The survival of many hardware companies depends on their ability to optimize their product’s Bill of Materials (BOM) cost.
After receiving your BOM (Bill of Materials) quotation from your contract manufacturer you might realize that you underestimated the costs, but don’t panic.
These are the 3 steps to follow to optimize your BOM cost.
Table of Contents
1- BOM COST OPTIMIZATION – CATEGORIZE AND PLOT
In the same excel sheet where your BOM cost is,create a new tab and plot a graph.
What you’re trying to achieve here is creating a custom summary view,better than the one the factory sent.
The graph should show your BOM divided by categories, as detailed as possible, and show the percentage it represents out of the total cost.
Your categories will be variation of
- Off the shelf parts
- PCB parts
- Custom Parts
- Fastener Parts
- Packaging
- Electronic Parts
- Mechanical Parts
- Resign Molded Parts
Your graph should look something like this
2- BOM COST OPTIMIZATION – FOCUS ON THE TOP 20%
Now that you have a visual breakdown of your BOM (Bill of materials Cost) focus on the most expensive components and parts.
Using the 80/20 rule, this concept is commonly used in the supply chain, it states that 80% of inventory cost is in 20% of the high volume inventory.
Most of the cost of your BOM will be allocated in those few but sensitive components and parts, it’s here where you have to find a way to cut costs without decreasing quality nor affecting product functionality.
Pro tip: Sometimes companies design a very elaborate packaging to give users the best unpacking experience possible, if this is your case,then perhaps going for a simpler packaging will give you a considerable BOM reduction cost.
3- BOM COST OPTIMIZATION – CONSULT WITH A TEAM OF EXPERTS
As we mentioned above, the costly components of your design will be the sensitive electronic and mechanical parts of your product.
You’ll need to find equivalent components that meet design requirements, change PCB designs or change mechanical designs.
If there are components that are really expensive, check with your hardware and firmware engineers to see if there’s a chance to replace them for more affordable ones.
Change large components for smaller ones.
If your PCB has 10 layers, then talk to engineers to see if it’s possible to reduce the number of layers.
If your mechanical design includes 10 moving parts, can you make them 8?
These are all decisions that you have to make together with a group of experts in manufacturing, including the factory to make sure anything new you design is something they can manufacture.
Whatever change you do, make sure product design and requirements are not compromised.
ORGANIZING YOUR BOM FOR QUOTATION
Knowing how to put together a BOM for quotations can be the key to finding the right manufacturing partner or stalling your project for months.
To get a reasonable quotation, you need to put in some work.
You don’t want:
- Buzz-off quotes (expensive quotes to make you go away as manufacturers don’t take you seriously because of your poorly structured BOM)
- low-ball quotes (rough low estimate to get a conversation going, invariably followed by some: “oh, but we didn’t understand you want the unit to …”)
You need to craft a well-researched Bill of Materials to get a manufacturer’s attention.
We ignore around 40% of the Bill of Materials quotations we get, pretty much because they’re not professional; it makes a company look like rookies who don’t know what they’re doing.
Try putting yourself in the shoes of the electronics manufacturer.
You open an email with a subject line like Quotation for Product Manufacturing, and somebody tells you:
Hello, I want to manufacture this product at the cost of $x/unit, this is the Bill of Materials, please give us a quotation for 1000 units.
And the bill of materials list you get is a few or many parts without much or any additional information.
For the manufacturer, there are still going to be many questions floating around.
Preparing a budget on the cost of development and units requires a lot of research and discussion to determine the best architecture, the best value for money parts, etc.
And statistically, only a small % of new ventures make it into production.
After quoting three duds, the cooperativeness of the say five key vendors we need to engage with for a project will go down a lot; we can’t afford to burn bridges with our favorite trusted suppliers.
Nobody wants to waste time and annoy key suppliers doing a BOM quotation for a company that doesn’t seem serious.
BOM STRUCTURE Q
The best BOM structure includes a column with the manufacturer’s part number for the component or product part.
If you’re looking for a swift response and avoiding wasting time with back and forth emails, make sure your BOM structure includes a column for the manufacturer’s part number.
If you do so, anyone who receives your BOM and is in charge of making a quote will appreciate it and give you a very realistic quote.
BOM STRUCTURE BREAKDOWN
- Off the Shelf Parts
- Custom made parts
- Fasteners
- PCBA components
- Packaging Materials
Some people refer to a BOM as the blueprint of a product, and that’s correct.
That’s why a Bill of materials must include every component and part necessary to bring the product to life.
Simultaneously, a BOM list will be vital throughout the product development process, from procurement and production control to logistics and inventory management.
TIPS ON BUILDING A BETTER BOM
1. NEVER SEND A BOM AS A PDF
When making quote requests, make sure you send your Bill of Materials in an excel or Google sheet.
This allows the manufacturer to grab the data and start working on a quote quickly.
Information on a PDF file requires manual input, which is prone to entry errors.
2. ASK FOR COMPONENTS’ LEAD TIME
Don’t forget to ask for the component’s lead time. Sometimes, components might be cheap and fully functional, but their lead times are enormous.
If your BOM components have huge lead times, it will cause problems throughout the manufacturing process.
3. KNOW THE PACKAGING OF YOUR COMPONENTS
Many SMT components come in reels or cut tape; this matters for inventory, manufacturing, and cost management.
Perhaps you only need 3k units of a specific component, but that doesn’t mean you’ll get a custom 3k units reel.
A reel of passive components will probably have 10k units.
You’ll have to pay for all 10k units.
So, what happens to the rest of the components in the reel? They can be removed from the SMT machine and stored for the next batch of products.
Remember that manufacturers work with a repetitive order set of mind.
Some manufacturers might offer smaller reel sizes, but it’ll come at a higher cost per unit.
Cut tapes handle smaller unit size, but if you need, say, 1000 components, don’t assume you’ll get a cut tape with 1k units; you might get ten cut tapes with 100 units each.
The choice of reels or cut tape will have an impact on the manufacturing process.
4- EARLY INVOLVEMENT
The BOM selection affects the job of everyone involved in product development.
Purchasing, manufacturing engineering, production etc. They all need the BOM to make the right decisions.
And at the same time, you need their input to buy the components and parts that best fit your product and its manufacturing process.
For example, the early involvement of the PCB manufacturing team will help you decide what’s best between a reel or a cut tape of components.
5. AIM TO FIND LOCAL EQUIVALENTS
For passives components like resistors and capacitors, don’t get hung up on brands; go with a local equivalent that will perform the same.
You could save up to 2/3 on connectors’ costs this way.
Plus, remember, importing components and other parts into the country where you’ll assemble will increase your costs.
And, if you’re thinking of importing some components into China, you should know that there will be a lot of paperwork and bureaucracy in the way.
Some factories even have government-imposed quotas on how many components they can import.
6- SOURCE ALL COMPONENTS AND OTS PARTS FROM CHINA
It’s only the best value for money. In China, you can find any component and OTS you can think of.
And, customizations for low volume orders do make economic sense in China. If you need to customize, say, 1,000 Displays, there’s a factory willing to do it; this doesn’t happen anywhere else in the world.
So, if you’re going to do the final assembly outside China, we advise you to buy components and OTS kits in China and then ship it to the assembly destination.
7- PROPERLY DATE A BOM
If you’re in charge of BOM management in your organization, make sure to correctly name each version of a BOM and add an exact date.
If incorrect or outdated parts on previous BOMs are accidentally purchased or soldered on your PCB, it is a nightmare to fix.
In this article, what follows now are different questions we frequently get, Bill of Materials FAQs you could call it.
WHY IS THE BILL OF MATERIALS IMPORTANT?
A BOM is a product’s blueprint and is critical to every aspect of its lifecycle — from procurement and production control to logistics and inventory management to sales and after-sales services.
Incomplete or inaccurate BOMs can cause production delays, increases in production and operational costs, decreases in product quality, and product returns or rework.
Without a bill of material, you wouldn’t know what components and parts needed to bring a product to life.
Procurement, supply and storage, cash flows, manufacturing lines, lead times, and time to market, all of these revolve around the Bill of Materials; that’s how important it is.
A poorly made bill of materials might put your project on hold for months if you chose components or parts which lead times are enormous.
Also, poorly optimized BOMs might make you run into cash flow issues and possibly sink your project.
If your BOM is full of components and parts that come only from, say, Digi key and Amazon, chances are your costs are high, and your final product cost won’t make economic sense.
It’s your manufacturing partner’s job, with the help of its connections, to optimize and decrease the cost of your BOM.
WHAT IS INCLUDED IN A BILL OF MATERIALS?
A bill of materials includes all the components and parts necessary to build a product.
A complete BOM must also include all the materials and parts needed for the product’s final packaging.
For each component and part listed in the BOM, there must be a set of fields that provide relevant information.
FIELDS TO INCLUDE IN A BILL OF MATERIALS
- Part and component number
- Unique part number
- A unique part name for each part or assembly
- Material specifications
- Description of each part
- Pictures
- Color code
- Finish/texture
- Quantity
- Unit measurements
- Unit price
- Total cost
- Lead time to make the particular part
- Tooling
- Supplier
- URL for components and OTS
- Status
- Notes/remarks
Not all fields will make sense for every item. Please have a look at our Bill of Materials Template.
Pro TIPS, always include
- The manufacturer’s part number
- Pictures
- URL for the component
I said that not all fields will make sense for every item because a BOM must include everything the product needs to be a finished product, and the specifications of, say, a resistor, is not the same as a cardboard box.
That’s why a bill of materials can be divided into different BOM types so that you can allocate different components and parts into different categories.
Now you might wonder, what are the types of BOM?
THE TYPES OF BOM (BILL OF MATERIALS)
1. ENGINEERING BOM
The engineering BOM contains all electronic components that will be mounted onto the PCB, all the mechanical parts of the device, fasteners, and off the shelf parts.
The engineering BOM doesn’t necessarily need to have costs.
2. SERVICE BOM
This is a list of all the components, parts, and tools that service technicians will need to install and repair a unit.
3. SALES BOM
This would be a proper quotation; you’ll get a detailed list from a manufacturing partner listing all the components and parts needed for your product.
This BOM must have unit and total values; otherwise, it wouldn’t be a quotation.
4. ASSEMBLY BOM
This BOM lists out only finished products. This has to do with how many finished parts are needed to put together the final product.
Think about it this way. You are working on manufacturing a Robot that consists of two legs, two arms, the head, and the body.
The assembly BOM will list out those six parts, it won’t list out every component and part needed to manufacture each part of the robot, all of which would be listed in the engineering BOM.
5. PRODUCTION BOM
A production BOM lists out all the production steps needed to complete a product.
In each step, there will be a list of all the components, materials, parts, and extra materials (protective wear for workers) required to finish each step.
A production BOM is essential for capacity planning and production scheduling.
6. SINGLE LEVEL BOM
This term refers to a BOM made for a device without many complexities, for example, a TV remote.
You can list out all components and parts necessary to manufacture a TV remote in a BOM without being concerned about creating subdivisions in the BOM for different device parts.
7. MULTI-LEVEL BOM
This term is used for BOMs that consist of many levels. Whatever it is, you’re manufacturing consists of different pieces that need to be put together to become part of a more significant part of the product, and so on, until you reach the final product.
The more complex your device is, the more levels your BOM will have.
HOW IS BOM CALCULATED?
The total of a BOM is calculated by multiplying the unit cost by the amount needed for each component or part, then you sum it all up, and you get your BOM total.
HOW TO MANAGE A BOM?
Excel has been the most common tool for BOM management.
It’s quick to implement, licenses are cheap, and most people have experience with it.
If you’re a small, single-location manufacturing organization, this is the best option for you.
Google spreadsheets are another option for a simple way to manage your BOM.
As a company grows and handles more products in its portfolio, development, and manufacturing processes increase.
This translates into a greater need for data sharing, software integrations, security, and team collaboration, for a faster time to market.
It’s in this scenario that companies start considering software for BOM management; they can either purchase one or create their internal system.
LIST OF BOM MANAGEMENT SOFTWARE
- Open BOM
- Mrpeasy
- Oracle PLM Cloud
- Master Control Manufacturing
- Ciiva
HOW TO GET A COSTED BOM?
- Build trust
- Share your costs
- Treat them as a partner
A way for companies to make money is to reduce costs on materials and components of a product and not reduce the retail price; actually, they aim to increase it over time.
A company that shares its costs, and more importantly, where it is that they buy at the price they buy, it’s giving away a critical competitive advantage, that if used against them, might even put them out of business.
So, when an electronics manufacturer receives a request for a BOM quotation, don’t expect them to answer right away desperately; for all they know, you might be a competitor trying to find out their costs and supply chain.
When you reach out, build trust and share as many relevant details as possible about your project.
Show that you’re a serious company looking to develop a long-term relationship.
Talk about the size of the market you’re targeting and your sales forecast.
Share any cost that you already handle for your product; let them know that you trust them, so they trust you.
