Bill of Materials, Inventory & Costing
The Small Business Doctor
The Bill of Materials (BOM) is like the ingredients list for the products your company builds and/or sells. It clearly lays out the quantity each raw material or input into the production of your finished product. Your bill of materials is a foundational component of your business.
Having a BOM is a key business tool for objective answers to how much inventory to order and hold on hand, tying up cash. What will you need for the day/week/month's production?
Decision-makers can identify risks in their supply chains, identify substitute products and spot ways to save time and money with sub-assemblies.
When we add raw materials prices to a BOM its usefulness expands to include costing and profit-margin analysis.
Is your company making money? Do you know how much? What products do you win on and lose on? By how much? A cost and margin analysis tool allows you to make better decisions with improved information.
Many businesses use their Bill of Materials to run "What If" Scenarios. For our sample company below, PB&J Co., that makes Peanut Butter and Jelly Sandwiches, we can use the Bill of Materials tool to find out the answers to questions like:
- What if the price of Peanut Butter goes up to $60/pail and I don't change my prices?
- What if we start putting 2 case labels on each case?
- What if the price of bread falls by $1.50/case?
To answer these questions, put your mouse over the spreadsheet below, then click the arrow in the top right corner to open the spreadsheet.
For #1: Go to "Price List" tab and change cell C2 to $60 and look how your profit margin and costs change on the BOM
For #2: Go to "Key Variables" tab and change cells M4 and M5 to "2" and look how your profit margin and costs change on the BOM
For #3: Go to "Price List" tab and change cell C6 to $28.50 and look how your profit margin and costs change on the BOM
Once you have a BOM built for your business it can be used to help with your inventory ordering and production planning process. The tool below allows your production manager/scheduler to input the desired number of products to build that day/week/month/quarter/year and what raw materials inventory you will need on hand to build that amount. This sheet can be integrated with your inventory count sheet and the spreadsheet can alert the user if there is too little inventory to build the quantity you want.
In the spreadsheet below, simply change the quantity of cases under "Cases to Produce" column you want your production manager to produce today and you can automatically see how much inventory you will need to build that quantity.