This Is How You Keep Track of Your Product Costs
This article will cover the main points that you need to know to create a complete Bill of Materials of your product and how to get the most out of it.
What is a Bill of Materials or BOM?
A BOM is a document, normally a spreadsheet (although there are now options in the cloud), where you list all of your product’s components. It essentially looks like a table with rows for each component and columns for the different items of each component (such as description, quantity, material, cost and more).
There are different formats for the BOM, some are simply a flat list of all the components, others are grouped by the components categories (plastics, electronics), some are grouped by sub-assemblies of the product or by manufacturing steps. If you are starting just go for a Flat view of all components to make it simple for now.
I find extremely helpful to include an image of the general view of your product, an exploded view or layout of your components, so you can visually identify each component and where it fits in the final product.
BOMs are an important tool in your product development. There is a lot of information packed in this single document that if used smartly can provide valuable insights about your product and business.
How to start creating a BOM?
Let’s use a spreadsheet and set up a flat view structure. Start with the basic information of your product in a cover sheet, including the mentioned image of a general view of your product and general information such as Product name, date of the latest update, version (1.0, 2.0, …) and anything else you find useful.
Next, prepare the sheet that will contain the actual components list and details. Fill the first row with the main data headers. It is recommended to use a filter on this first row for easy filtering and sorting:
-Component name — Common name of the component
-Component description — Brief description of the component technical details
-Part Number — You should define a part number strategy to avoid confusion between components (example ABC001, ABC002,…)
-Thumbnail — Adding an image of the component helps to identify it quickly
-CAD files name — If you already have CAD files you can add the file name or even a link to it
-CAD file version — Add the CAD file version to keep track
-Quantity — This is the quantity of this component that will be used in a single product. Commonly it is just 1 unit of each component but sometimes a particular component may be used more than once in the same product such as screws.
What technical data can I include in a BOM?
In the previous section, we have defined the basic data to start your BOM. But there is much more information that you feed into the BOM to really get a full picture of your product technical data.
- Materials — Specify the material of each component. Better if you can provide the specific grade for the material.
- Finish — Define the surface finish and color of each component
- The manufacturing process — Define the manufacturing processes to make the part (injection molding, metal stamping,…). For those components that are off-the-shelf, there is no need to specify this.
- Dimension — General dimensions may be helpful for others in your team, for example, to define the packaging.
- Weight — You can get the weight directly from the CAD systems before you even have the physical part. Useful for logistics.
- Volume — As with weight you can get this from the CAD file. Useful for logistics as well.
- Special instructions — In case there is additional information specific to each component. For example, if they require special packaging for protection or instructions on how to handle the part. In textiles, the consumption of the material is important, there could be a good place unless you want to create a specific row for consumption.
What do you need to know about your Suppliers?
Your BOM is starting to look quite complete by now but let’s add some essential information that will help to understand a bit more your supply chain and plan your operations.
- Supplier name — For each component, you will have one supplier that will manufacture or supply that component. If any component is going to be manufactured in house, just specify it like that.
- MOQ — This is the Minimum Order Quantity, and as the name suggests is the minimum quantity that your supplier will accept. This is important because it will determine how many parts you need to order no matter the number of products that you will manufacture. This has costs implications especially in your product is going to be low volume.
- Lead time — Another important piece of information that you should collect from your supplier. This obviously would be an estimation but should give you an idea of when you should place orders to get components on time. This has an impact on your final product assembly and your own delivery times to customers.
Get this information soon in your development process and avoid nasty surprises.
Which are my costs?
We have left for the end the last piece of information that you should add into your BOM, your costs. However, this is most likely the most important information that you want to know about your product.
The overall cost of your product is commonly known as Cost of Goods Sold (COGS) and it refers to all of the costs of producing your product added together. And which are those costs?
- Unit price — This is the price of each of your components alone. It will typically include the cost of the material, the process running cost, any additional process such as painting or silkscreen and the labor. Make sure your costs are in the same currency.
- Assembly price — This is the cost of the final assembly of your product. This is assembling all parts together, any packaging, testing and quality control.
- Shipping — Cost of shipping your products to your customer or warehouse location. This will vary depending on the terms agreed with your manufacturer, known as Incoterms (topic for another post).
- Tax & Duties — Usually overlooked, tax & duties are to be paid on your products depending on the final destination. Get an idea of what this cost could be to avoid surprises.
And lastly, I will comment on an important item related to costs that you should know from your suppliers. That is their payment terms. This is how and when you should pay your suppliers for your parts. It can be as favorable as 30 or 60 days after delivery of the parts to you but most commonly (especially for new and small customers) they will ask for payment before shipment or even before starting production. Negotiate this hard!
Is there any other cost that I should know about?
Continuing with the discussion of the costs above. There is one particular cost category that is usually required during your product development, probably before you have any clients and definitely before you have a product to sell. This is the cost of the tooling and equipment needed to mass-produce your parts.
These fixed costs are quite substantial depending on your product and it is the reason why developing products usually require some sort of initial investment. Plastic injection molds, casting tools, assembly jigs & fixtures are some of the most common toolings that are required to build your product.
On some occasions (rare for new customers) certain suppliers will accept to amortize the tooling cost in your unit price. This is incredibly advantageous since instead of paying for tooling in advance, you pay as you sell (or produce) products. If you are ever proposed with this option or if you ask and the supplier accepts, my advice is to take it (although this will entirely depend on your specific case and your own financial situation).
Keep track of these costs as you develop your product. Some design decisions will impact greatly in your fixed costs which in turn will dictate how much money you should have available to launch your product.
What should I do with the BOM now?
In this last section, I would like to explain in which way you can use all of this information that you have been feeding into the BOM. The first and obvious advantage is that you have on a single document that contains pretty much all of the information about your product. Anyone in your team or external stakeholders can have an overall view of your product. But there is more than that.
All of the information in the BOM can be compiled in useful graphs. As an example, you can visualize what is the cost distribution per component or category, so you know where to focus on cost savings. Another useful information is your parts lead time that you could use to plan and schedule your purchase orders with suppliers.
One of the most relevant reports that you can get with the BOM is an estimation of your cash flow. If you input costs, fixed costs, production volumes, lead times and payment terms, you can have an overview of by when you will be requiring a certain amount of money. This will ultimately tell you what is the maximum amount of money that you will require at a certain point in time, or how you could adjust this by changing some of the parameters such as payment terms.
In addition to that, you can also play around with your potential retail price. If you input this price you can also use your COGS and estimated production volume to know your break-even point at which you would have covered your costs.
All of the above are extremely useful insights for your product development and business, so don’t underestimate the value of a well defined BOM.
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All the best in your product development and remember we are here to guide you in your journey. Contact us on www.abilista.com if this was helpful.
