BOM Cost Reduction Techniques For Procurement Specialists

When it comes to the electronic component industry, companies and their internal teams need to figure out how to effectively manage their Bill of Materials (BOM) if they want to achieve profitability and maintain a competitive edge in a highly competitive market. This sentiment is especially true for procurement specialists, for whom BOM management heavily impacts the effort to optimize BOM costs and ensure efficient sourcing of components.

Understanding BOM Structure and Data

A BOM is a comprehensive list of all components, assemblies, and materials required to manufacture a product; it’s a critical document for procurement, production planning, and inventory management. For companies to effectively manage costs through BOM management, they must understand the key components of a BOM and the importance of data accuracy and consistency.

Key Components of a BOM

A typical BOM includes the following elements: 

• Items: The individual components or assemblies that make up the product.
• Quantities: The required number of each item for a single unit of the product.
• Attributes: Additional information about each item, such as part number, description, supplier, and cost.

Importance of Data Accuracy and Consistency

Accurate and consistent data is fundamental for effective cost analysis and optimization. Errors or inconsistencies in the BOM can lead to:

• Overstocking or understocking: Incorrect quantities can result in excess inventory or shortages, leading to increased costs and potential delays.
• Incorrect pricing: Inaccurate cost data can lead to overpaying for components or underestimating the total cost of the product.
• Supply chain disruptions: Errors in the BOM can cause delays in procurement and production, impacting delivery times and customer satisfaction.

Data Standardization and Normalization Techniques

To ensure data accuracy and consistency, it is essential to implement data standardization and normalization techniques. This involves:

• Establishing a standardized format: Defining a consistent structure for BOM data, including item codes, descriptions, and units of measure.
• Implementing data validation rules: Setting up rules to check for errors and inconsistencies in the data, such as duplicate items or missing information.
• Using data cleansing tools: Employing software tools to identify and correct data errors and inconsistencies.

BOM Cost Analysis Techniques

Once the BOM structure and data are established, the next step is to conduct a thorough BOM cost analysis to identify potential areas for cost reduction. There are multiple options that companies can tap into to achieve efficient and accurate BOM costing.

BOM Costs Breakdown Analysis

Cost breakdown analysis involves breaking down the total cost of a product into its individual components and analyzing the cost drivers for each. This helps identify which components contribute the most to the overall cost and where supply chain cost-reduction efforts should be focused. 

Benchmarking

Benchmarking involves comparing the cost of components or assemblies to industry standards or competitors, which can help teams identify areas where costs are higher than average and provide insights into best practices for cost reduction.

Value Engineering

Value engineering is a systematic approach to the analysis of the value provided by each component and the identification of alternatives that can achieve the same function at a lower cost. This technique can be particularly effective for components that represent a larger position of the total cost of a design. 

Teams that apply value engineering principles early in the design phase significantly influence BOM costing by selecting components that offer the best balance of cost and performance. Value engineering reduces the risk of late-stage redesigns and supports long-term BOM cost reduction by minimizing reliance on high-cost or obsolete parts.

Cost Modeling

Cost modeling is the creation of mathematical models that predict future costs based on a multitude of factors, such as component prices, exchange rates, and production volumes, to help identify potential cost risks and develop strategies to mitigate them. 

For example, cost modeling can help procurement teams forecast BOM cost fluctuations throughout electronic product development. They can simulate various sourcing scenarios for components like microcontrollers or capacitors, adjusting for changes in supplier pricing and performing a detailed BOM cost analysis to uncover the most cost-effective configurations. Modeling directly contributes to BOM cost reduction by guiding smarter, data-driven component sourcing decisions.

Total Cost of Ownership (TCO)

TCO is an approach that evaluates the long-term costs associated with components, considering factors such as:

• Maintenance costs: The cost of repairing or replacing components over time.
• Energy consumption: The energy costs associated with the component’s operation.
• Disposal costs: The costs associated with disposing of the component at the end of its useful life.

Life Cycle Cost Analysis (LCCA)

LCCA analyzes the total cost of a product or system throughout its entire life cycle, from design to disposal. This can help companies identify opportunities to reduce BOM costs at various stages of the product’s life cycle.

BOM Optimization Strategies

Once the cost analysis is complete, procurement specialists can implement various BOM optimization strategies for cutting BOM costs, which focus on streamlining processes, reducing waste, and negotiating favorable terms with suppliers and partners. 

Component Standardization

Component standardization involves reducing the variety of components used in a product. By standardizing, companies can: 

• Lower purchasing costs: Often, bulk ordering larger quantities of standardized components leads to discounts and reduced supplier transaction costs.
• Simplified inventory management: Fewer components to track and manage.
• Improved supply chain efficiency: Standardized components can be sourced more easily and efficiently. 

Supplier Consolidation

Supplier consolidation involves reducing the number of suppliers used for a particular component or material. This can lead to:

• Improved negotiation power: Greater leverage with fewer suppliers can result in better terms and pricing.
• Simplified supplier management: Fewer relationships to manage.
• Reduced risk of supply chain disruptions: A smaller number of suppliers reduces the risk of disruptions due to supplier failures or delays.

Embracing BOM Management Software

As always, technology is making all the difference across all industries and functions, and that’s no different when it comes to procurement and BOM management tools. The following technologies are helping to improve processes and reduce costs: 

AI-Powered Optimization

Artificial intelligence (AI) can be used to:

• Analyze vast amounts of data to identify patterns and trends that may indicate opportunities for cost reduction;
• Select the most cost-effective components based on factors such as price, quality, and availability; and
• Forecast component prices, supply chain disruptions, and other factors that may impact costs.

Advanced Analytics

Advanced analytics techniques, such as data mining and predictive analytics, can be used to:

• Analyze data to identify the underlying causes of cost increases or decreases;
• Identify bottlenecks and inefficiencies in the procurement and production processes; and
• Assess supplier performance data to identify opportunities for cost reduction and improved collaboration.

Blockchain Technology

Blockchain can be used to:

• Track components from source to delivery, enhancing visibility and reducing the risk of fraud or counterfeit components; and
• Improve supply chain transparency and efficiency, blockchain can help reduce costs associated with inventory management, quality control, and logistics.

Strategic BOM Management for Cost Reduction

Effective BOM management will require a strategic approach that aligns with the overall objectives of your business and addresses the potential risks associated with that movement. By focusing on the following areas, procurement specialists can maximize cost savings and improve the likelihood of long-term success.

Alignment with Business Objectives

BOM management should always be aligned with the overall business goals, including profitability, quality, and sustainability. Invariably, this means that cost-saving efforts should not compromise the quality or performance of the product and should be evaluated in the context of the broader business strategy. 

Risk Assessment and Mitigation

Identifying and mitigating potential cost risks is equally important to successful BOM management. This can include: 

• Assessing the risk of supply chain disruptions due to factors such as natural disasters, geopolitical tensions and instability, or supplier failures;
• Identifying components that may become obsolete and developing strategies to mitigate the risk of increased costs or supply shortages; and
• Monitoring market trends and coming up with strategies to manage price fluctuations in times of need.

Continuous Improvement

Companies with a culture of continuous improvement tend to get BOM management right; the regular review and refinement of processes to identify new BOM cost-cutting opportunities and address emerging challenges results in a level of proactivity not found in all businesses. If you, as a procurement specialist, can adopt a strategic approach with the factors listed above, you’ll find that BOM management becomes a valuable tool in your arsenal against rising costs and overall business longevity and success.

Strategic Supplier Relationships

Likewise, procurement teams must build strong supplier relationships if they want to achieve a cost-effective process. Collaborative partnerships come to the fore here. The monitoring and management of supplier performance and active investment in their development open the door to favorable terms, reduced costs, and a reliable supply of components. 

Collaborative Partnerships

Building collaborative partnerships with suppliers involves: 

• The establishment of open and transparent communication channels with suppliers to share information, discuss challenges, and identify opportunities for mutual benefit;
• The alignment of supplier goals with the company’s objectives to ensure that both parties are working towards the same outcomes; and
• Collaboration with suppliers on innovation initiatives to develop new products or processes that can reduce costs or improve quality—ideally, both. 

When it comes to supplier performance management, remember to regularly evaluate supplier performance based on key metrics, such as cost, quality, delivery, and service. This can be based on data but should also include occasional on-site audits to make sure that your partners are performing their duties in line with company—and, importantly, ESG—standards. 

When suppliers are not meeting expectations, consider investing in development programs to help them improve their capabilities and reduce costs. This can include:

• Providing training and development opportunities to enhance the supplier’s workforce’s skills and knowledge;
• Assisting them in implementing lean manufacturing principles to improve efficiency and reduce operational costs; and 
• Supporting them in implementing quality improvement initiatives to reduce defects and raise product quality.

The Importance of Ongoing BOM Optimization

While this journey can prove difficult, it’s important not to forget that BOM management needs continuous attention and optimization. Procurement teams should regularly review and refine their practices to identify new cost-saving opportunities and enable competitiveness within product design. 

If you are looking for resources and BOM management software to support your procurement specialists in their efforts to optimize BOM management within your company, consider looking at Altium 365—a comprehensive application suite that offers a range of features to support efficient and effective BOM management, including a powerful BOM Portal.

With Altium 365, your teams can: 

• Create and manage accurate and consistent BOMs;
• Conduct advanced BOM cost analytics;
• Optimize component selection; and
• Collaborate with design teams. 

If you’d like to find out more about the BOM management capabilities of Altium 365, visit a dedicated capability page.