Your ERP system may have more BOM functionality than you think
All full-function ERP systems have a BOM (bill of material) module but not every company that has a BOM module uses it to its best advantage. This is the first of two articles to address the problem. This first one looks at the range of functionality available, and the second one looks at how such functionality can be used to help solve common business problems.
One problem is that many companies believe BOMs to be just parts lists, which they can be with simple products that have very short production lead times, or items produced in process industries where everything comes together pretty much at the same time.
But the terms 'parts list' and 'bill of material' are not synonymous and companies that believe that they are, are frequently missing out because properly structured bills of material can:
- reduce raw material and work-in-progress (WIP) stocks
- reduce production lead times
- reduce delivery lead times (not the same thing)
- reduce BOM maintenance workload
- improve BOM accuracy.
To understand how these things are possible, this first article discusses the available different types of BOM; namely:
- production BOMs
- phantom BOMs
- planning BOMs.
Some would argue that 'design BOMs' should also be on the list but, as these are rarely held in ERP systems (they are usually held in a CAD system or equivalent) they will not be considered here.
These are the bills of material that most people think of when discussing BOMs; so do not need to be described in detail here. Except to say that, although the purpose of a BOM is to define the materials that go into a particular product or item (and its structure), companies can usefully ask themselves whether low-value shopfloor consumables, such as staples and washers, should be included or whether these should be managed simply by reorder point (ROP) control.
There may be costing implications when doing this, so the matter will be discussed now in the phantom BOMs section.
When used for manufacturing items that contain sub-assemblies, a production BOM identifies these within the overall BOM so that the necessary works orders can be raised for their manufacture. For example, product A is made from sub-assemblies B and C, which are in turn made from raw materials or components D, E, F, and G.
That requires works orders to be raised for the manufacture of items A, B, and C. But it may be that, although the company wants to structure the BOM in this way so that the makeup of Product A can be seen and understood, it doesn't feel that raising a works order for sub-assembly B is worthwhile.
This is perhaps because, when it is assembled, it is immediately consumed in the manufacture of the A, and carrying out transactions to book it into stock and out again would add no value. So, sub-assembly B is declared to be a phantom (so-called because it is only seen fleetingly).
Now works orders are still required for A and C, but not for B, and the materials pick list for product A calls for assembly C from the warehouse along with items D and E. This is the intended, and still primary, use of phantom BOMs but people who understand them can use them for other purposes.
In the previous section, on production bills, it was mentioned that many manufacturing companies use many low-value items such as staples and washers. From a production viewpoint, it usually makes sense to treat these as consumables. But if a company's costing department wants these to be listed on the bill (some low-cost items can have a disproportionate effect on standard costs), it can be hard to justify the time spent entering a large number of items into a bill when they cost pennies.
But adding these items to a 'consumables' phantom BOM and then calling that phantom onto multiple product BOMs massively reduces the workload. Even when the items are not penny items, the same approach can be useful. Imagine that a company makes items that, for dispatch, are bolted to a pallet and shrink-wrapped.
If a 'packaging' phantom is created to hold the pallet, the nuts and bolts, the shrink wrap, and any other common items, then that phantom can be added to multiple product BOMs as one item and not several.
Production bills represent a particular product and normally, if products differ, they require different part numbers and bills of material. So, for example, a manufacturer of washing machines will have a different bill for each model in their range. But what of an automobile manufacturer?
A particular model will come with a range of options for body style, engine size, color, gearbox, trim, etc. Together, there are potentially thousands of different permutations, and having a different bill of material (and part number) for each would be impractical.
When it comes to building individual cars, each has to have its build specification but, for medium and long-term planning, demand forecasting is only practical at a family (model) level, and this is where planning bills come in. An individual car will have a specification that defines each of the options previously mentioned but a planning bill needs to hold all the options.
When considering the engine, instead of just saying that it requires an engine, it will hold all of the engine choices along with the predicted percentage requirements for each. For example:
- 1.0 liter – 20%
- 1.5 liter – 50%
- 2.0 liter – 30%
That also means that demand forecasting is much easier (and therefore likely to be much more accurate) because all that is required is to forecast the total number of cars and the percentage split of each option. If total sales in a given period are forecast to be 1000, then MRP will see demand as:
- 1000 x 20% = 200 1.0 liter engines,
- 1000 x 50% = 500 1.5 liter engines, and
- 1000 x 30% = 300 2.0 liter engines.
Likewise; it can look at predictions for body style, gearbox, trim specification, paint color, etc, and generate purchase and manufacture requirements for these. How all the options are bolted together for any individual automobile is not, at this stage, important.
All that is required is to know that the supply chain is geared up to supply broadly the right amount of each item. Although the forecasts can never be 100% accurate, they don't have to be, as a small amount of buffer stock in the system will help cope with any short-term variance.
With these definitions of bills of material established, the next article will look at how they can produce the benefits previously claimed.
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