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18 April 2019

Cooking up a Recipe for a Well-Managed Bill of Materials

Meeting the promise to your customer on price, quality, performance and delivery puts the same requirements on all the bought-in materials, components and assemblies listed in the Bill of Materials (BOM).

I think of the BOM tail supply like the ingredients in a recipe. Just as a chef will invest in sourcing the prime cuts, the freshest fish and the finest produce, but pay less attention to the “store cupboard ingredients,” so will the procurement and operations departments concentrate on the major components that reward the effort invested in the “best deal” in terms of price, quality, specification and innovation. That doesn’t mean that the “store cupboard ingredients,” the items in the “tail” of the BOM, do not matter: my best efforts in the kitchen will be ruined if I run out of salt, and my customer promise can’t be fulfilled if the supply of something so simple.

An attempt to put more resource into tail spend management does not only increase costs out of proportion to the apparent benefit, it can actually impair the ability to fulfil the customer promise by creation of delays, extension of decisions and lead times, and increase of complexity. And therefore the risk of things going wrong.

When talking to clients, they often tell me that more active in-house management of BOM tail spend is concerned with a lot of constraints and priorities. Firms are keen to be lean – not just on the shop floor but in their total business operations. This means eliminating non-value-adding processes of which conventional procurement has many: hierarchies of decision and approval points, sourcing research, multiple RFx and invitations to tender.

Besides business operations, firms also want to be lean in their use of staff – since skilled personnel is hard to obtain and expensive. Sales or revenue per employee is a critical KPI. Workflows need to be simplified, streamlined and automated where possible to relieve not only procurement, but also production staff and other end-users. Many firms are not able to reach these goals by themselves because it is not in their core focus, or lack the resources to implement them.

Furthermore, I find, companies also require consistent business processes and adoption of best practices for all their production lines or facilities globally. This is partly to meet legal and regulatory requirements, but it is also a prerequisite if firms are to benefit from advances in robotics and automation and the application of Industry 4.0 up and down the supply chain. In practice, you often still see huge differences and inconsistent processes between sites.

Despite all the obvious benefits, a lot of our customers still challenge with making a convincing Return on Investment case for investment in tail spend management. Benefits of using mobile apps to help create and communicate demands forecasts are recognised and ways of automating procurement flows are seen, though converting fixed costs (including labour and capital) to variable, demand-sensitive cost is difficult.

Part of my job is to prove companies that using the support of a third party “integrator” is a way of managing the tail of BOM spend efficiently and effectively without increasing headcount or tying up capital. I also have to show them that this approach doesn’t just offer more efficient transactions, it also actually reduces supply chain risk.

A lot of the managers I talk to are under the assumption that “if it sounds too good to be true, it probably is”. Fortunately, I can say that integrated supply methods are creating real and continuing, affordable benefits. Have a look at the video about our BOM tail solutions to discover how you can cook up your recipe for success in managing your BOM tail supply.

Dirk van den Hengel is CCO at MAG45

Dirk van den Hengel

Dirk van den Hengel is Chief Commercial Officer at MAG45. Dirk is a Supply Chain Management professional with a strong track record in business consultancy and project management. He co-developed MAG45’s international project management department and helped create the company’s value proposition. He holds a Master’s degree in Industrial Engineering & Management Science from Eindhoven University of Technology.