Bill of materials costs are extremely important because they affect the gross margin of the product.  As all manufacturers know, product gross margine is preserved at all costs because margin improvements fall directly to the bottom line.

The other reason gross margin is so carefully protected is to be able to scale the business.  If gross margins are good and opportunities exist, it is a low risk approach to scale the business up and improve overall profitability.  All of this happens because the Bill of Materials Costs are carefully controlled.  Any lack of attention to this, or a poor financial manager, will jeaprodize potential profits and growth.

Often contract manufacturing is used by smaller manufacturers to reduce the cost of production and reduce Bill of Materials Costs by outsourcing the work to be able to get volume discounts and alternative parts at lower prices.  This is another means to reduce Bill of Materials Costs, but it comes with risks as manufacturing outsourcing reduces internal volume and hands the experience effect to the outsourced manufacturer. 

Often items are missed in the bill of materials.  It is important to get all items, no matter how inexpensive, in the bill of materials.  By doing so you can protect yourself from unexpected and dramatic changes in the cost of one component or part required for manufacturing.  A good example of this was in the news several years ago when a factory, which was the only provider of a key chemical to the semiconductor industry, burnt.  Memory prices went up subtantially as a result as a result of the dramatic change in price of an insignificant component on the bill of materials.

Bill of Materials Costs are very important and Negotiation  for better pricing on items becomes a key business strategy.  Estimating higher volumes when negotiating prices on components is a common strategy.  This,  combined with optimistic views on volume often lead to difficult situtations for OEMs, particularly in cases where contracts are either take or pay.

Careful planning and analysis are the key to accurate estimates, low risk business positions and Bill of Materials Costs which are practical.