Is your Bill of Material Process a Core Competency?

by Dave Garwood

Bills of material -- not a new topic! An old friend recently asked, "Are companies still struggling with this topic? We have been talking about bills of material since the early MRP days." The answer is yes. Many companies still struggle with keeping accurate, properly-structured bills.

Bills have always been, and will always be, an essential document for every department in a business. Family kitchens and fine restaurants have been preparing meals for years, yet recipes are still needed. Bills are the recipes for industry. As new products are launched and new engineers are added to the staff, the question of how to structure the bill and what to include comes up again...and again...and again. Unfortunately, there is no industry standard for structuring bills and yet, they are an integral part of how we cost, plan, build and service our products. We spend mega-bucks maintaining this critical documentation.

What is causing this resurgent interest in bill of material structuring? Several events are driving this continuing need for restructuring bills of material.

Five Drivers of the Resurgent Bill of Material Interest
1. Formal systems demand an accurate and properly-structured bill of material. For decades, most companies used an informal system, frequently dubbed "shortage/expedite" system, to get parts and material to keep production going. They pulled material from the stockroom, staged the orders to discover shortages, made a "Hot List" of the missing parts and expedited until the shortage was filled. A correct bill of material was not so important with this informal process. Tribal knowledge ruled. The expeditors depended on their own bill and visible shortages. Today, many companies use the bill in an ERP system to calculate future requirements, predict shortages and schedule orders to avoid shortages. Flying the plane with instruments demands accurate instruments. Flying with leather helments and wind socks does not. Some companies also use the bills to "backflush" and deduct inventory records. These formal systems depend on good bills. Bad bills will cause bad results. They have to be accurate and properly structured with formal systems.

2. New concepts such as lean manufacturing, JIT and others have created the need to restructure bills. For example, as material flows are simplified into work cells or focused factors or flow lines, levels in the bill can be removed. The bills can be flattened. Bills that were correctly structured yesterday are not correct today when manufacturing processes are streamlined.

3. As one burger palace commercial said, "we want it our way." Customers demand products with more features and options to meet individual customer needs. The potential combinations of these options causes the number of end items or SKUs to explode. This requires a totally different look at how bills are organized. Creating a SKU or catalog number for each end item becomes impractical. The bills need to be reorganized or modularized. Tools such as configurators to create end item bills for each customer order become essential! The organization of bills becomes radically different when competitive pressure requires many more features and options and the ability to do mass customization.

4. Competitive pricing pressures have driven the need to eliminate unnecessary cost activities. Structuring bills is a process. A low quality process will cause high costs. A high quality process meets the expectations of these internal "customers." Who are the bill customers? Almost every functional department. Maintaining multiple bills for engineering, manufacturing, costing, etc. becomes a prime target for cost reduction. A single company bill of material will nuke the unnecessary costs to keep multi bills! One bill for everyone means understanding and meeting all of their expectations with one bill data base.

Other wasteful, costly activities become necessary when bills are not properly maintained. Costs are wrong and bad decisions are made. Order entry errors occur and have to be corrected. Material shortages pop up. Inventory records are wrong. Product Service gets the wrong parts. Customer delivery dates are missed. And many more symptoms drain The P & L as these mistakes are corrected. A high quality bill of material process, including an effective change control process, is essential to avoiding these costly mistakes.

5. The term "engineering release" is obsolete. We cannot afford the bill to be sheltered in engineering until they are ready to let the rest of the organization have a peek (or release) at it. If the other internal bill customers find problems with the bills, they must be discovered early and be corrected before we go to market. Getting to market faster with new products doesn’t allow time for recalls, warranty claims, retrofits, production delays, etc. This means the bill must be debugged during design, not while the product is in the customer's hands or during initial production runs. The bill must be used to order prototype and initial production run material. All materials that will eventually be required are often not simultaneously known during these phases. Yet lead times require them to be ordered before the bills are complete. This means the bill "evolves", i.e. it is made available to the organization in "partial releases." The bills need to be visible before they are complete. This approach doesn’t fit the old paradigm of engineering completing the design and having a 100% complete bill before it is "released." The bill process must accommodate this evolution of the bill approach during the design phase.

Product life cycles are getting shorter and shorter. This means the frequency of new product launches is higher and the ability to use bills before they are complete is more critical than ever.

Bills of Material as a Competitive Weapon
Core competencies that separate a business from the competition are not always in the technology of the product. Sometimes it is in the way we run the business, i.e. business processes. eBay, Dell Computer and Federal Express are few examples. Product technology can often be purchased or duplicated. The ability to effectively manage a business to meet customer needs cannot.

The ability to quickly customize products, avoid unnecessary costs, respond quickly with short lead times, launch new products without costly delays and have the right materials at the right time without warehousing excess inventory can be a real competitive advantage. Maintaining properly structured, accurate bills of material during this constantly changing business environment is an essential element to meet this competitive goal. Does your bill of material process have this capability? Is it a core competency?

Better find out how to make it one before your competition does!