier costs.
Assess the quality control measures needed, as higher quality requirements can increase for component costs.
Other major impacts on cost includes waste minimization, design optimization, and economies of scale. Consider how changes affect cost.
You may also try investing in more market research, utilizing a cost-tracking software, conducting regular cost reviews, and comparing your BOM costs to your competitors’ costs. This is an on-going process.
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Unveiling the Hidden Costs: Understanding How BOM Costs Impact Companies’ Bottom Line
BOM costs can significantly affect a companies’ bottom line. For example in cost control, when these costs increase due to rising material prices or supplier changes, it can directly affect a company’s profitability.
An Example: Orange Electronics
Let’s say you work at Orange Electronics (fictionalized company) for a decade. It’s a mid-sized consumer electronics manufacturer highly regarded for their tablets and smartphones. For half a decade, the company has experienced healthy profit margins and market share. Unfortunately, you’re noticing the problems in cost control.
First, the company sourced essential components like semi-conductors and display screens from various suppliers. Over time, these suppliers increased their prices due to market conditions.
A lot has changed in a decade! Regrettably, Orange Electronics did not have a robust contract negotiation or alternate sourcing strategies.
Second, Orange Electronics production process was inefficient, which led to high labor and energy costs. This was partly because the machinery was outdated, and they hadn’t invested in automation or process optimization.
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Lastly, they had quality control issues with some of their components. It turned out that to meet quality standards, Orange Electronics would have to spend more on inspections, rework, product recalls, all of which escalated costs.
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Identify Cost Reduction Opportunities
BOM cost optimization involves categorizing and analyzing the various component prices within the BOM to identify areas where cost reduction opportunities and efficiency improvements can be made to reduce costs further.
Visualizing this process with a plot or chart can help in better understanding and decision-making.
BOM Cost Optimization – Categorize and Plot
Here’s how to approach BOM cost optimization with categorization and plotting.
Categorization requires first identifying the cost categories. Divide the cost components in your BOM into logical categories. Common categories include materials, labor, overhead, supplier, and miscellaneous expenses.
Then, assess the significance of each category in terms of cost impact. Use qualitative or quantitative measures to assign weight or importance to each.
Last, further break down each category. We call this sub-categorization. For instances, within a materials cost category, you can have subcategories like metals, plastics, and electronic components required.
Plotting is your next step in cost optimization. Create a pie chart to visually represent the percentage of each cost category in the BOM. The size of each slice in the pie chart corresponds to the proportion of costs attributed to that category.
Use a bar chart to compare the costs of different sub-categories. If you created the subcategories for materials, you can create a bar chart that shows the cost breakdown for metals, plastics, and electronic components needed.
You may chose a stacked bar chart to show the cost composition of different products or projects.
I personally recommend a cost trend line for Orange Electronics, which will track the trends of different categories in the BOM. This helps with identifying cost fluctuations and areas that may need to cost control measures.
A scatter plot with also help our friends at Orange Electronics because this will help visualize the relationship between different cost components. For example, they could plot the relationship between material costs of semiconductors and displays and the number of units successfully produced.
After categorization and plotting, you must analyze your cost structures. This is essential for making informed decisions to optimize costs and enhance profitability.
Regularly Review and Update
Monitor the BOM Process
Identify the key metrics that will help you assess the BOM performance.
Common KPIs (Key Performance Indicators) include product cost, quality, lead times, and supplier performance.
Conduct regular cost analysis to compare the should-cost BOM with the actual costs.
Track these variances to understand where cost overruns and savings are occurring.
Monitor the performance of suppliers in terms of cost, quality, lead times, and reliability. Are they meeting your expectations?
Implement a robust quality control process to ensure that components within the BOM meet quality standards.
Monitor rejection rates, defects, and any recalls that may affect the product’s quality.
By implementing monitoring and evaluation practices, you can maintain control over your BOMs performance and ensure that it aligns with your cost and quality objectives.
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ASK FOR THE COMPONENTS’ LEAD TIME!
When asking for the lead time of a component in the electronics industry, or really any industry, it’s important to be professional and clear. State your request clearly, “We are in need of the lead time for the following component: [component name or part number].”
Be specific, too! When you’re inquiring, be sure to include all of the components or part numbers and their descriptions.
If you have other questions, such as minimum order quantities, payment terms, or shipping options, include them at this stage. And, don’t forget to express appreciation for their cooperation. and providing the lead time information.
How accurate is should-costing?
The accuracy will vary depending on specific circumstances. It is extremely valuable as a method of cost estimation, but it should be used with the awareness of its limitations and with a commitment to obtaining the most accurate and up-to-date data possible.
Regular updates and adjustments are often necessary to account for changing conditions.
How to perform a should-cost analysis
If Orange Electronics wanted to run a should-cost analysis, here’s a step-by-step guide on how they should perform the analysis.
First, they would define the scope of the analysis. They need to determine whether they’re estimating the cost of an entire product, a specific component, or a group of components in the BOM.
At the second step, they would develop a comprehensive BOM structure that lists all the materials, components, and parts required for the product. This includes quantities, specifications, and part numbers.
Then, data will be collected on key cost drivers such as labor, materials, overhead costs, supplier costs, and quality control expenses. Benchmarking to the industry and competitors’ costs will give Orange Electronics understanding how they compare to market standards.
They will have to work collaboratively to categorize costs, estimate labor and overhead, analyze supplier costs, and assess the quality control and compliance costs.
Frequently Asked Questions!
What are some ways I can reduce BOM costs for my company?
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If I were to start the journey independently, what data sources provide the most accurate component pricing information?
Obviously, obtaining accurate component pricing information is crucial for cost estimation and management. Consider directly contacting authorized distributors and manufacturers. This is possibly the most reliable way to get accurate pricing information. Industry publications and reports are often published with pricing information, including trends and forecasts. There are custom MRP and ERP systems that will integrate with suppliers and provide real-time pricing data. But of course, contacting the supplier and having direct communication is what we at Lone Star Tech believe is the fastest and most accurate.
When you are seeking component pricing, it’s just good practice to use multiple sources to cross-verify prices and find the most competitive deals. Additionally, consider reputation and reliability of the sources you use, as accurate pricing information is critical for effective cost management in electronics manufacturing.
What is a Single Level BOM Structure?
A Single-Level BOM lists the components and subassemblies required to manufacture the product without including the components within those subassemblies. It’s a straightforward, one-level breakdown of the product’s immediate components, but does not detail the sub-components.
Imagine you are creating a Single-Level BOM for a bicycle:
- Frame of Bicycle
All the components are listed, but handlebars, wheels, seat, and brakes are not broken down into their individual components.