How to best use the Bill of Materials in your ERP system 

For manufacturers, the Bill of Materials (BOM) is a set of instructions that drives their business. The accuracy of the BOM is critical to ensure a profit is made and sufficient inventory levels are maintained. If the BOM is inaccurate, products will not be assembled correctly, leading to lost sales and customer dissatisfaction. Therefore, businesses must build and manage their BOMs to ensure none of these problems occurs. 

Developing and maintaining a bill of materials 

An engineer and a cost accountant typically create a bill of materials (BOM). The engineer is responsible for defining the quantities and routing — the product manufacturing steps. It can initially be at a high level, while the cost accountant must provide values for each item listed on the BOM. These values include labour hours. 

The cost accountant is in charge of assigning costs. Prices usually need to be reasonably precise, but there will be times when some fee buffering is required to cover unnecessary things. Once the product specs are finalized in the BOM, it is for the cost accountant’s job to handle. The role of the BOM is more critical because when a production job is running, the BOM details are put into the position. 

At the end of the manufacturing process is running, an enterprise resource planning (ERP) system should be able to compare estimated costs, materials and labour of the job with actual values. The cost accountant should monitor variance, and if there is a significant variance constantly, then an engineering change request can be requested to review and change the BOM. 

The review process is essential in ensuring the BOM’s accuracy and profitability. 

BOM confidentiality 

The bill of material is the recipe for a product. As such, it should be kept secure and confidential. It is the secret sauce. Only the engineer who has access to material quantities and routings, and the cost accountant who can see material quantities and values, should have full access to the BOM. 

In some cases, the BOM can be disclosed for regulatory reasons or to provide customers with quality information. However, it is usually done at a high level, and only overall costs are disclosed. 

An ERP system can restrict bills of materials (BOMs). For example, cost information might be available only to those who have permission to access a particular BOM or perhaps only to managers. Other fields, like part names and quantity, are generally visible to all users in the system. Depending on their permission level, users can see different elements of the BOM. 

When a BOM is updated based on customer feedback or product revisions, the engineer must request approval from management. Management will approve the request once all changes have gone through quality control. The new version of the BOM is then secured and released to all interested parties. 

How detailed should a bill of materials be? 

In many manufactured goods, some parts are too minor to warrant tracking in the bill of materials. These components can be classified as shop floor items, which can then be allocated a percentage cost in the statement of the material. As needed during production, shop floor items may be taken from inventory as they’re used and replenished as part of standard Kanban replenishment procedures. 

Use phantom items to reduce complexity in a bill of materials (BOM). A phantom part is a set of components included as a single unit within a BOM. When a production process job is done, the phantom part disappears, and its sub-items are included in the job. 

Accuracy is important. 

An accurate bill of materials (BOM) and a precise production schedule and sales orders or forecast demand are critical components in determining material requirements. If the BOM is inaccurate, this can create severe problems for requirements planning. For example, if each element is 89%, the overall requirement accuracy (BOM x Schedule x Forecast) is about 65%. However, the calculation means that 42% of items procured for production will go wrong. That has profound profitability implications. Therefore, the need to have an accurate and precise production schedule can raise the accuracy of the requirements plan even if its forecast is not entirely correct. 

An inaccurate Bill of Materials can adversely affect the rest of the business. 

• production time can be affected by the quality of workers, 
• Orders may not be fulfilled on schedule. 
• Which impacts customer satisfaction negatively; 
• Inventory mistakes can lead to waste and loss of money. 

Accounting packages are not always appropriate for manufacturers. 

As a manufacturer’s business grows, it’s accounting often moves from traditional spreadsheets to an accounting package. But such packages often fail to keep pace with the dynamic demands of manufacturing processes and products. 

Accounting software can keep track of inventory, but it’s only as accurate as the information you enter. Manufacturers who use accounting software are constantly doing stock counts to confirm the accuracy of the data in their ledgers and to ensure that they have enough parts on hand for manufacturing and procurement purposes. 

The value of a bill of material (BOM) 

Building a bill of materials is a time-consuming task when manufacturers implement an enterprise resource planning (ERP) system, as it requires the work of several individuals. However, manufacturers can reap significant benefits from its implementation once the value covers this initial cost that the BOM brings in terms of improved inventory management, production timing, costing, and customer satisfaction.