What is a Bill of Materials?
Wikipedia defines a Bill of Materials (BOM) as a list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, parts, and the quantities of each needed to manufacture an end product’. The end products are often referred to as the ‘finished goods’. There are generally three types of Bills of Materials.
An Engineering Bill of Materials (EBOM) defines the design intent of the product and is often based on a CAD drawing.
A Manufacturing Bill of Materials (MBOM) is all the materials used to create the end product including packaging items.
A Sales Bill of Materials (SBOM) is a list of items as they are ordered.
The Manufacturing Bill of Materials is normally the one referred to as a Bill of Materials or BOM. It is also referred to as the formula, ingredient list, or recipe.
A Bill of Materials forms part of the MRP (Material Requirement Planning) system, which in turn is normally part of an ERP (Enterprise Resource Planning) system.
What is the Structure of a BOM?
A BOM is normally hierarchical in nature, with the end product at the top and the list of raw materials listed below. This is referred to as a single-level BOM. If the manufacturing process is more complex, the BOM will be made up of several levels or sub-assemblies, each level having its own BOM. These levels assist with identifying the main components of the BOM and organising all the raw materials into different groups. This is referred to as a multi-level BOM.
Typically each item within a BOM will contain, at the very least, this information:
- Stock Code or Part Number
- Description of the item
- Quantity required
- Unit of Measure
What is the importance of a BOM?
The Bill of Materials is used to ensure that the correct raw materials and components are used in the manufacturing process as well as the correct quantities. Linking to an Inventory Control System gives information on raw material availability, information on purchasing with supplier details, prices, and lead times. This information can also be used to provide realistic delivery dates to the customer.
Having an accurate Bill of Materials can help reduce stoppages due to stock shortages and increase the efficiency of the manufacturing process. Many businesses make the mistake of having too much stock which ties up precious cash resources, or too little stock which impacts the manufacturing process and results in lost sales and time wastage. An accurate BOM can greatly assist with managing this balancing act.
Having a BOM means that the cost of manufacturing the end product can be carefully established and monitored. The impact of price fluctuations can be immediately established as well as the cost implication of needing to substitute raw materials. The BOM can also take into account any wastage that is part of the manufacturing process. Additionally, the cost of labour can be incorporated into the BOM.
In a manufacturing business, one of the major expenses will be the cost of materials. On the financial statements of the business, it will be crucial that the material expenses are accurately represented, and having accurate BOM’s in place can ensure that this is achieved. Essentially this gives an accurate Cost of Sales (COS) value, resulting in an accurate Gross Profit (GP) figure. Furthermore the value of the stock (inventory) holding can be accurately calculated.
Having accurate BOM’s will result in an accurate costing system.
An Example of a Bill of Materials.
A company manufactures apple fruit pies. A simplistic Bill of Materials might look something like this:
|2||Tin Foil Case|
|2||Plastic Cover Film|
Obviously, there will be the exact quantities of each of the ingredients and also baking and labour costs that would need to be added. This is a very simple example of a multi-level BOM where the finished product is made in stages.
Advantages of a Bill of Materials software system
As mentioned, a Bill of Materials forms part of an MRP system, which, in turn, is part of an ERP system. This means that it forms part of an integrated system. By creating accurate BOM’s, when a customer sales order is captured into the system, the raw materials required to fulfil the order will be flagged and any shortages will be quickly identified. This allows a realistic delivery date to be provided to the customer. Sales orders can be grouped to work out efficient production schedules and the necessary purchase orders to suppliers can be generated. Any variations in the cost can be highlighted. A production schedule with a detailed list of all the raw materials and the quantities required can be issued to the warehouse or stock room. The packaging materials required can also be itemised and issued from stock. These issues then update stock levels so that later sales orders use the accurate available stock levels to check raw materials and packaging required. Once the manufacturing process is completed, the sales orders can be converted into delivery notes and/or sales invoices. All the costs and materials used in this whole cycle are fed into the financial figures, enabling the business owner and managers to monitor profits and efficiency.
Omni Accounts offers a comprehensive Bill of Materials module which forms part of its fully integrated ERP (Enterprise Resource Planning) system functionality. It is suitable for all types of businesses and has no restriction on the number of levels of a BOM.