THE INTRODUCTION:
The following companies approached us to ensure their material consumption costs benchmarked that of the industry:
India’s leading exporter, manufacturer and supplier of auto components - alternator, starter motor to OEM customers.
Subsidiary of one of the world’s leading manufacturers of welding and corrosion protection material with a global outreach in around 25 countries.
THE PROBLEM:
The companies in question extensively assessed whether the proportion of own material consumption to total revenue was greater or less than the industry standards. It was revealed that the material to revenue ratio of the companies in question was higher than that of their peers. However, as a result, their gross margins were also significantly less relative to others.
THE SOLUTION:
The companies sought to investigate the reasons alongside validating the existing bill of materials (BOMs) [1] for the entire product range.
Following are the salient benefits of designing/ creating accurate BOMs:
Offer a custom-made shopping list to the manufacturers, with the option to scale it up and down based on the company’s budgets.
Lay the foundation for effective inventory management; the manufacturers can ensure that the stock is ordered only when required, thereby avoiding high inventory holding costs.
Develop effective Material Requirement Planning (MRP) strategies – to enable quick decisions on whether to procure material outside or source it through in-house capacity.
THE RESULTS:
After rigorous deliberations and continuous collaboration with the clients for over one and half months, our Chandra Wadhwa & Co. team implemented a comprehensive approach for BOM validation, which offered operational insights to the management for efficient decision making.
The methodology followed was as under:
Sample Selection: 80/20 rule of the Pareto principle was adopted, and major products (The top 20% constituted 75% of the total revenue) were selected as samples for BOM validation.
Shop floor Testing: From the selected samples, BOMs were tested by observing the production process physically and ensuring that the actual process material consumption aligns with standard consumption as per BOM.
Quantitative Reconciliation: Quantitative reconciliation between standard vs actual material consumption [2].
BOM Quantity Variances: Quantity variances were observed