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 manufacturer of welding and corrosion protection material with a global outreach in around 25 countries
The companies in question did an extensive assessment on 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 in comparison to that of its peers. As a result, their gross margins were also significantly less relative to others.
The companies sought investigation of the reasons thereof, alongside validation of the existing bill of materials (BOMs)  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 company’s budgets.
Lay the foundation for effective inventory management; the manufacturers can ensure that the stock is ordered only when it’s required, thereby avoiding excessive 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.
After rigorous deliberations and continuous collaboration with the clients for over a period of one and half-months, our team at Chandra Wadhwa & Co. 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 analysis was adopted, major products (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 
BOM Quantity Variances: Quantity variances were observed during shop floor testing and quantitative reconciliation was noted. These variances were extrapolated to ascertain the cost impact on each product.
Validation Impact: Product-wise summaries were prepared for evaluating the impact on cost and quantity. Along with this, list of redundant/ non-functional BOMs were prepared, and eventually mark out for deletion in ERP. List of non-moving/ slow-moving stock (NMS/ SMS) were mapped against respective BOM items to recalibrate BOMs (if required).
After comprehensive scrutiny of the products/ processes involved, following observations were highlighted to the Board:
Process wastages (like scrap, material obsolescence, etc.) were not incorporated in standard BOMs.
Indirect materials i.e. consumables (like solder wire, tapes, varnishing oil, etc.) were shown as being fully consumed in standard BOM, however in actuality, these were consumed in lesser quantities.
Some BOM items were calculated based on a particular unit of measurement (UOM) but were actually consumed in other unit of measurement (UOM). Appropriate conversion factors had to be applied in the ERP system for accurate presentation
30-40% of the BOMs were to be recalibrated. Post recalibration, the material procurements were reassessed and curbed effectively. Operational wastages were also capped efficiently. As a consequence, the standards were closer to actuals and material costs was reduced ~(7-8) % of the total material consumption cost.
The main learning from the assignment was that the focus and priority of the management towards material consumption and bill of materials increased the accountability of the key stakeholders departments  involved in the BOM designing and updation processes.
1. ⌃ Understanding Bill of Material (BOM) in depth 🡕 A bill of materials (BOM) is a comprehensive list of parts, items, assemblies, subassemblies, intermediate assemblies, and other materials, required to create a product, as well as instructions required for gathering and using the required materials.
2. ⌃ Actual Material Consumption = Material Opening Stock + Quantity Purchased – Material Closing Stock (against production orders)
Standard Material Consumption = Product BOM recipe X FG quantity produced.
3. ⌃ The key stakeholders departments involved in BOM designing and updation processes include the following:
1. Management Information System (MIS) and Cost Accounting
2. Financial, Planning and Analysis (FP&A)
3. Research and Development (R&D)
4. Production, Planning and Control (PPC)
5. Contracts and Procurement (C&P)
Reach us if you have any concerns regarding cost management accounting issues in your organization.
Partner, Chandra Wadhwa & Co. (Cost Accountants) | B.Com, FCMA, ACA, DISA | Certified SAP-CO Consultant | Executive Program on Management and Finance (IIM, Ahmedabad)
Address: 1305 & 1306, Vijaya Building, 17, Barakhamba Road, New Delhi - 110001, India Mail: firstname.lastname@example.org
Tel: +91-8800018190, +91-7503703599.