Operations Management

Bill of Materials

Written by Andrew Goldman for Gaebler Ventures

Bill of Materials are extremely important for tracking the cost of your product. In addition, they can be used to plan for material procurement while reducing the possibility of errors.

Depending upon the nature of your business, you may offer one product or service or a variety.

In either case, if you create something to sell to the customer, you need to purchase parts and materials to complete the product or service. For every individual product or service you create, your company should have bill of materials on file, containing all the pertinent information.

This may seem overly formal for your small business, but it's not too hard and it's extremely important. Proper Bill of Materials will help you with MRP as well as pricing models.

Most small businesses do not have MRP software planning and purchasing their production. For most small businesses, advanced MRP software is not necessary, but the concept behind these systems is crucial for any sized business.

The MRP software takes forecasted demand and plans out all purchases of necessary equipment based on the bill of materials in the system. While you do not have a computer program, your operation follows many of the same steps. Your team creates a forecast, and materials and labor are planned to meet that expected demand.

A bill of materials will help you more accurately order the necessary amount of raw materials and labor. You can create the bill of materials using Microsoft Excel or similar program. The BOM should contain all of the materials required to make the product, including expected labor. If there are service parts (drill bits, glue, scissors) that are required, they should be included as well. Be as detailed as possible when creating these documents, they are the genetic makeup of your products.

If you've created the document using Excel or similar, you can set up the BOM to calculate exactly how much should be purchased for an individual forecast. For example, you would want a cell where you could fill in the number of forecasted demand, and another column next to the materials that would calculate how much of each material is required to complete the expected demand. Using a computer calculator greatly reduces the amount of errors that can occur with an informal ordering system. It is still up to the individual to make the purchases, but the calculations become faster and easier. It is also important to include a waste factor (as a %) to create a buffer when purchasing if waste is expected.

Including the purchasing price of material and labor is another key component of your bill of materials. By including this information, you can use your BOMS as pricing models as well. Your purchasing department should continually update the costs of materials as they increase.

The rollup calculations will be automatically handled by the computer and update the total cost of your product. A company that is not utilizing this system may have increasing material prices and not realize it. By having a system that contains all this information, you will be completely up to date with the cost of your product and your profit margins.

Depending upon your product or service, get creative with your bill of materials. You can create the document that works best for your company. The key is to contain all the information related to the product and allow the document to be updated. By having these documents in place, you can plan your operations like the larger companies, and at a fraction of the price.

Andrew Goldman is an Isenberg School of Management MBA student at the University of Massachusetts Amherst. He has extensive experience working with small businesses on a consulting basis.

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