The Phantom of Manufacturing

For a manufacturer to achieve a business goal of increasing the company's revenue and improving profit margins, it’s all about being on the path of continual improvement to maintain market competitiveness while increasing sales and market share. In order to remain competitive and make a profit, a focus on creating high-quality products, delivering products to market faster, and reducing cost is crucial for a manufacturer’s success. The manufacturing shop floor is where profits are made or lost. One important area in manufacturing that is often missed but that can have a significant impact on the competitive edge is the manufacturing bill of material (BOM). In this article I provide framework for strategy, structure, and alignment of the bill of materials with the manufacturing process and lean practices.

I often see operational inefficiencies because of poorly structured manufacturing bills. Much of this is due to the lack of knowledge, initiative and/or collaboration to improve BOMs. Failing to prioritize the bill of material strategy and structure can be one of the biggest mistakes a manufacturer can make. This is where some manufacturers need to take a step back and understand the function and strategy that the bill of material serves for the organization. Based on my 30 years of working with manufacturers and BOMs I will share my experience and the method used for assessing and restructuring the manufacturing BOM for manufacturing excellence.

What is a Bill of Material (BOM)?

A bill of material (BOM) is a list of components, and the quantities required of each, to make up a manufactured assembly. A BOM is also a primary input to the Material Requirements (MRP) System and the manufacturing work order process. 

The bill of material can consist of raw materials, sub-assemblies, consumable items, and often may include shipping material, and/or documentation. If the bill of material is primarily for product design purposes, this will be an engineering BOM (eBOM). If the bill of material is structured for product planning and assembly, this will be a manufacturing BOM (mBOM). There is also planning BOMs, modular BOMs, and configurable BOMs. For the purpose of this article I will focus on the manufacturing bill of material.

All manufacturers have a bill of material. From industry to industry the bill may be called something different; some manufacturers in the pharmaceutical industry may call the bill of material a formula. Those in the food industry call it a recipe. Bills of material have been around since the beginning of manufacturing. The creation of the manufacturing bills must take into consideration the manufacturing process. The bill of material structure provides a hierarchical classification of the items which form a product. The structure of the bill of material can have a significant impact on operations and the competitive edge if managed and structured appropriately for planning and assembly. It can certainly have serious consequences to operations if set up poorly.

The manufacturing bill of materials is the foundation for parts procurement, fabrication, and the manufacturing assembly process. It is the foundation and framework on which the entire planning process depends. The levels of manufacturing bill should be driven by the manufacturing process. By definition, the bill of material is a list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, parts, and the quantities of each needed to manufacture a product.

The bill should include;

• assembly part number,
• component part numbers,
• description,
• quantity,
• unit of measure,
• reference designators,
• stocking type: Manufactured assembly (M), or purchased component (P)
• scrap factors,
• effective in/out dates,
• component revision level,
• revision history / reference notes.

The bill of material is the blueprint of a product, from procurement and production control to logistics and inventory management. A bill can range from a small two-part cable wiring assembly to an entire vehicle. The purpose and structure of the bill of material can lead to a spirited debate between departments. Different functional areas of the business have specific needs for the BOM, therefore the functional areas must work together to optimize the bill’s effectiveness for operational excellence.

I find many manufactures struggle with their BOMs and their proper use. I often find a disconnect between the BOM’s structure, the manufacturing processes, business requirements, and effective cross-functional integration/communication.

 The graph below (Figure 1) represents a simple example of a manufacturing bill of material product structure for a bicycle. We’ll call the bike model number RX100. The product structure of RX100 is displayed graphically with manufactured assemblies, purchased components, and the quantities of each that are required to assemble RX100. Also identified in the graph is where manufacturing work orders will be required for assembly of the product by level.

Figure 1: Manufacturing Bill of Material Product Structure

The graph below represents the bill of material for the RX100 (Figure 2).

?Figure 2: Bill of Material List of Assemblies and Components

Bill of Material Structuring Principals

When structuring a bill of material, it is important to understand the following basic principles:

• Covers the business requirements of all users.
• Have the fewest levels possible.
• Use unique part numbers.
• Include all scheduled items and assemblies.
• Identify all materials required for the assembly.
• Receive approval of all owners of the BOM before system entry.

The BOM should mirror, through the level structure, the way material flows in and out of stock and throughout the manufacturing process. BOM structuring is a dynamic process, continually changing. As manufacturing processes change, lean practices are implemented or adjusted, etc., the BOM changes to reflect the flow. Therefore, a process must be in place for communication of reviews and updates with appropriate process owners.

Questions to ask of the bill of material management:

• Have the owners of the BOM been identified?
• Have the users of the BOM been identified?
• BOM business requirements defined?
• Is BOM strategy defined?
• Is BOM policy defined? Is there a change policy and approval process that is routed to owners for approval?
• Do the owners of the BOM know their role with the BOM and understand the organization’s BOM strategy and policy?
• Have the users of the BOM system been trained on system features and functionality?
• Who is responsible for BOM system maintenance?
• How will revisions be tracked?
• Is there a process for reviewing and restructuring BOMs?
• Is a BOM audit program in place?
• Are the BOMs at a 99% accuracy rate?
• What is the knowledge level of lean manufacturing and its application to BOM structure?

Who Owns the Bills of Material?

The bills originate in engineering, which provides the list of components, sub-assemblies, and related specifications. But does that qualify engineering as the sole owner? No. Other functions of the business are affected by the bill and have business requirements of the BOM. These other functional areas must also be considered owners of the BOM;

Functional integration points include those listed below in Figure 3;

Figure 3: Bill of Material Integration Points

Engineering uses the bill to define, document the product, assign the part numbers of components and sub-assemblies including quantities required for each specification.

Planning plays a key role in BOM structuring for the manufacturing process. This may include identifying points for phantom creation and/or planning BOMs and recommendations for components effective ‘in/ out’ dates for material usage.

Cost Accounting uses the bill to calculate product costs.

Sales Order Management determines product options and forecasts, and assists planning on related percentage mix.

Inventory Management / Warehouse uses the work order parts list (based on the BOM) for parts picking. Also, depending on how the BOM is set up per shop floor processes, material flow may need to be adjusted.

Purchasing is responsible for raw material procurement based on bill of materials and requirements through material requirements planning generation.

Shop Floor plays a key role in defining the assembly process and how the product is built.

Quality Management is responsibility for product quality.

Bill of Material Administrator coordinates changes to the bill of material maintenance system, communications to other departments and system entry of changes. This role audits bills for accuracy, manages phase-in/phase-out dates of BOMs/components and related documentation.

As you can see, the bill of material touches many areas of the organization encompassing the supply chain. The creation of the BOM must take into consideration the needs of the functional areas that integrate with the bills and, most importantly, the strategy for manufacturing and planning. Planning new product introductions with an agreed-upon bill of material strategy up front means fewer headaches and restructuring during production build. 

 Bill of Material Examination for Restructuring

Why would we want to review bills of materials for restructuring?

Poorly structured bills contribute to:

• Material shortages,
• missed customer deliveries,
• long delivery cycles,
• excessive order times and cycles,
• excess and obsolete inventory,
• poor configuration control,
• warranty claims,
• manufacturing inefficiencies,
• planning and scheduling inefficiencies,
• inventory inaccuracies,
• customer dissatisfaction / lost sales.

Understand, we only want to restructure the bill if there is a need to. The ideal time to compose a correct bill and avoid restructuring is before new product introduction. A bill of material improvement initiative can take time and resources to accomplish. However, this investment of time and resources can provide a great return for operations. 

If the business does a thorough job in creating a BOM with the appropriate team members during product development, much restructuring effort may be avoided. During the examination, the number of levels to a BOM should be analyzed with the related assembly process to keep levels to a minimum.

Understand that each unnecessary level in the bill;

• creates waste in operations,
• adds extra paperwork,
• extends the product lead time,
• increases the amount of work necessary to maintain the bill,
• increases planning and scheduling time.

Multi-level BOM's are essential to complex manufacturing assembly operations. However, there are strategies to structuring the bill of material that streamlines the processes which must be taken into consideration.

Reasons for Levels in a BOM

Product structures can be very complex. Layers of sub-assemblies within sub-assemblies may be required to build a finished product. Inefficiencies in material handling, manufacturing processes, planning and scheduling will take place if the BOM specifications and structuring are not laid out properly.

When examining each level of a bill of material, questions to ask are:

• Is the BOM level for planning and scheduling?
• Is there a business reason to do work orders (printed or electronic) and/or inventory transaction for an item?
• Is there a requirement to stock the item? Is there a need to make and sell the item as a service part?
• Is the product returned on occasion by the customer for rebuild or refurbishment or disassembly?
• Is it for the benefit of creating common parts grouping for different bill of material users?

The Phantom

Phantom BOM's play a key role in minimizing BOM structure levels. Phantoms are very common in manufacturing, however, there are many manufacturers who have yet to understand the usage of phantom bills. Increased complexity of a manufactured piece of equipment becomes a good candidate for phantom setups in the BOM.

A phantom BOM can be called many things including: pseudo bill of material, transient bill of material, self-consumed bill of material, modular bill, non-stocked sub-assembly bill, and ghost assembly bill. The phantom bill of material, as defined by the American Production and Inventory Control Society, is “a coding and structuring technique used primarily for transient sub-assemblies.” I use the term ‘phantom’ as a more precise description of the topic.

The phantom bill represents an item that may not exist physically but is treated as an accounting unit. Simply put, a phantom assembly is a sub-assembly that has its own set of components that is always assembled within and consumed for a higher-level bill of material (assembly). As a standard, a phantom is zero lead time, not stocked or made on its own work order and cannot have its own routing. However, on occasion, it may be stocked for service parts, quality inspection checks, or other reason. The phantom is a sub-assembly that is consumed on the production line within the next-level parent assembly. Therefore, there is no need for a separate work order to stock it. The components of the phantom will report directly to the parent BOM/part list. This permits MRP logic to drive requirements straight through the phantom item to its components. With this change we have also eliminated the planning and scheduling of the assembly, now being a phantom assembly.

The phantom BOM is a tool that allows manufacturers to simplify the manufacturing bill of material. By simplifying the bill of material, we also simplify the manufacturing, planning, and scheduling process. Lean manufacturing favors flat BOMs. But when it comes down to actual transactions, just like in traditional discrete manufacturing, introducing phantoms reduces the number of production orders. In other words, there will be fewer transactions. 

The following graph (Figure 4) displays the RX100 bike with assembly B-100 set up as a phantom assembly. A work order is only created for A-110 frame which will be required for the work order for product RX100. The components of the phantom assemblies (C-100 and C-110) now roll up to the parent assembly A-110.  

Figure 4: Product RX100 with Phantom Assembly

What did we gain with the phantom in place for assembly item B-100? The phantom eliminates the need to plan, create, schedule and manage work orders for assembly B-100 since this is now assembled and consumed directly into the parent assembly A-110 by a wheel assembly feeder line. This results in an improvement to operations. The material flow is adjusted to feed the wheel components (C-100 and C-110) into the frame/wheel assembly (A-110) process.

Material Flow with Phantom Bills

Now that we have adjusted the bill of materials to include a phantom assembly, we must assess the material flow for adjustment. Prior to the phantom adjustment, a work order was created for the B-100 wheel assembly and material issued from the warehouse to the work order. With the phantom in place, the wheel assembly components now report directly to the frame assembly A-110. We now need a material flow process to get the components to the frame assembly.

Material Flow - Kanban

The material movement of components that is consumed into the phantom assembly is often accomplished by a kanban system. Now that we are adding phantoms to the bill of material structure, it is possible that the material flow process will need to be adjusted. Working with a kanban system of material replenishment, combined with system materials back-flush inventory transaction at assembly completion, may be an option to consider. This begins to align with a 'pull-system', a Lean technique for reducing the waste of the production process.

Kanban is a Japanese word that suggests "sign" or "signal." From a manufacturing perspective, a kanban is a visual indicator — this could be a card, or an empty bin or rack — that triggers replenishment of an item. The intent with the phantom approach is to streamline the manufacturing and material movement process. To streamline material handling, an inventory location is set up at the point in the assembly process where the material is used, known as ‘point of use.’ With the structuring of phantom assemblies, you can set up a kanban replenishment system to replenish inventory to the point of use assembly line work center location. In some cases, this may not be a realistic approach. It depends upon the number of components used in a particular operation. In some cases, there can be a location staging area setup nearby. The trigger to replenish the work center location could be based on visual queues or on set times throughout the work shifts. This could be based on a replenish system, a hand held data collection scanner, alerting the materials handlers to restock when the inventory hits a re-order point based on stock inventory level for a particular location. In some cases it may make sense to identify low cost 'C' items in the BOM as 'expensed items' thereby reducing inventory transactions with appropriate kanban process in place for inventory replenishment.

How to Implement Phantom Bills

At this point it has been determined the BOM Restructure Team consists of the process owners (Figure 3). The team decided to do a BOM restructure improvement initiative, adjusting for phantoms on select complex bills, an improvement request submitted by the production planning department. How do we accomplish this? The manufacturing assembly line is moving like a freight train from operation sequence to operation sequence, work center to work center. Planning and scheduling have work orders flowing through the shop, material movement is flowing non-stop from work center to work center. Making changes to the BOMs, manufacturing process, and material flow, may seem like a daunting challenge and certainly can be.

With production in motion and a complex BOM to restructure, a tightly coordinated approach is necessary for the phantom implementation. Engineering, shop floor supervisors, planning, scheduling, materials, product costing, and quality must all be aligned and ready to execute change in proper sequence.

Solid methodology and a carefully orchestrated event is needed to restructure the bill to the production system. Much work to the change-over to production will include; system setups, testing, validation, proof of concept demos, management approvals to move forward and a solid plan to execute.

Methodology

As for methodology and tools, a tool that I use often that is a sub-methodology of TQM (Total Quality Management) and other improvement methodologies, is the Shewhart Cycle, also know as Deming Cycle or PDCA; Plan Do Check Act (Figure 5). This cycle is an iterative four-step management method used in business for the control and continuous improvement of processes.

Figure 5: Shewhart Cycle- BOM Restructure

The following steps is a good process to work with for BOM review and improvements in a controlled approach.

Phantom BOM Implementation Process

The following is an example phantom setup to a bill of material using the PDCA methodology (Figure 6).

  Figure 6: Phantom Process Overview

1.Team Development, Review Requirements, Process Flow, and Identify Assembly for Phantoms Setup – BOM Restructure Team

First, identify a team lead to drive the project. Ideally, this person will need to have good knowledge of the product structure, manufacturing processes, cross-functional knowledge, bill of materials concepts, and a good facilitator. Ideally, this person should also have strong knowledge of the BOM/ERP (Enterprise Resource Planning) system functionality.

The BOM Restructure Team will consist of the owners of the bill of material and process. The team will;

• review business requirements,
• review process flows,
• identify / approve a bill of material for the improvement initiative,
• approve final design for implementation.

2. Future State Process, System Design, Setups and Test – Team Lead / Business Analyst

Proceed with documenting a future state process, system design and system test with the proposed phantom assembly. Once the team has decided to move forward with BOM restructuring, create a plan for the process:

• BOM identified,
• tasks,
• dates,
• roles and responsibilities,
• distribute to the team.

3. Demo Proof of Concept – Team Lead / Business Analyst

After successful test, the team lead/business analyst will set up a proof of concept presentation to run through the process with the Restructure Team.

4. Approval to Proceed to Implement – Management/Restructure Team

Management/Restructure Team approves to move forward with phantom implementation.

5. Schedule Roll-out – Team Lead / Business Analyst

Set up a meeting with BOM Restructure Team.

The agenda will include:

• Overview / Review of the Phantom Change(s)
• Objective of the Phantom Change
• Products Identified for Phantom Change
• Process to Implement Phantom to Production
• Date of Phantom Change
• Roles and Responsibilities 

6. Begin Cut-over – Restructure Team

The BOM Restructure Team convenes into a conference room which includes representation from engineering, planning and scheduling, cost accounting, warehouse and quality. A process of sequential steps to be performed within the ERP / BOM / CAD database system by each team member while validating the changes take place displayed on a wall screen. A temporary hold on the creation of new work orders and material transactions may be in order. Confirm with the material handlers that the material flow process change-over is ready in the warehouse and on the manufacturing shop floor (if change-over applies).

7. Parent Assembly Routing – Manufacturing Engineering / Cost Accounting

Adjust the routing rate (setups, labor, machine) of the proposed phantom and move the rates to the next higher level assembly routing setup. This will ensure accurate costing and provide for phantom assembly cost visibility to Cost Accounting.

8. Item Master / Branch Stocking Type, Line Type Change – Engineering

Adjusting the ERP system item master database may be in order to identify the assembly from manufactured assembly to a phantom assembly, depending on system setups required of particular BOM / product data management systems.

9. Validate Bill of Material Stocking Type / Line Type Default – Engineering

Following the adjustment of the ERP system item master database update to reflect a phantom assembly, this step will be to validate the bill of material displays the assembly as a phantom.

10. Cost Roll / Cost Freeze / Validate – Cost Accounting

A cost roll and freeze will be in order to adjust for the routing rates movement from the phantom assembly to the parent routing (step 7). There should be a zero cost variance at the parent level following cost roll / freeze.

11. Create a Test Work Order in Production Environment to Validate Change – Planning / Scheduling

Planning/Scheduling will test phantom setups in the live production system by opening a test work order and generating the parts list and routing of the parent assembly to validate the phantom assembly setups. The parent assembly work order parts list should now include all components to the phantom assembly. The parent assembly work order routing should now include an operation sequence specific to the phantom assembly process including appropriate labor rates and setup rates.

12. Begin Work Orders in Production Environment and Monitor– Planning / Scheduling

Planning/Scheduling will make the call to their department to inform they can now create work orders for the assembly items with phantom changes, and monitor. Warehouse personnel on the team will make the call to material handlers for material flow changes to take effect immediately.

13. Process Complete

 The process is complete and should be initially monitored through manufacturing accounting.

Results of the Phantom Change to Bill of Material

This methodology was a real example of what took place for a manufacturer across multiple products in three separate sessions of implementing phantoms to BOM's. This resulted in alignment of BOM's with the assembly process, material flow, a considerable reduction of work orders and the management of those work orders. The methodology and approach also increased team knowledge of the business requirements, cross-functional integration and the value of a collaborative team approach to operational improvements. 

Conclusion

Over the years I have helped manufacturers examine their manufacturing processes and bill of materials management to align appropriately with best practices. Though the bill of material is only one component to the supply chain, it is a significant piece that can provide a competitive leverage with proper setups. With bills of material, I always tell my clients that the first priority is to make sure they are accurate. The second priority is to examine the bills and related manufacturing processes for improvements where possible, starting with the most complex.

Following the restructuring of a bill of materials initiative, a manufacturing engineer asked "Why didn't we do this 10 years go?". In business, communication, collaboration, and leadership’s drive for improvements are essential components to operations and the competitive edge. The challenge of a bill of materials restructuring initiative is not in the system setups, but in getting the people involved in the process together on one page, in sync, working in collaboration to make improvements to operations. Functional silos working independently can greatly limit an organization and the progress of its improvements. Sir Francis Bacon is believed to have coined the phrase, “Knowledge is power.” With collective cross-functional knowledge in business, combined with collaboration, this power is compounded.

While restructuring efforts of the bills of material provides many benefits, there are obstacles that companies face. The obstacles include knowing how to properly structure and maintain bills of materials to support lean manufacturing principles and still provide users with their required information. This may require an initial investment of training to build the required knowledge-base, to get everyone on the same page with lean principals, system functionality, and best practices. In many cases, I find there is at least one resource employee who has the credentials and experience to transfer knowledge to the team in a formal training session. Don’t overlook the talent from within the organization.

Remember, the manufacturing shop floor is where profits are made or lost. Cutting cost in manufacturing is key for the competitive edge. Having accurate and streamlined bills of material for products designed and assembled is a critical step in the manufacturing process. BOM strategies, aligned with lean practices, compose a process of transformation, improvement to operations and manufacturing cost reductions. One of the biggest mistakes a company can make is not placing importance on the bill of material strategy and structure.

About the Author:

John Paulson has more than 30 years of international experience in supply chain, manufacturing operations, and ERP / JD Edwards consulting. John's focus is implementing best practices in manufacturing, planning, and inventory driving operations to a lean and digital environment.

John can be reached at 503-819-0190, or email him at [email protected]

Bill of Material Training Workshop:

Schedule a training session with John Paulson on the following topics —

• Overview of the Bill of Materials
• Bill of Material – Process, Systems, and Integration
• Bill of Material Structuring Principals
• Who Owns the Bill of Material?
• Engineering Change Management
• Top Requirements of a Bill of Material
• Lean Strategy and Technique with Bill of Materials
• How to Implement Planning Bills
• Examination and Restructuring BOM's – The Methodology
• JD Edwards EnterpriseOne BOM Setups and Maintenance

Who Should Attend?

Engineering, Planning, Purchasing, Finance, Quality, Inventory Specialists, Business Analysts, MIS, Supply Chain Specialists

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Article Sources:

• Bills of Material for a Lean Enterprise, by Dave Garwood
• American Production and Inventory Control Society

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