What is BOM?

what is bill of materials

BOM is the core of the manufacturing process!

Bill Of Materials is the list of materials, assemblies and subassemblies that are necessary in order to produce an item. It also includes any processes that must be performed on the item once it goes into production.

Why is it important?

BOM is the connection between your inventory and manufacturing, it is the first step into the manufacturing process.

Every line in the BOM represents an item in your stock and includes all the important information about the item, such as: SKU, UOM, stock levels, whether you need to order some materials to be able to complete the production, and the estimated cost and amount for the quantity necessary to produce the finished item.

Depending on the complexity of the finished item, there are two types of BOM:

1. Single level – made directly from raw materials
2. Multi-level – besides the raw material it also has sub-assemblies with their own BOMs

The cost of production relies on that connection!

The raw materials used in the production have a certain cost (which includes the landing cost as well) and you are using a certain number of pieces or a certain quantity;
the work operations have their own cost per hour, and the duration can vary.
Because the BOM can be branched out to grasp an unlimited number of items and work operation, manually calculation the cost of production is a difficult, time consuming and detailed-oriented job, that is very prone to human error.
And if your finished product also has a certain quantity of sub-assemblies included in the production process, it can get even more complicated.

To make it easier to follow the production process, and calculate real time cost through every step of the way, preventing miscalculations and eliminating human error, that is the main goal of an ERP such as ERPAG!

The questions that a BOM answers:

As a source of information on how to manufacture a product and what it takes to do so, the BOM is spread throughout all the relevant departments in a company:

  1. Inventory – because it provides information on the listed products and compares the stock levels to check the material availability
  2. Purchasing – if some materials are not available, that triggers the fulfillment option, making a list of suggestions of what needs to be ordered so you are able to start (execute) the manufacturing
  3. Manufacturing – not only because the finished item needs to be manufactured, but because that finished item might have subassemblies that need to be manufactured as well
  4. Sales – because it will give you a predictable delivery process for the customer, which is based on the material availability (lead times for the necessary material to arrive, the duration of the manufacturing process itself) and the estimated cost of production (rolling-up the cost from the raw materials, through the subassemblies to the finished product, including the work operations cost)

BOM is the foundation for planning purposes throughout your company!

Given the above, an accurate BOM lays out all the info required to help making better decisions about purchasing the material, manufacturing the product and, in the end, selling it and all of that efficiently and cost-effectively.

In ERPAG, having an accurate BOM also has some additional perks, such as being able to review all the places in the product BOMs where a certain part number appears.

Based on various reports, it will also be a great indicator on how to set up your minimum stock quantity limits for the assemblies, sub-assemblies and finished items in your stock, and based on that, the system will give you an indicator of what you need to purchase and produce in the following period!

Inventory management and "The Lost socks" syndrome


This is a great example to explain what are the most common mistakes in warehouse and inventory management.

We are all aware of one of the greatest mysteries of all time - the lost socks! :)
The Internet is full of memes and comics covering this phenomenon.

But this phenomenon is a great example to explain what are the most common mistakes in warehouse and inventory management.

inventory management lost socks

There is an even pressure from the global market to handle this phenomenon. :)

The overall world market loses where so high that scientist formed a special group to fight this
out-of-the-planet mystery... (kidding)

But now for real - there was a recent study ordered by the famous appliance manufacturer for their new washer campaign:

In short, there was an attempt to try to calculate % of lost socks per washing cycle.
So, they even came up with the formula - that solves the mystery….

The science behind the scenes

Okay, now to get to the real things - what this has to do with the inventory management?

Behind this formula, there are basic thermodynamic rules guiding the entropy principle.
In short - It is not: “the order from chaos” but totally opposite: 

“When you have an order, during a time you will get chaos - if there is no influence by the order creating force.”

This same syndrome has been noticed in the warehouse management and inventory management.

This metaphoric example with socks is literally what happens in the supply management process.
There are some key phases in this process and in every phase, there are some critical steps. 

These steps, depending on the software optimization and organizational principles, can generate an error in the supply chain and inventory management process.
  1. Collection
  2. Distribution
  3. Processing
  4. Inspection
  5. Deliver
In the next picture you can see what happens in each process step and compare them:

inventory management lost socks

You can spot the analogy in the example - now let us see the logic in the inventory and warehouse example (the simplified model):

As these errors accumulate, they bring us the critical points in the process, which in the end lead us to:
  • stockpiling
  • return of goods management
  • orders overdue 
  • product swapping
  • mismatch
and overall boost business cost and downgrade our competitiveness.

Metric that is not shown in this chart and is also present is - TIME.
Now, loss of time from a small business perspective is devastating, why?

Usually small business tends to rely on a small group or, very often, one decision maker.
Also, these are often very vertically specialized people that bring more value to the end customer. And if that person needs to invest additional time to handle missing inventory, then they cannot deal with the real thing.

To get a bigger picture just look at these numbers:

Walmart, for instance, reported that in 2013 it lost $3 billion in revenue because of mismatches between its inventory records and its stock.

“Between 2003 and 2011, the U.S. Army lost track of $5.8 billion of supplies among its warehouses,” says Fadel Adib, the Sony Corporation Career Development Assistant Professor of Media Arts and Sciences MIT.

In 2016, the U.S. National Retail Federation reported that shrinkage — loss of items in retail stores — averaged around $45.2 billion annually.

That's why we need to address critical errors in the process and try to eliminate “missing socks” from our inventory and warehouse management. By doing that, we make our system more secure in repetitive cycles.

inventory management

By tackling each of critical step errors we can drastically improve the overall efficiency and drop costing. In ERPAG ( we can:

1. Picking
  •  by predefined lists generated by the system
  • double check with lot/serials/QR codes
  • speed up with bin locations
  • If there is an error, the system forces employees to notify system and trigger handling procedures
2. Transfer
  • Automate procurement process with the automatic fulfillment process
  • Predefined supplier (prevent double entry)
  • defined lead times
  • expected dates
3. Processing 
  • already prepared load of materials
  • If there is an error, the system forces the employees to notify the system and triggers handling procedures
  • Tag items as they leave shop floor
4. Pack
  • Compare against awaiting orders
  • Automatically reserves quantities 
  • Using labeling and scanning speeds up the process and eliminates human readability errors
5. Delivery
  • Assigns packages to close the supply chain cycle
  • Automatic label printing from the system
  • Track delivery by status tags from different platforms (mobile, desktop)
And there you have it, folks! The mystery is solved:

Use ERPAG to manage your inventory, and there will no longer be ‘’lost socks’’ in your stocks!


FIFO vs Weighted Average (Inventory costing method)

What is inventory costing? Types of inventory costing?In this text, we will not explain the reasons, differences, benefits, etc. between FIFO and average method, we will focus on application and results 

FIFO costing method

What types of cost calculation methods will be used by the companies are chosen among themselves depending on the different parameters and their needs.

In this text, we will not explain the reasons, differences, benefits, etc. between FIFO and average method, we will focus on application and results through ERPAG.

The inventory costing method can be set up for each warehouse differently (through the administration > warehouse list option).

FIFO costing method

Through our example, we will purchase and sell only one item through two different warehouses, one of which is set as FIFO and the other as "Weighted Average".

1. Purchase orders - receive

We made two purchase orders in each warehouse with one item where the purchase price is $ 50.00 and $ 60.00 (quantity: 10 pcs). And, of course, we "received" the items.

FIFO costing method

FIFO costing method

FIFO costing method

The easiest way to track the changes is through the 'stock card' or 'Inventory / Stock list'.

FIFO costing method

Since the items are just entering our stock, the result is identical.

FIFO costing method

Note: "Receiving" purchase orders and "packing" sales orders make changes in your inventory/stock levels, eg. they are increasing/decreasing the quantity of the items you have in stock.

2. Sales Order - pack

In our case, we will also create two sales orders (per warehouse) where we will sell 10 pcs from each warehouse (the selling price is $ 100.00 without tax).

Now there are differences in the stock card.

FIFO costing method

In the warehouse which has the FIFO costing method, the purchase price used in the sales orders (from which the COGS - Cost of goods sold is formed) is $ 50.00 and $ 60.00.

While at the warehouse which has the average costing price, the purchase price used in both sales orders is $ 55.00, the average purchase price.

Since we have sold the entire purchased quantity, the result looks identical (COGS: $ 1,100.00, Margin amount: $ 900.00), but if viewed individually after sales there is a difference.

The best way to see this is in the stock card as there are additional columns related to the cost difference after each change (margin).

FIFO costing method

In our example, we have a higher margin from the first sale than from the second one.

3. Sales Order - Sale of goods from two purchases

An example is simple when the sale is divided so that the goods sold belong to one purchase order. The whole quantity has one selling price. What will happen if in our next case the first Sales Order has a quantity of 11 pcs and another Sales Order has a quantity of 9 pcs?

FIFO costing method

There will be an average purchase price for mutual quantities.

FIFO costing method

In our example, 10 pcs will have a price of $ 50, while 1 pcs will have a price of $ 60, and that will make our stock price averaged $ 50.91 (10x50 + 1x60 = 560; 560/11 = $ 50.91).

4. Retuns, Void

When returning goods or voiding orders, the price taken will always be from the document,  regardless of the method of cost tracking, ie, the stock will be corrected by the price it was purchased/sold.

In our case, the customer will return 1 pcs from our second sales order.
FIFO costing method

5. Change in stock price / value in inventories

Stock price/value is automatically calculated at the entrance/exit of goods in the warehouse. However, accounting standards envisage the possibility of a correction in special cases (changes of the conditions on the market, adjusting to inflation or season, the need for a more accurate calculation of the selling price, etc.).

Please note that in some national standards this is allowed and in some it is not. Since ERPAG is primarily intended for internal use and not for the official management of business accounting books, we have enabled users to make corrections in a simple way.

We will take our example immediately after receiving the goods from the purchase order.

Stock price is in both warehouse $ 55.00 and quantity 20 pcs. We need to set the stock price to be $ 60.00.
FIFO costing method

We can make the wanted change either through the 'stock adjustment' or directly from the item setup through the 'set quantity' option.
FIFO costing method

In both warehouses we will type in the wanted price ($60 in our example)

FIFO costing method

We will make two sales through the Sales Order, 10 pcs from each warehouse. The result in out stock card is now different.
FIFO costing method

Stock adjustment increased the 'purchase cost balance' and from that moment, each exit of the items will be by the corrected price (in our case for $60).

What we see as a difference is COGS, where now is $1.200,00 while in other examples is $1.000,00. Since we increased our stocks by $100,00 and for the sake of keeping our accounting expenses and income in balance, Stock Adjustment has it's own 'journal voucher'.
FIFO costing method

We increased our supplies by $100,00 and for that amount we have an income (account: Surplus). If we decreased our supplies, the difference would be deficit.

6. Transfer between warehouses

The transfer between warehouses that have different methods of keeping the stock price is completely supported. The warehouse from which we send the items will have its stock decreased by the method it keeps to calculate his stock price, while the warehouse which receives the items will use their own method of calculating the stock price.

We will transfer 10 pcs from our example (after we received the PO) from the FIFO warehouse to the weighted average warehouse.
FIFO costing method

And we will sell the entire quantity from the weighted average warehouse.
FIFO costing method

Our stock card will now look like this:
FIFO costing method

7. FIFO in the manufacturing

The principle is identical as with sales, the 'input items' are like Sales Orders (they decrease the stock) while 'output items' act as Purchase Orders (they increase the stock).
FIFO costing method
FIFO costing method

Each work order has information about the estimated cost and actual cost. Depending on the costing method the results may deviate based on the work order, while in overall they will be identical.
FIFO costing method

8. Summary

Again we must mention that each company has to decide on its own which method will it use, based on its business needs.

Both methods will over a specific amount of time give an identical result.

From our experience, we can only say that if your purchase price are not changing that often, that it's better to use an average costing method. It's faster and easier to control. While, if you are working on the projects where on each sales/work orders you have a need to precisely control the cost, then we are giving an advantage to the FIFO method.

If you have changes in your warehouse, you won't be able to change the costing method.

In that case, we recommend that you open a new warehouse and transfer complete quantity over.

2019. ERPAG Inc


Bill of Materials (BOM) Management for Manufacturing

How to manage multi-level Bill of materials? What is the main benefit of implementing BOM in manufacturing? Modern cloud-based software in a mission to simplify bom management in manufacturing.

Bill of Materials Management

1. What is the bill of material (BOM)?

In the core concept bill of a material describes a product structure.
If we wish  to expand and get a bigger picture then we can define a bill of material like in this wiki citation:
"A bill of materials or product structure is a list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, parts, and the quantities of each needed to manufacture an end product."
As we can see BOM acts as a blueprint for our complex product.

2. Manufacturing overview having a bill of material in mind.

Today, SMB manufacturing is a more versatile concept than 30-40 years ago. From the small manufacturing point of a view, you didn't have to deal with overseas suppliers, online sales channels and rapid prototyping/estimating. 

In past times, just a small portion of manufacturing was outsourced from the main production facility to contractors, and usually, buyers were from the same city/state.

Today we are dealing with totally different business models in SMB, even though they look exactly the same.

e.g  We will make comparisons between 2 small business that compete for the same market in the same product category - smart child bike.
We will call them Company A and Company B.

Bill of Materials ManagementCompany A is a family business in wood manipulation industry for more than 50 yrs. They follow trends and expand portfolio with children bikes, toys etc. Main product designer designed simple bike and created BOM with estimates-after a couple of prototypes BOM has been approved and ready for the manufacturing. The complete manufacturing process is in house and company has its own resources to deal with manufacturing and assembly process.

Company B is a startup or early-stage small business. They also have great product designer that has designed cool small bike and created  BOM. 
But in this case, all manufacturing is outsourced and only the final assembly is in the house.

In both cases, ERPAG as a software solution needs to handle the complete process, from ordering, over manufacturing to final delivery to the customer.

What is expected from software solution is to give estimated manufacturing time, cost of labor, machining and landing cost.

Usually, we call this type of software Manufacturing Resource Planning or simply MRP. In one word we expect from MRP to give us a cost of manufactured goods as close as possible.

3. What are the basic steps to implement manufacturing based on the bill of material?

From our experience, everything starts with perfect inventory. 
You cannot even dream to implement MRP if you don't have good inventory management in your company.That means that you have a way :

  • to open new SKUs, 
  • to track serial, lot numbers using barcode or QR code generated from the system. 
  • Also, you need to define your warehouses (initial inventory, physical location, bins). 
  • to define your suppliers (lead time, purchase prices...).
  • to connect your sales channels (brick-and-mortar, eCommerce).

4. Creating Bill of material (BOM) in ERPAG
In ERPAG creating a bill of material is easy. We have created a special input form to make it easy to add components, sub-components and operations.

So basically what we need to do is to transfer each element of our Bike to a BOM.

Bill of Materials ManagementBill of Materials Management

As you can see from the image ERPAG fully supports Multi-level BOM. It enables you to create very complex BOMs and easily see the cost and inventory levels.
You can build up you tree-view structure where each level represents the position of an element in BOM.

The different levels within the BOM illustrate the parent-component relationship, otherwise known as a “multi-level BOM.” This means that every component or sub-assembly occupies a certain “level” within the BOM hierarchy. 

Each level has its own code so it can be tracked by the parent-child principle. In this way even if one component is used in multiple parts or assembly we will know its position in BOM.

Bill of Materials Management
Example of BOM structure in ERPAG

5. How to deal with the supply chain, and right-in-time order fulfillment?

Now back to our heroes, Company A and Company B.

Until this moment the workflow is more or less the same for both companies. Now comes the interesting part.
Upon receiving order ERPAG automatically triggers Fulfillment mechanism based on the technology latest algorithms. We track current available stock and update purchasing module in order to fulfill our orders.

In Company A case, ERPAG will generate more manufacturing orders to produce missing components.

As work orders unfold fulfillment, engine scans for missing basic components and triggers purchasing module.

Bill of Materials Management

Basic workflow:

  1. Receive an Order
  2. Generate WO based on BOM
  3. Compare against inventory 
  4. Generate all WO for missing sub-assemblies
  5. Automatic fulfillment process (PO ordering prepare)
  6. Order missing items from suppliers
  7. After receiving missing items we can finish our manufacturing process
  8. Assemble bottom up
  9. Deliver Finished goods
  10. Ship to customer

In the ordering process, ERPAG supports multi-suppliers per item so you can easily make better decisions .
That means that you will be provided the current item price from the system in the critical decision making moment.

All work-orders get an EXPECTED date based from the Supplier setup and expected date of Purchase Orders.

Bill of Materials Management

Now we can finish our manufacturing and input real material qty, the time recorded for each operation, generate serial and lot numbers.
Last step is to deliver manufactured finished good into specified Warehouse. 

In Company b case, ERPAG will generate WO based on SO received. All missing items in this scenario are outsourced. Based on inventory info, ERPAG populates fulfillment list and enables you to select best supplier options. Based on selection ERPAG can generate bulk POs and order missing items from contractors or outsourced suppliers.

Bill of Materials Management

After receiving all missing items, shop floor can continue with assembly and deliver finished good. Conclusion These are all very simplified scenarios and in our success stories we have seen BOMs with more than 40 layers or levels. Also with real contractors and dropship involved these scenarios and workflows can get little bit expanded, but still easy to follow. To try for free and test please go to: To see customer stories go to: Resources: "What is pseudo bill of material? definition and meaning". Retrieved 2018-04-17. ^ "Bill of Materials". Inventory Interface. Gerald Drouillard. 2001-12-28. Retrieved 2011-06-07.


About Security

ERPAG security blog.Clickjacking.Cross-Origin Resource Sharing.Formula Injection.Stored Cross-Site Scripting 


For ERPAG as a cloud-based application and our company as unity, the most important segment is security. When we say security, then we mean the safety of data access by our users, the safety of data on servers, the safety of handling such data by employees as well as the overall security of all other factors and procedures that enable ERPAG to function 24/7 all 365 days a year. In order for data security to be controlled, ERPAG Inc. has designated security officers by an internal document. Thanks to good organization and continuous education of employees with modern protection trends, ERPAG successfully passes security tests every year by Synopsys, one of the largest software security companies.

For secure access to data by our users, ERPAG uses multiple combined levels and protection techniques. Access to our service is possible only through the HTTPS  secured protocol using the verified SSL certificate and TLS1.2 algorithm. In this way, secure encrypted communication between the browser on the client computer and the ERPAG server is enabled, without the possibility that a third party (malicious software on a client computer or internet providers') will intercept the communication and encounter sensitive data.

Regardless of the fact that ERPAG does not store customer credit card information, we still respect the PCI Security Standards . Among the recommendations of the aforementioned standard, ERPAG introduced the mandatory use of strong passwords. Also, logging is enabled using oAuth2 authorization where a user, using his Google, Microsoft or Intuit account, authorizes ERPAG without leaving password information. The password recovery option allows the user to recover his forgotten account using his valid email address. ERPAG monitors user activity during logging and validates the password. In the event that there are more unsuccessful logging attempts in a short period of time, ERPAG will consider that someone is trying to use the password-guessing technique to access user data. Then the account will be suspended for at least 30 minutes and an email notice on the temporary suspension of the account will be received on the user mail. In this way, ERPAG prevents unauthorized persons or software from entering the user account with the above-mentioned method. One of the security techniques is also automatic logout for users who are inactive for more than 30 minutes in order to prevent unauthorized access to ERPAG if the user forgets to log out.

ERPAG contains a multi-level defense system from DDOS and Spoofing attacks by placing the attacker's IP addresses on the blacklist. Also, many other techniques of attacking or downloading user accounts have been prevented, and some of them are:

- Stored Cross-Site Scripting and Reflected Cross-Site Scripting (XSS) prevent injection scripts from client-side;

Clickjacking - preventing data from being stolen by redirecting clicks to malicious software;

- Cross-Origin Resource Sharing (CORS) - preventing the use of resources from other domains;

- Content-Security-Policy (CSP) - preventing the execution of the code from untrusted domains;

X-Content-Type-Options - prevents Internet Explorer from MIME-sniffing a response away from the declared content-type. This also applies to Google Chrome when downloading extensions.

- Formula Injection - preventing the implementation of embedded malicious code into a spreadsheet such as Microsoft Excel or LibreOffice on the client.

- Restricted File Upload - validate the file uploaded by the user (comparing the contents of the file with its extension, banning executable files .exe .bat .com .dll etc.) as well as checking the file by antivirus.

The database of each individual user is isolated in the so-called sandbox in order to avoid direct access. All sensitive data in the database are encrypted so that they are not possible to read outside ERPAG.

In addition to some of the above-mentioned types of protection, ERPAG replicates data to backup servers on multiple geo-locations, but in accordance with the GDPR and other regulations related to the storage of personal data.

Physical access to servers is limited and regulated by internal documents and protocols of companies that own large data centers and where ERPAG Inc. has leased servers. Also, access to user data by employees in ERPAG Inc. is strictly controlled and permitted only with the written consent of the user and the permission of the security officer, and only in cases when support is needed.

Data security is also affected by the user himself, who besides our engagement needs to understand that data security cannot be controlled from one side only. Irregular behavior by giving a user account to another person, sending a password to the mail, an irregular update of the operating system and browser, allowing access to the computer for third-party users, etc. provides access to user data on which ERPAG Inc. cannot affect.

Despite the mentioned protection techniques, security remains at the very top of our company's priority. Responsible behavior of our clients and employees in ERPAG Inc. allows ERPAG to function 24/7 in mutual satisfaction.