What Is a BOM (Bill of Materials) and Do You Need It? How to optimize production costs using BOM for consumer electronics.
By Vera Kozyr
Opinions expressed by Entrepreneur contributors are their own.
A BOM (Bill of Materials) is a list of product materials and a key document in the design and manufacturing of electronics. A BOM includes a list of electronic components and all constituent parts of the casing, supplied accessories, and a set of packaging materials.
Almost all developers, regardless of the brand's recognizability, want to reduce the product's cost. The more complex the product, the harder it is to keep track of all the components and stay current with the realities of the market. According to estimates, the cost of production of all iPhone 11 Pro Max components does not exceed 45 % of its retail price. The meticulous work of product managers and buyers has clearly contributed to the cost optimization of software development, R&D, marketing activities and, of course, has increased company margins. BOM optimization is important and necessary.
This review covers the basic techniques for BOM management and optimization.
BOM types
There are several types of BOM, and the most common ones are as follows:
EBOM – engineering bill of materials, which includes all the components and modules required to assemble the device itself. Packaging, accessories, etc. are excluded;
MBOM – manufacturing bill of materials, including packaging and all materials used in the assembly up to stickers and accessories included in the kit. It is common for this document to indicate the product's specific SKU. This document often has a clearly defined validity period, primarily for cost control and, in addition, for control/tracking of changes;
MEBOM – mechanical engineering BOM is most often a subsection of an EBOM focusing on mechanical elements of the device;
SBOM – sales BOM, a document with the fewest technical details and lowest overall level of detail. The sales team often uses FOB (free on board) price list and does not have access to BOM. The exception is large corporations and companies where sales departments are also responsible for cost optimization. No offense to sales teams, but practice shows that the less BOM data there is in a sales BOM, the lower the likelihood of possible internal data leakage.
The purpose of different BOMs is to provide departments with the minimum sufficient information for their work while ensuring maximum protection against any information leakage.
This article describes EBOM (engineering BOM) with a focus on electronic components.
Although MEBOM (mechanical engineering BOM, including everything from screws to casing) optimization steps are similar to those of EBOM, this topic is too extensive and deserves special attention. We will save it for further discussion in the future.
So far, it is enough to mention that the number of internal mechanical elements depends on the design, materials, strength, acoustics, electromagnetic compatibility, and a dozen of other parameters. By optimizing the device's mechanics, the developers try to strike a balance between economy and preserve the original concept of the device and its design.
Related: 3 Tips to Save Money When Creating Your New Tech Product
BOM management systems
BOM is information, and large amounts of information used by a large number of people require an information system. Importantly, BOM information is used not only by developers but also by specialists from procurement, logistics, and production departments and representatives of certification units and financial services.
Discussed below are the information systems ranging from expensive ones, with a cost of about $1000 per month per workplace, to systems provided for free. The cost depends on the functionality and integration into larger systems.
Related: The 10 Costs You'll Pay to Bring Your Hardware to Market
BOM optimization
1. Optimizing the list of device components
Consider an electric kettle as an example. An average BOM of a "not-very-smart" kettle comprises over 30 components. According to global practice, at least 20 key parameters, in addition to price, shall be tracked for each component.
The key ones are:
Brand
Manufacturer
Unique component number
Package multiplicity factor
Type of packaging for electronic components
Release date
End of production date
Technical specification
On the basis of the available parameters, we need to optimize the list of components to reduce the cost of production.
Let's start by reducing the list of components to a working functional minimum.
Experts term this process "unification." In this case, unification reduces the number of the product's unique components (SKU, stock keeping unit). As the number of unique components decreases, their total quantity may increase. In doing so, we aim to "shorten the list" by eliminating the purchase of new components from cost items. Decreasing the number of SKUs also reduces the demand for pick-and-place machine feeders or their number on the production line, affecting the cost of production.
Sometimes, to achieve the desired result, product characteristics are revised.
In fact, a kettle doesn't really need to have a display or Bluetooth. For example,
Res 1K Om – 2 (before, pcs/unit) => 0 (after, pcs/unit)
Res 100 Om – 3 (before, pcs/unit) => 3 (after, pcs/unit)
Res 500 Om – 3 (before, pcs/unit) => 8 (after, pcs/unit)
Total: 9 (before, pcs/unit) => 11 (after, pcs/unit)
The next step is to search for cheaper analogs.
First, determine the essential characteristics that affect the product quality and performance.
Look for components that meet the same requirements but are cheaper.
For example, sometimes metal body elements can be replaced with processed plastic. An increase or decrease in product weight can also be managed by using alternative materials. It's important to note that this parameter can also be important for logistics.
Once the "price/quality" balance is reached, proceed to managing the terms of delivery.
Related: From Prototype to Production: 3 Things You Need to Know
2. Delivery terms management
Price, prepayment, post-payment, regular shipments, discount terms based on purchase quantity – these are all delivery terms.
The final price of a part is affected by the purchased quantity.
As mentioned earlier, while reducing the number of unique components, we can increase the total quantity of components per item. As you surely deliver several orders per year, such manipulation will increase the total volume of annual purchases.
Suppose we have 4 components (Part 1–4) and, being buyers, need to negotiate more favorable delivery terms.
Part 1: Supplier 1 – Supplier 2 – Supplier 3
Part 2: None – Supplier 2 – Supplier 3
Part 3: Supplier 1 – None – Supplier 3
Part 4: None – Supplier 2 – None
If the price of Part 4 is high, we should try to get the best deal by combining Part 4 orders with Parts 1 and 2 and thereby increasing the total order quantity.
The second option is to combine 3 items by buying them from Supplier 3 and purchasing only Part 4 from the unique Supplier 2. This way we can negotiate a discount with Supplier 3 for a large order. And we can also place an order for the unique Part 4 component from the supplier that offers the best quality characteristics for this component compared to others.
In addition to the purchase volume, the distribution channel of components and the stability of orders are of great importance. Therefore, the next step is to determine the maximum annual consumption for each item.
Product 1 – 100 000 units per year – Part 1 - 16 pcs per unit => 16*100K = 1,600,000 pcs yearly
Product 2 – 180 000 units per year – Part 2 - 18 pcs per unit => 18*180K = 3,240,000 pcs yearly
4,840,000 pcs of Part 1 yearly as a result
It is common to calculate the annual volume in relation to finished products and update the annual purchase volume of each item according to the changes made.
When ordering several items from a large supplier, you can negotiate a discount based on the total volume instead of debating the price of a separate item and its delivery; that's when the unification step will prove its worth. Discount amounts can vary.
