An increasing number of clients have been asking us questions about the Bill of Materials (BOM). But what is it, and why is it so important?
What is a Bill of Materials?
BOM is a list that provides all the information on the components, materials, and accessories that goes into the production of the final product. A BOM not only gives you a clear picture of the raw materials that go into the finished product, but it also helps you track the progress and evolution of your manufacturing project.
The rising concern about BOMs makes sense. As costs go up, and quality issues become less tolerable, the BOM is the first thing managers look at to find solutions.
Why should you obtain the Bill of Materials in China?
While knowing one product's BOM are commonplace in the West, that is not the case in China. However, as someone buying goods from a factory in China, it is even more crucial for you to get your hands on the BOM because of the questionable practices at some factories.
Access to this document can reduce costs and increase profits in 2 main ways:
1. Increased cost transparency and competitiveness
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.
If your company has some market power and can negotiate for an open BOM, you should definitely push for it!
There are 2 reasons why Chinese suppliers resist 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 suppliers, especially if they only do assembly & packaging operations and don’t add a lot of value in the supply chain.
- Cost transparency would give the buyer an indication of the manufacturer’s cost and profit margin. The buyer can then question the supplier’s operations and its associated costs.
This attitude comes with a number of downsides, including:
- No visibility of costs, and no way to challenge price increases.
- No visibility on environmental risks in the supply chain.
- No specific information on using components. In fact, few Chinese suppliers provide a Material Safety Data Sheet (MSDS) unless explicitly requested.
- High risk of ‘bait & switch’, e.g., the mass-produced product is made with cheaper, subpar batteries than the prototype.
- Difficulty in fixing many issues – in our experience, the majority of quality issues were, in part or totality, from the component suppliers. Quality can only be improved by the involvement of these suppliers.
2. Ensure high-quality, cost-effective sourcing
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 often keep these spreadsheets extremely private as they may be receiving some form of kickback from suppliers. They may be so protective of it that if you introduce an Enterprise Resource Planning (ERP) system, they will do whatever they can to sabotage the whole implementation.
Another reason to check your BOM is to detect poorly done sourcing. When purchasing decisions are based on kickbacks, incoming quality control issues are not considered in the procurement process. You can then end up with a terrible set of suppliers.
Fortunately, checking a bill of material against market price is not difficult, but you need to make sure to take into account the following:
- Yearly quantity,
- Average order quantity,
- Quality standard,
- Other special requirements.
After this, it is a simple market research project, but it can sometimes yield some very uncomfortable findings. Some companies even have an off-premises “shadow sourcing cell” that regularly challenges the purchasers. It keeps them on their toes and ends up saving a lot of money – often more than 5% of the total purchasing costs.
The importance of knowing your suppliers
As I explained above, knowing your BOM is critical. Some suppliers may distort information, so you need to make sure that you have a BOM with all the actual materials you want in your product. For more information on creating a BOM, check out this video walkthrough by Sofeast.
CMC’s founder and CEO, David Collins, shared that in his experience, one of the most significant benefits of having your own BOM is that you know your suppliers, which then helps you answer these questions:
- Are you in control of the BOM?
- Are you getting the best price on the materials of your BOM?
- Is the supplier on the BOM for that critical component the best supplier?
Companies that outsource manufacturing to a “partner” often come to us because they are receiving poor quality products. The problem generally is their approach as ‘traders’ in their market – they feel they can simply change suppliers if they believe one is not good. This may be products that have multiple suppliers, but what if you are at the mercy of the supplier for specific products?
Unless you are willing to go to the factory and control the manufacturing process yourself, you will need to know the sub-suppliers that are involved in making your product. Each supplier effectively determines the quality of your final product.
As a buyer, you need to understand this and be involved in selecting the right suppliers. By being involved, you will create an atmosphere of accountability. You can even ensure that the standard is upheld by hiring consultants or quality experts to make sure your products meet your expectations.
While your price may be good, your total cost will often be terrible if you do not control your BOM. Working to make sure you know your product, and ensuring it is good, is the most important part of getting a product that is satisfactory in cost, quality, and timeliness.
Have your say
Why don’t some customers insist on getting the BOM of the Made-In-China product they are paying for? Have you experienced a reluctance from suppliers to provide the BOM or the risks associated with the lack of a BOM? Let us know your thoughts below.
Looking to decrease costs associated with procurement? Check out CMC’s complimentary presentation on ‘How Your Procurement Policy Might Prevent You From Cutting Costs'.