What is Bill of Materials? | TranZact

Sep 7, 2021 in Documents



Production or Manufacturing whenever you all hear these kinds of words, the first thing which comes to your mind will be factories and machines. And much other stuff related to the product creation process. But do you have noticed about what is the first step taken into the production planning process? It's the creation of the Bill of Materials (BOM) document. Without BOM, you cannot estimate anything about production like raw materials quantity, other resources requirement, cost of production, profit estimation, etc.

Now to clear the doubts of my readers about this blog. It will answer all your questions about the Bill of Materials (BOM), its usage, meaning, the different types, and many other exciting things.

What is Bill of Materials (BOM)?

Before going to a standard definition, let's understand the BOM with an example. Suppose you want to make a particular favorite food item say a Pizza. Then to make that Pizza, you will need a list of ingredients for collecting them before going for cooking. And after you got all your ingredients, you will need an instruction manual to guide you with the cooking process. So, after all of that, your final product will get ready.

The Bill of Materials (BOM) is an exhaustive list document that tells about all the raw materials, sub-assemblies, intermediate assemblies, and information required to manufacture a finished product. The BOM provides all the relevant information like the quantity, quality, shape, size, and others for the production process. The bill of material serves as a communication medium between multiple manufacturing partners and a single manufacturing plant.

Why is a Bill of Material (BOM) needed?

It is the same question as to why we need a cooking guide for making our favorite Pizza? You may not be knowing the ingredients, methodology as to how to cook it, and that is the reason for using the cooking guidebook.

So same reason goes with BOM people who are actually working in the production process may not have a complete idea about the whole process. And if they, by their own judgment, change any component in the manufacturing process, it may go haywire.

Also, the top management cannot easily understand the manufacturing process requirements because they are not working on it directly, and they will need a standard document to understand it. So these are some common reasons where the BOM's presence is necessary. Now let's look into some detailed reasons where BOM helps a business out.

Material purchase planning Material requirement planning and tracking

Material Purchase Planning

BOM makes clear what all raw materials, resources, and steps, requirements are present in the organization. And accordingly, the quantity requirement is also there. On the basis of these pieces of information, the raw material procurement process becomes easy.

Cost Estimation

With the help of BOM total quantity and proportion of raw materials required for a particular product gets known. And that is how if we want to calculate the cost of production, it can get done. Further, the management can make decisions based on this cost estimates data and plan the future working model.

Inventory Control

BOM gives organizations ideas about raw material and other resources consumption. And that's how they project their short and long-term manufacturing plans. Accordingly, using up their working capitals and control their inventory needs. Further, they can quickly determine if there is any problem with the inventory consumptions due to discrepancies.

Read more about - Inventory Control: Six Best Techniques To Follow

Material Requirement Planning (MRP) & Tracking

BOM is one of the first steps in the Material Requirement Planning (MRP) process, essential to all manufacturing concerns. The process involves many steps. But BOM helps them ascertaining all the quality standards, proportions, and other specific instructions for creating the final product. And accordingly, companies plan everything out. Further, they can easily track everything like whether raw materials reached the warehouse or not, stock levels are sufficient or not, and if there is some additional need of resources or not. And this all goes on continuously because of the Bill of Materials.

Maintaining Cashflow

With the help of BOM and the organization's plans, the requirement of working capital will get anticipated. Accordingly, the company will know how to manage their cash inflows and cash outflows to pay for their inputs needs. Further, they can put aside some additional funds for specific months where the procurement quantity will increase on the basis of BOM's material proportions.

Read more about - Ways To Improve Cashflow In SMEs During Pandemic

Vendor Selection

Bill of Materials specifies the quality and different other specific information for product preparation. And firms using this erudition select the different suppliers or vendors for their raw material requirements. The importance of vendor selection is essential because, in emergency needs, you can rely upon them. Many factors apart from quality and specification requirements go on for supplier selection and rating process.

Read more about - What is Supplier Relationship Management & Supplier Rating – 6 Methods for doing Vendor Rating.

Types of Bill of Materials (BOM)

In different industries, if you go deep down, many types of BOMs will be present. But majorly, there are only two kinds of BOMs that are differentiated on the basis of their structure. Let's discuss them further.

1. Single-level BOM (Bill of Materials) -

As the name suggests, is the single-level bill of material that shows the components required to create either one assembly or sub-assembly.

The meaning of assembly is the final products that can be sold and used directly. The sub-assembly is the finished product that can become input for other manufacturing processes.

This BOM is used directly in production lines to ease out the understanding of the whole process.

2. Multi-level BOM (Bill of Materials) -

The Multi-level BOM has one more name of Indent BOM. So this particular structure BOM helps in showing the relationship between components, sub-assemblies, and main assembly. This relationship has two other titles of Parent-Child and Top-Down methods.

This BOM is of hierarchical nature, in which the top-level shows a sub-assembly that is one of the main components of the assembly. And how other sub-assemblies, when put together, creates the final product. 

The Multi-level BOM can have both single and multi-level BOMs of sub-assemblies and their own sub-assemblies. Accordingly, the Multi-level BOM helps to break down the process of building up a final product that will have an ultimate use for consumption of any kind.

How to make a Bill of Material?

From all the above discussions, you all can understand what BOM is, what it does, and what are its two types. And that's why you are wondering how to implement it in your own organization. So to solve this problem, you can use any automation software to create a BOM.

But before that, you should break down all the components and procedures used to create your main final product. Accordingly, you will get to know about all the components and whether you will procure them from somewhere else or will manufacture them. Further, you will decide about the person who will create it and can add revisions to it. Then you will decide about the structure of BOM if it will be single or multi-level. And after that, you will start listing it with the help of a software solution.

Way Foward

Now, if you are implementing the usage of BOM in your organization. Then I think you are doing it to maintain clear communication and better understanding between different departments. And also to collect and track data and learnings using which you can make efficient key decisions for your firm.

So these all things can only become useful to you only with a digital solution. Because if you will prepare the BOM manually, then the purpose of it will become faulty, and other things will suffer.

So it is advisable to use automation software for the preparation of BOM and other business activities. And the firm can choose from a variety of software available in the market only on the condition that it suits them and satisfies all their needs. TranZact is one such option available for SMEs and Manufacturing concerns.

TranZact is a digital transformation tool and platform for SMEs to digitize business processes right, from customer inquiry to dispatch. It helps in digitizing the core business activities, which involves the preparation of the Multi-Level Bill of Materials. It provides BI Dashboards, which tell about the position of cashflows, total balances of creditors, and other reports. That further helps the users to make data-driven efficient decisions for their business. So firms should choose this software or any other software only if they provide for their nature and size. Otherwise, go for other solutions available in the market if it suits them.


TranZact is a team of IIT & IIM graduates who have developed a GST compliant, cloud-based, inventory management software for SME manufacturers. It digitizes your entire business operations, right from customer inquiry to dispatch. This also streamlines your Inventory, Purchase, Sales & Quotation management processes in a hassle-free user-friendly manner. The software is free to signup and gets implemented within a week.