What is a BOM in Electronics and How Do You Actually Reduce Its Cost?

Every tiny cost can accumulate, which can become a snowball effect leading to hidden massive costs. Companies keep a strict eye on it, but somehow, there are loopholes in the costing process. These loopholes occur because of errors in the BOM. BOM is the central part of any production because it analyzes the total cost of a product. It is like a blueprint that shows all the information a production team needs before it starts the manufacturing process. If there is any error in it, everything faces the impact, from forecasting to the final quality inspection. If one controls cost in the formation of the BOM, the rest of the processes meet cost-reduction efficiency. 

BOM in Simple Terms 

“Bill of Material” is like a detailed list of all the components, materials, and everything an assembly needs for production. A document that allows a manufacturer to plan, source, and manage all the raw materials for the production is called a BOM.  This document precisely helps to manage the number of components, their quantities, price per unit, and compatibility with production. Design, production planning, and inventory management teams use BOM to source everything they need for production. 

Manufacturers analyze total production cost through this document, which also helps in budgeting and forecasting. If they make a BOM with precise information, they can save lots of production costs and errors.  As a result, profit margins rise and delivery time drops.

Formula of BOM

BOM = (Per unit Cost x Number of Units Required for Production) + Secondary Costs  

For instance, a PCBA requires multiple components for its production. Manufacturers need to prepare a BOM that mentions all the units required for their production as well as the cost of each unit. It will also include shipping, tariffs, and every secondary cost. Now, the manufacturer will get an estimated amount of production along with buffer quantities of raw materials.

What Happens When There are Errors in the BOM?

Errors in the BOM mean there will be lots of disruption in the forecasting, inventory management, and production. It also means that there will be a risk of sourcing incorrect or obsolete components along with incorrect quantities. There will be compatibility issues because of that, and also product lifecycle problems. When all of these problems occur, expect delays in production and delivery. 

EBOM vs MBOM: How Do They Affect Costing? 

Industrial experts already know about these terms; those who are unaware, here is a little introduction for them. EBOM and MBOM are two of the subtypes of BOM, which contribute to the inventory sourcing process. Designers and engineers prepare EBOM (Engineering Bill of Materials) for prototypes and initial designs. EBOM contains a hierarchical structure and component details about each product. It also contains specifications about each component and its connection with other components. 

Then comes MBOM, which is “Manufacturing Bill of Material”. The entire supply chain team uses it for the listing of raw materials, components, specifications, tooling/machine selection, and manufacturing hierarchy details.

• In simple words, EBOM describes how an electronic product should be, and MBOM describes its raw materials and production process. Both need to be integrated because any conflict between EBOM and MBOM can affect the cost of production.
• Any changes in EBOM and no updates for the MBOM team lead to the usage of an outdated MBOM in production. It leads to incompatibility of parts, urgent order placement, cost increase, and delay in production.
• If the manufacturing team has no information regarding the revision in EBOM, there will be conflicts in the production. Then there will be an additional cost of reordering the new components via rush orders, which will surely affect delivery time and cost.
• Multiple versions of EBOM can cause confusion and the selection of the wrong file. It creates a high risk of differences between EBOM and MBOM. Different versions of EBOM can lead to extra labor hours and a waste of material. 
• Mentioning incorrect unit types, quantities, and designs can lead to flaws in the procurement process. Then there will be a high cost of having buffer units with wrong compatibility. The procurement team will have to place an order as per the updated EBOM, which will take time, extra cost, and labor hours. 

All these conflicts occur because production and design teams lack integration. This lack of integration occurs when the communication fails to convey the latest changes in files. When designing teams make any changes in the EBOM, and production teams have no information about it, such errors in the final BOM take place. 

Where Most BOM Cost is Concentrated

There is an 80/20 rule in the component sourcing process. 20% of the components carry 80% of the total sourcing cost. Therefore, you need to focus on negotiating the prices of those 20% components that are key to functionality. The rest of the 80% components make up around 20% of the cost of production. So, these components do not need much negotiation because they are standard components that are already cost-effective. Negotiating on these microcomponents will not make much difference compared to the 20%.   

Six BOM Cost Reduction Strategies

There are over ten cost-reduction strategies that help manufacturers control their extra costs in production. To make things simple and concise, we added six BOM cost-reduction strategies that help companies. Here are all of them that can help you minimize the cost that occurs because of errors in BOM formation.

Component Standardization Across Products

Using standard parts in most types of products reduces a huge chunk of cost. It depends on the design team how it designs to make standard components compatible with each product. When production teams use similar components in most products, the cost of sourcing drops. It reduces the cost of procurement, inventory management, and installation. Also, sourcing these standard components allows buyers to get more discounts compared to custom or unique components. Here are some additional suggestions that can help buyers reduce costs in the BOM. 

• Reduce the number of layers in the PCB. Fewer than 6 layers is cost-effective, and using 2 or 4 layers is better.
• Select a PCB material that perfectly meets the compatibility and the cost is also low. For instance, choose standard material for PCB where you do not need high-performance or thermal efficiency. Choosing a special material for a standard PCB will unnecessarily increase the cost of production.
• Choosing a standard surface finish is the most cost-effective way because a special finish will be costlier.
• Drill sizes for PCBs also affect the cost. Try to go with standard holes instead of custom bids until you really have to.
• Do not go for excessive specifications or you will face cost issues. Also, you will be stuck with one specific supplier because of strict specifications, and you will lose negotiation power. 
• Choose multi-functional ICs over components with single functions. It will reduce the number of units and the chance of confusion in the BOM.

Integrate Procurement and Designing Teams 

You need to integrate both teams (design and procurement) to reduce errors in the BOM. When they keep updating each other on every step, there will be the least risk of having differences in the EBOM and MBOM. There must be a review of the final files of EBOM, so there will not be any confusion in the MBOM proceeding. EBOM and MBOM must match.

Engineering and procurement teams have to work closely, so there will be fewer changes in the design after the procurement team locks the order. In other words, the engineering team will have to update the procurement team on time if there is any change in the design. 

Go for Multiple Sourcing Partners 

Having only a single authorized distributor is not a good idea. If you face component shortages or monopoly issues, there will be no other way except surrendering to the supplier’s demands. So, it is always better to have multiple sourcing partners to avoid component shortages and monopoly issues. If you have an alternate distributor, you can source components from it at a lower price. 

• It reduces complete reliance on a single authorized distributor.
• Having another distributor gives you a backup instead of having a complete pause on production. 

Focus on Total Cost of Ownership, Not Just Unit Price

Focusing on total cost of ownership instead of just a unit price is a wise move. It is not just about having low-priced components, but more than that. What if the low-priced components fail to perform or reach their end of life? TCO helps you evaluate lots of factors like maintenance costs, energy consumption, disposal costs, etc. 

It is never a cost-effective move if you procure components at a higher discount at the cost of high failure costs. It is better to procure components that might cost a little more, but they offer high durability, performance, and compatibility. It is not just about cost on paper, because there are lots of costs involved when the device starts working.

Evaluate EOL Status Instead of Just Focusing on Low Cost 

Components whose lifecycle is near the end will cause disruption when there is a shortage. You may end up paying a premium price in sourcing those EOL components. So, choose components whose lifecycle is longer. Contact the manufacturer and ask for the estimated lifecycle of each component. Review the BOM after a specific time of production to seek changes in cost, components, their EOL, and sourcing limitations. 

Stick to an Authorized Distributor with Discipline  

Never go to any unauthorized distributor because there will be a high risk of counterfeiting. You will have to stick to an authorized distributor in order to get authentic components. No matter what the urgency is, never take the risk of sourcing components from an unauthorized distributor. You may end up having weak traceability, poor compatibility, counterfeiting, and a list of many other problems. 

In case you face counterfeiting problems, the biggest risk will be the damage your brand will face. The failure of components, reverse logistics, repair costs, and a chain of back-to-back problems will create a dark stain on your brand. 

The Role of the Distributor in BOM Cost Reduction

Choosing an authorized distributor can not only save your BOM cost, but it will do more than that. You will get simple traceability, safety from counterfeiting, a reasonable price, and compatible components. One of the authorized distributors who can offer these benefits is HK Jennypenny Tech Limited. It has everything you need because it can offer a bulk supply of components that have already met their EOL. 

Choosing such a distributor can save you time in sourcing microcomponents that are essential for production. An authorized distributor has access to multiple manufacturing brands, which helps buyers get every kind of essential component. Also, there is less risk of a shortage of components.

Conclusion

The manufacturing process is not a one-time process, nor is the procurement of components and raw materials. BOM’s cost reduction is a repetitive process where buyers have to choose an authorized distributor for consistent results. Any error in the BOM can disrupt the entire inventory forecasting, sourcing, management, and production process. So, BOM is the key, and its cost reduction is the utmost objective of every manufacturer. Choosing an authorized distributor like HK Jennypenny Tech Limited can surely make lots of difference. 

FAQs

Is It Necessary to Include Alternate Components in the BOM?

Yes, it allows a supplier to add alternate components if main components are not available. Buyers have to provide details like alternate components, so the sourcing process does not get delayed.

Why Should I Qualify Two Suppliers in BOM?

It is mandatory because having a single supplier will cause a risk of monopoly. You will not be able to negotiate prices better if you do not have a backup. Therefore, another authorized distributor will be there to supply components if the first distributor faces a shortage.

What Happens When There are Differences in EBOM and MBOM?

There will be errors in the final BOM then. If manufacturing and procurement teams do not know about any last changes in the EBOM, there will be a high risk of sourcing some wrong or extra components. For instance, if the EBOM was updated a week ago and the procurement team picks up an older file, there will be differences in the required and sourced components.  

Are Standard Components More Cost-Effective for BOM?

Yes, standard components are more cost-effective for the BOM. Engineers need to mention more standard components in the design, so there will be less cost in production. Standard components are cost-effective, and their sourcing is easier.