Bills of materials (BOMs) are sometimes referred to as the “recipe” of a manufacturing job. Get that recipe wrong, and the results can leave you feeling sick to your stomach.
Not only can inaccurate BOMs and routing of materials result in defective final products, the practice of “best-guess BOMs” makes it nearly impossible to determine actual costs to produce your goods.
Without knowing the true costs of materials and labor, you’ll never know if you made money on a job. The challenge is more difficult than it may seem at first glance.
A classic BOM and routing scenario
A particular complex manufacturer was sold to a private equity group that brought in a new management team, including a new chief financial officer (CFO). After reviewing BOMs for assembly, operations and routings, she wasn’t confident that the associated costs for manufacturing the goods were being accurately tracked in their existing legacy system. After some digging, she discovered inconsistent costs of materials, labor and overhead were being applied to items.
Applying an estimated percentage of labor and overhead to the cost of goods being sold is an all-too-common practice with some manufacturers.
For this particular company, they were applying a general calculation of 80% of payroll and 20% of “other” expenses. Instead of tying actual costs to actual operations performed by employees, finance simply took a stab in the dark and did journal entries to estimate the costs of goods sold.
Not having detailed expenses associated with each job’s assembly process can lead to a host of problems, including ultimately misquoting projects and losing bids. It also becomes difficult to track resources, schedule manufacturing operations to various work centers and to know which work centers spend the most time on a specific step in the manufacturing process.
Knowing these details will not only help you determine accurate costs but also expose opportunities to improve efficiencies.
Using NetSuite ERP to improve BOMs and routing
The key to tracking costs is using a system to create a detailed plan that assigns components to a work order and outlines the operational steps needed for routing. The more detailed the plan, the easier it is to assign costs to each step in the workflow and identify potential improvements.
With NetSuite enterprise resource planning (ERP) software, manufacturers can get as granular as they need to with their BOMs and routing workflows. Even non-inventory costs such as packing boxes, labels and shipping can be tracked to ensure every expense is accounted for.
Work order tasks can be scheduled using a visual tool that shows all tasks for each work order and work center. Drag-and-drop scheduling simplifies capacity planning, and color-coding alerts you when a work center is scheduled above capacity.
A task scheduler assigns a time for each operation and components for a work order so costs can be captured for each task.
For example, each operation record is tied to a run rate (e.g., it typically takes 15 minutes to machine a part to a 2-inch diameter). Run rates are linked to a cost template, which, in this case, would determine how much that 15 minutes costs in labor, overhead, materials and setup time.
Any variances that are entered, such as an operator who takes 10 minutes longer to complete a task, will automatically adjust to provide accurate costing.
As work orders are processed, the materials, labor and overhead costs are captured in the work in progress (WIP) at either standard or actual consumption.
These accurate costs are then transferred to inventory when the work order is complete. Over time, any variances can be aggregated to provide a final cost.
Information about variances may also reveal opportunities for improvement. If a certain shift or operator is able to perform a particular task 10 minutes faster than another, production managers can dig deeper to discover what makes the difference and train other operators to follow suit for maximum output and cost savings.
Running real-time reports at the touch of a finger to analyze WIP is a critical tool for engineers and management. If you discover that a certain type of operation, product, or work center consistently takes longer than anticipated, the associated costs will be reflected in the report. From there, you can strategize ways to cut down on costs or adjust pricing.
Ensuring that those who engineer your BOMs and routing are connected to the data they need will help you determine accurate costs, labor requirements and potential improvements during every phase of a product’s development and production.
Learn more about the extensive functionality of NetSuite ERP and how it integrates across every department to create visibility and opportunities for improvement. Connect with a NetSuite Certified consultant from Wipfli today.