2nd May 2019
If your business stocks a range of products that are ‘made’ or sold as a combination of multiple items, ensuring you use the correct method of stock management and costing will avoid any accounting issues and ensure your costs, sales, margins and stock valuations remain accurate.
Understanding how each different option works and how it should be treated can have a significant impact on sales and costs, so here is a quick guide to some key terms and what they mean.
BOM/Bill of Materials
A BOM 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. A BOM will typically have a product code (SKU) of its own and may be held ready assembled in stock, or simply have a component list which helps guide a picker/packer or the assembly line to create the final product.
Some components within a BOM may be sold individually, i.e. not always as part of a BOM.
Most accounting systems will be able to hold ready assembled items in stock but also look back down the assembly list to the individual component parts and be able to tell you how many BOMs can be assembled from component stocks.
A BOM may have its own sale price and cost price which are not always a simple accumulation of the competent prices. This may be because the combined sales prices of the individual parts do not make the final BOM competitive or you may wish to apply an assembly cost to the BOM which pushes the sale price higher, in order to achieve the same margin. The sale price of a BOM may also be use a different margin or mark-up formula to an individual item.
SKU/Stock Keeping Unit
A SKU is the code or reference applied to a product for inventory management or sales purposes. A SKU can be generated by you and may tell a story e.g. TS-LS-WH for a long sleeve, t-shirt in white; or it may be system generated and simply be an alpha numeric.
SKUs can be applied to all aspects of your product inventory and may even include non tangible items e.g. labour time or consultancy. Applying SKUs allows you to track revenue by product and can also, in the case of BOMs allow you to differentiate between a finished item and one or more of its component parts.
A warehouse kit typically refers to a group of products which are sold as a single package but not necessarily held as a combined unit in stock. Unlike a BOM, a kit does not have to include the same items each and every time. Kitting can be used to manage multi buy deals or pack products whereby the exact make up of the pack has variables e.g. buy 3 t-shirts of unspecified/variable colours.
Whilst a kit will still require a stock movement for each of its individual elements, you do not always have to track the sale of the kit itself.
Kitting is commonly used for retail point of sale (POS) or items shipped alongside standard SKUs or BOMs.
If you’re struggling with managing your inventory or need some advice on how to track sales and costs for products, please contact me for more details. It’s not always entirely straightforward and getting it right from the start can avoid unpicking issues later which can become snowballs if allowed to continue unchecked.