The first category of direct costs includes direct materials, known as Bills of Materials (BOM). These encompass all elements necessary to manufacture a specific product. How to register the cost of such materials? There are three fundamental methods:
- Backflush: logging based on registered production and BOM. Goods issue notes can be generated automatically based on this list. Batches are typically selected using known algorithms, such as First In, First Out (FIFO), or Last In, First Out (LIFO), depending on the industry.
Benefits: No need to involve an operator or build automated systems.
Drawbacks: There is a potential for errors, for example, if a different material is delivered than indicated by the algorithm.
- Direct registration of consumption: clearly determining each batch and quantity based on actual consumption rather than BOM consumption.
Benefits: High accuracy, relying on actual data.
Drawbacks: Time-consuming, as the data must be manually entered or a suitable data acquisition system based on automation needs to be developed.
- Hybrid Approach: using backflush for standard situations, and engaging an operator in direct registration in non-standard scenarios.
This is a compromise between the two previous approaches: the involvement of an operator or automation is limited but not eliminated entirely.
Acquisition with or without reservation
When discussing consumption registration, two approaches should be noted:
- Reservation Model: Materials are assigned to specific orders.
Benefits: Avoids errors related to using the wrong material from another order. This also eliminates issues of picking materials that belong to another order.
Drawbacks: Requires additional workload. What is more, in non-standard situations, when an element has to be added, an inter-warehouse transfer needs to be made and a reservation needs to be made again, leading to delayed reaction times.
- Non-Reservation Model: if materials are available on the shop floor, workers or machines can simply take them if they fit the process.
Benefits: Streamlined workflow. When a material is available, work can start immediately. There is no delay, no additional document circulation, or the need for transfers and reservations. Logistics is simpler as we deliver a specific material to one production area and not a particular place.
Drawbacks: Potential for taking materials from the wrong order, which can negatively impact the schedule.