Companies frequently expand their product portfolios, catering to individual customer segments or seasonal trends. They do this by creating multiple variants of existing and new products. Through a detailed bill of materials (BOM), they keep track of the materials required and the proportions needed to make the latest product or variant.
A BOM is a detailed list of the raw materials, ingredients, components and assemblies, along with the required quantities or recipes, for manufacturing an end-product.
Products with similar functionalities or features have a high potential for standardization. However, when developing a new product, manufacturers often introduce new ingredients and components without considering whether they already exist in the company’s ecosystem. The consequence is that multiple BOMs are created, resulting in hundreds of millions of dollars in additional annual costs.
When a company adds products and variants to its portfolio, the number of BOMs it manages increases. Many BOMs, if not scientifically managed, can lead to massive inefficiencies. One could even argue that many symptoms of operational inefficiencies in manufacturing, such as excess and obsolete inventory, high procurement costs and complexities in warehousing, are all the result of improper BOM management.
Product variants often share 80% to 90% of their ingredients or components. Yet production costs between variants can vary drastically. Because they cater to a similar price point, the margin of one variant can be far less than another, simply because of a minor change in its BOM.
A well-known manufacturer of fast-moving consumer goods (FMCG) had many variants in its detergent portfolio catering to different market segments. A closer look at the production cost, however, showed similar products serving the same purpose, segment, and fragrance — yet the cost of producing one variant was 33% more than another. The most significant contributor to this difference was the raw materials used. By simply consolidating BOMs, the company identified opportunities to reduce 8% of material costs — translating to $120 million a year.
Complexities in Inventory Management
Due to sudden supply shortages, companies sometimes develop an alternative BOM, and use that for generating material requirement (MRP) and procurement plans. However, this leads to unnecessary complexities.
The Indian arm of a Europe-based automobile manufacturer had to generate alternative BOMs due to COVID-19-related supply shortages of a gearbox assembly. The company found alternative suppliers, but some had minor production variations, while others supplied only parts for the gearbox. The company addressed the problem by creating multiple BOMs for the same vehicle variant. It was a recipe for manual error.
The first error manifested as an improper BOM configuration. When the supply of gearboxes stabilized, the MRP read from multiple BOMs for the same variant, and recommended more procurement orders for the gearbox assembly. Not only did this lead to higher procurement charges, but store management became more complex as well, leading to the second manual error. There were multiple instances of wrong gearboxes moved to the assembly line due to the increased number of units to manage, resulting in further line stoppages or heavy amounts of rework. This directly impacted throughput, with the line consistently missing its production targets and experiencing a 5% increase in labor and overhead.
By eliminating just three of the additional BOMs, the company saved $1.5 million a month in procurement charges, while also greatly reducing the man-hours needed for rework.
MOQ and E&O
Non-standard ingredients and can’t be used in any other product. Often, they have a minimum order quantity (MOQ), leading to excess or obsolete (E&O) inventory.
A U.S.-based food manufacturer had to procure a specific coloring for a variant of a seasonal beverage. The coloring could be used in just one product in its entire portfolio. The vendor was based in Europe, and the MOQ was high. At the end of the season, the manufacturer had almost $1 million worth of the coloring agent that had to be scrapped. Had the company used standard food coloring from its global portfolio of BOMs, it could have avoided excess inventory and the higher procurement cost.
Expanding BOMs is inevitable for a company to grow. However, having too many can mean increased inefficiencies. The way forward is to hold a diverse portfolio, while ensuring that BOMs are standardized to the greatest degree possible.
It’s also imperative for companies to keep initiating BOM standardization projects at regular intervals, to remove non-essential ingredients and components from the purchasing matrix.
Rationalizing the BOMs
BOM rationalization can be achieved through a two-pronged approach:
- Consolidating recipes, by identifying BOMs with similar ingredients or parts and composition. Then, determine the optimal blend to replace multiple varieties with a single low-cost BOM that fulfills the purpose.
- Formulation deep-dive, by comparing BOMs to identify ingredients or parts that are driving cost or have no reusability. Then, identify alternative ingredients to reduce the overall material cost.
BOM and formulation comparisons should be done at the lowest granularity possible, not just at a cursory material group level. Manufacturers should consider the specifications of parts and materials used, and quantities consumed. A good similarity at the lowest granularity ensures high confidence while replacing a BOM.
It’s important to understand and include all business rules during comparisons, to ensure better rationalization decisions. Missing business rules can alter BOM suggestions and incur higher supply chain costs.
When introducing new BOMs, care must be taken to maximize the number of standard parts used. And, once BOMs and formulations are standardized, it’s imperative to perform audits regularly, or else inefficiencies may creep into the system. Retiring certain BOMs created for temporary use can drastically reduce the number to be managed.
The Role of AI and ML
BOM rationalization is easier said than done, especially considering the large number of parts and materials or number of BOMs to analyze. Artificial intelligence and machine learning can parse hundreds or thousands of BOMs to help businesses identify similarities. With the addition of business priorities such as cost, regulations and feasibilities, the number of BOMs to be consolidated and rationalized can be narrowed further.
Across industries, be it FMCG, medical, or automotive, companies with a vast, diverse product portfolio need to manage BOMs for each product and variant. Rationalization and material standardization can help to significantly reduce costs and release working capital. AI and ML can enable companies to better manage BOMs and standardize materials, components and ingredients, reducing overall supply chain costs and improving operational efficiency.
Anirudha Deshpande is director, supply chain; Sudarshan NR is manager, supply chain products; and Aninda Das is manager, supply chain, with Tredence.