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Trade Compliance

The Role of the Product Master File In Managing Bills of Material

In this blog, we'll discuss why the effective management of Product Master Data is not possible without the capability to accommodate detailed Bills of Material. 

Dan Gardner

Business Solutions Consultant

Introduction

Back in January of 2021 I wrote a blog entitled, “The Role of the Product Master File in a Successful Import Management Program.” The premise of that blog was that the Product Master Database serves as the “genesis file” from which virtually all import-related operational functions are born. Basically, I made the case that item-level requirements like product classification, country of origin determination and landed cost calculations are impossible to keep track of without a detailed Product Master file.

In this blog, we’ll be taking the above premise even further by exploring the topic of Product Master Data (PMD) within the context of Bills of Material (BoM’s). This time around, we’ll be looking at import and export environments, as well as the role of BoM’s in both a manufacturing, as well as a finished goods context. In all instances, the theme remains consistent: the effective management of Product Master Data is not possible without the capability to accommodate detailed Bills of Material. 

Bills of Material for U.S. Manufacturers that Import Raw Materials and Export Finished Goods

Needless to say, Bills of Materials were born in a production environment where manufacturers need to know the “recipe” for every product that they make. Composed of raw materials, components parts and/or sub-assemblies, BoM management became more complex when U.S. manufacturers began to import the materials they used to produce their finished goods.

Very quickly, manufacturers had to adjust Product Master Data Files and their corresponding BoM’s to accommodate import-related factors such as HTS classification numbers, country of origin and eligibility for Trade Preference Programs. These days, BoM’s that contain imported components are even harder to manage given requirements for Corporate Social Responsibility (raw material provenance), as well the need for fully costed Bills of Material that account for unit cost, transportation costs and customs duties.

While there are many BoM-related factors for manufacturers to consider when building a PMD file, we’ll talk about two that are particularly salient. First, it is not unusual for a raw materials importer to source the same item(s) from vendors in different countries. From a Bill of Material and Product Master Data perspective that means that the same item will have a different unit cost, landed cost and country of origin, all of which have to be captured on both the BoM and PMD file. 

For example, Item A from Mexico is eligible for duty free treatment under the USMCA, while Item A from China is subject to the Section 301 tariffs. Either way, both the Bill of Material, as well as the Product Master Data file have to be able to account for the same item coming from different countries. In this scenario, it is also likely that the two (same) items will have a different item number, thus increasing the possibility for confusion in the Product Master file.

Another important consideration for Bill of Material and Product Master Data management is the topic of common parts and/or ingredients. A goal of manufacturers that produce a broad range of products, companies try to use common raw materials that can be used in producing a number of different products. For instance, a pharmaceuticals manufacturer might use the same non-active ingredient that goes into five different products. 

Continuing this line of thought, one of the key features of Bills of Material that are integrated into a Product Master Data file is the ability to link item-level raw materials to the finished good(s) that are sold both domestically and abroad. In the case of common parts, it’s logical to state that a raw material that goes into several finished items must be tied to each of those finished goods, otherwise the PMD file will be sub-optimized. Unfortunately, that’s not always the case and subsequent activities like qualifying finished goods for a Free Trade Agreement, Country of Origin determination, or duty drawback becomes murky at best.

Bills of Material for Importers and Exporters of Finished Goods

As stated previously, Bills of Material have been historically associated with a production environment. These days, importers and exporters that deal only in finished goods (i.e. they don’t make anything themselves) also have to concern themselves with Bills of Material. Although somewhat counterintuitive, there are a couple of examples that help to illustrate this point.

First, consider a designer of wearing apparel that imports goods from manufacturers in countries such as India, Bangladesh and Pakistan. In its role as the designer of an item like a women’s top, it is the designer/importer that determines things like the type of raw materials (e.g. thread strength), as well as the composition of the article itself (e.g. cotton vs. polyester).

In the above scenario it’s easy to see that the designer/importer has to provide the Bill of Material…otherwise how would the overseas vendors know what raw materials to use? By providing a Bill of Material that can be tied to the finished item housed in the Product Master Data file, it will be much easier for the importer to classify the item (based on composition), as well as attain accurate landed cost data to determine the sales price of the finished article of clothing. 

Let’s switch things up and consider the case of a U.S. company that acquires medical equipment produced in the U.S. and that exports those finished products to overseas customers. In spite of the fact that the seller does not manufacturer the goods, they would need access to (or knowledge of) a product’s Bill of Material for purposes of qualifying for a Free Trade Agreement. Based on that level of detail, the seller could make reference to FTA qualification in their own Product Master Data file and know that a Certificate of Origin would be required upon export to the corresponding FTA country. 

An additional circumstance where Bill of Material information is critical is related to duty drawback. Although the U.S. exporter in the above example doesn’t manufacturer the goods, they could still be eligible for a drawback claim based on their ability to prove that some (or all) of the raw materials that constitute the medical device were imported. Again, access to and/or knowledge of the underlying Bill of Material is essential to this exercise. At the very least, the exporter should have a field in its own Product Master Data file that flags a given item as eligible for a duty drawback claim.

Using Technology to Embed Bills of Material in a Product Master Data File

With just a couple of examples, it’s easy to see just how important it is for Product Master Data files to not only capture details on finished goods, but their underlying Bills of Material, too. This is definitely the case for manufacturers of products that contain foreign raw materials, with the same being said for importers and/or exporters of finished goods. 

Unfortunately, many of the Product Master databases found in commercially available ERP systems were designed for domestic use and are not suited for the rigors of international trade. At the other end of the technology spectrum, importers and exporters that have developed “home grown” ERP systems experience similar challenges. In both instances, the best option is to acquire technology that not only integrates easily with off-the-shelf and home grown systems, but was purpose-built for the compliance, operational and financial demands of import/export trade.

With the advent of Application Programming Interfaces (API’s), it is not as difficult as it once was to align in-house systems with Product Master Data tools from Best-In-Breed software providers. In fact, API’s are much less cumbersome than Electronic Data Interchange (EDI) and the cost of running API’s has come down to the point where it is now economically feasible. Given the genuine need for BoM level management within a Product Master database and the existence of reasonably priced technology, purpose-build PMD tools have moved from a “nice to have” to a “must have”.  

Summary

If a company manufacturers products from imported raw materials, it is essential that said firm’s Product Master Data file can accommodate item-specific Bills of Material. Without that capability, there is just no way for that manufacturer to effectively address the compliance, operational and financial demands inherent to an international supply chain. 

Even if an importer doesn’t manufacture the goods they sell, the company has to provide a Bill of Material to their offshore suppliers so that products can be made to the importer’s specifications. Based on the detail found in a BoM, the importer can then execute on mission-critical activities like HTS classifications, country of origin, eligibility for Trade Preference Programs and duty drawback.

For exporters that don’t manufacturer, the same principles hold true. Whereas an original Bill of Material would be in possession of the producer, exporters need to know what the products they sell are made of for purposes (once again) of export compliance, country of origin and FTA qualification. Finally, since it is an export that triggers eligibility for a duty drawback claim, access to Bill of Material data is fundamental to the recovery of duty drawback funds.

3rdwave is not only sensitive to all of the above issues, we have developed a web-based, purpose-built Product Master Data solution that can literally house hundreds of Bills of Material. Based on this “genesis file” orientation, 3rdwave supports all facets of the import/export process, beginning with its state-of-the-art Product Master offering. For more information on how 3rdwave can unleash the power of your Item Master, visit our Master Data Management page.