The traditional bill of materials itemizes at least the direct material and labor costs associated with building a product, which one can use to determine the gross margin associated with the product, as well as for material and labor planning. More elaborate bills of material are more inclusive, covering such other items as the cost of commissions, semi-fixed and fixed costs, and the administrative costs of preparing invoices and tallying cash receipts. In all cases, the focus is on how many expenses one should include in the bill of materials from the range of possible expenses through a product's initial sales cycle.
But what if the product may be returned for remanufacturing? This introduces a second stage of the product life cycle. In this situation, the materials cost of the product generally declines to about 40% of the total cost, from about 70% in the initial stage of production. Also, the type of labor required varies considerably from the labor skills used to initially create the product. Further, there is the cost of developing a relationship with customers in order to convince them to turn in their used products for remanufacturing. Clearly, this calls for an entirely separate bill of materials that properly reflects the change in material requirements, as well as the altered labor routing required to refurbish the equipment. This second bill can be linked to the initial bill with a designation letter in its title. For example, if the initial bill of materials for a 4-cylinder engine is labeled 10011, then its second-stage bill can be labeled 10011-R.
The presence of a second-stage bill of materials presents an opportunity for the financial analyst, who should now model product profitability not only on the first product cycle, but also on the second one, using the second-stage bill of materials as a costing guide. Since remanufactured goods are usually very profitable, this can result in a major improvement in a product's total lifecycle profitability.
Not sure if remanufacturing will work for you? Consider that remanufactured goods are perfectably acceptable as warranty replacements in many industries. Though customers may not want to initially purchase a remanufactured item, requiring them to take such goods as part of the warranty agreement leaves them with no choice in the matter, and can save a company a great deal of money over the usual approach of issuing brand-new replacements.
Some cautions regarding remanufacturing: (1) It almost never works for fashion items, which are designed to be disposed of once used, and (2) it does not work well without a strong distribution network, since distributors can keep track of who owns products, and convince them to turn in their old equipment.