Clients have asked us more questions about BOMs (Bills of materials) in the past 6 months than in the 2 years prior.
In this post I'll explain why you need to know what's in the bill of materials...
Let’s look at two very common situations with bills of materials
The rising concern about BOMs makes sense. As costs go up, and quality issues become less tolerable, the bill of materials is the first thing managers look at in order to find solutions.
Have you encountered either of these following situations with a bill of materials?
1. Companies are not given the BOM of the products they buy from their Chinese suppliers
If your company owns a product design’s IP rights, and if you pay for a product’s manufacturing, you should know the list of its components, their prices, and the corresponding sub-supplier names. At least that’s the norm for many companies in the West.
It should be in the terms requested by the buyer. If your company has some market power and can negotiate an open bill of materials, you should definitely push for it!
There are 2 main reasons why Chinese suppliers resist it things being more open and transparent:
- Chinese suppliers want to ‘hook’ their customers, and make it as difficult as possible to switch to a competitor. Naturally, knowing the names & prices of the sub-suppliers makes it easier to switch, especially if the supplier only does assembly & packaging operations and doesn’t add a lot of value in the supply chain.
- Transparency on costs would allow the buyer to know how much of the price goes to their operations (which are often primarily labor) and profit. It gives a lot of power to the buyer who can question why the supplier needs so much space, so many indirect workers, such a high margin, and so forth.
Now, what are some of the downsides of this attitude? Here are a few that come to mind.
- No visibility of costs, and no way to challenge price increases. That’s an obvious one.
- No visibility on environmental risks in the supply chain. (We wrote about this before in this simple case study.)
- No precise information on the components used. For example, few Chinese suppliers give a MSDS (Material Safety Data Sheet) unless very explicitly requested.
- High risk of ‘bait & switch” – what we have seen is a prototype made with batteries from bad suppliers and production made with much cheaper batteries that would not have passed the tests in the lab.
- Difficulty of fixing many issues. More than half the quality issues we have been working on were coming, in part or in totality, from the component suppliers. These suppliers need to be involved in the process of improving quality!
2. China-based factories have suspicions around their products’ BOMs
More precisely, top managers have suspicions about kickbacks from suppliers to the purchasing staff. This is so common, I guess I should not elaborate on this.
We have seen a number of factories where even the general manager does not know the BOM of his factory’s productions. The purchasing staff keep it in their own Excel files and do not want to share it. Introduce an ERP and they will do whatever they can to sabotage the whole implementation.
Another reason to check your bill of materials is to detect poorly done sourcing. The engineering manager pushes for his cousin’s components to be purchased, the purchaser awards business to the supplier that gives the highest kickback or to the one that is easiest to deal with, the incoming QC problems are not fed back into the procurement process… and you end up with a really bad set of suppliers.
Fortunately, checking a bill of material against market price is not difficult. Make sure to take into account:
- Yearly quantity,
- Average order quantity,
- Quality standard,
- Other special requirements.
Some companies actually have a “shadow sourcing cell” that is located off-premises and regularly challenges the purchasers. It keeps them on their toes. It ends up saving a lot of money – often more than 5% of the total purchasing costs.
Have your say...
Have you seen these types of situation, and the risks I described? Why don’t customers insist on getting the bill of material of the Made-In-China product they are paying for?
Share a comment below and we will make sure to respond.