A Software Buyer s Guide Kitting and Assembly March 2003
TABLE OF CONTENTS March 2003... 1 Kitting and Assembly Overview... 3 What Makes Up a Kit or Assembly?... 4 Tracking Materials... 4 Tracking Labor... 4 Other Components... 5 Pre-assembled Kits... 5 Build-to-Order (BTO) Kits... 5 Do Kit Components Need to Display on Internal and External Documents?... 6 Modifying Kits... 6 Disassembly... 6 Customer Kit Returns... 7 Tracking Kits and Components... 7 Best Software Solutions... 8
Kitting and Assembly Overview There are many ways that software applications can help distributors combine items for sale. Various forms of this process are known by many terms, including kits, sales kits, assemblies, and light manufacturing. The variety of names stems, at least in part, from business requirements for these processes that can vary by industry, product line, or even by customer. By leveraging software applications for the processes, many distributors have discovered that they can improve customer service, decrease the time from order to shipment, lower inventory-carrying costs, as well as reduce the administrative overhead required to schedule and manage the process. Best of all, the distributor gets a clear picture of the cost of the assembled inventory so that finished items are sold profitably. For a distributor to be successful in today s competitive market, inventory-carrying costs must be minimized and accurately tracked. One way of accomplishing this in many industries is by assembling finished goods to meet customer orders. This is particularly true when numerous items are sold containing the same base components, but have minor modifications that make them unique. One common example is kitchen appliances like dishwashers. Kitting is familiar to products that have configurable attributes such as color. Individual dishwashers are delivered from the manufacturer to distributors without face color plates. Once the distributor receives an order, they insert a front color plate based on the customer s request. This allows the dishwasher distributor to offer a wide range of colors white, black, stainless steel, even avocado green and harvest gold, without stocking complete units. The distributor gets a clear picture of the cost of the assembled inventory so that finished items are sold profitably. For example, if a distributor forecasted sales of 100 units, but did not know which of five colors would be the most popular, the distributor would need to stock 100 units each of five colors, or 500 units, to meet customer service levels at 100 percent. However, the distributor can greatly reduce capital expenditures by ordering only 100 costly base units and 100 each of the relatively less expensive faceplates. Kitting can also be required for regulatory reasons. Specifically, although the U.S. and Mexico participate in the North American Free Trade Agreement (NAFTA), there are still some regulations that govern shipments between the two countries. Companies have established maquiladoras, or Mexican factories within a trade zone close to the U.S./Mexico border. In many cases, although raw materials flow from busy ports in Los Angeles to the Mexican factories, returning a fully complete finished product back to the U.S. may incur higher tariffs than a partially assembled item. U.S. distributors sometimes take delivery of partially finished components and then complete the assembly in their own U.S. facilities. Many distributors are engaged in kitting due to increased financial pressure. They may find it more cost effective to perform a value-added operation as a distributor rather than paying to outsource. In some instances, the process or product may be proprietary and a distributor would want to control the assembly in-house. Finally, some distributors have a business model that is contingent on kitting. For example, a distributor may accept a manufacturer s returns and rejects, and then refurbish them for sale 3
in foreign markets. In this case, they will want to track both the material as well as the labor costs involved in repairing and repackaging the products. These distributors can only record accurate costs and achieve guaranteed profitability with their pricing decisions by using the kitting process. What Makes Up a Kit or an Assembly? Because accurately tracking inventory costs is so important to the financial well being of distributors, software applications can automate the tracking of kit costs. This includes tracking the material, labor, miscellaneous expense items, and even outside processes required to track items. In most industries, materials and labor are the two most significant cost contributors. Tracking Materials A kit or assembly, which is a finished product, is usually made up of individual components, including materials. This is sometimes also referred to as a Bill of Material, particularly in manufacturing environments where the list is more extensive and often integrated with a routing, or sequence of processes. Distributors often use kitting to create a finished good from partially completed, or sub-assembled components, as in the dishwasher example stated previously. Most software applications that provide kitting functionality allow materials to be assigned to a finished good. The quantities of material, as well as the corresponding unit of measure, are indicated for each assembled item. Individual material costs are also tracked and rolled up into the finished product. Software applications can automatically decrement the on-hand balances of individual components as the finished good, or kit, is completed and the corresponding inventory count increases. For example, if a distributor sells first aid supplies, they may offer a home emergency kit that contains bandages, antiseptic, aspirin, and gauze. As the kit is completed and stocked in inventory, its on-hand balance increases. This results in a corresponding decrease in the amount of individual materials in stock. Tracking Labor Labor costs can become a critical element of the overall cost of a finished kit. Consequently, most software systems can accommodate labor as a miscellaneous inventory item. More advanced systems, particularly those that offer full manufacturing capabilities, can accommodate standard labor reporting that is automatically assigned or allocated as a finished kit is completed in the system. This is often referred to as backflushing. Labor can also be tracked by having individual employees record the actual time required to assemble a kit. The latter gives a much more accurate cost, but is usually more appropriate for manufacturing environments where the company makes or even engineers products to order resulting in wide labor variances. 4
Other Components Some products require the expense of items that are not normally tracked in inventory. For example, if products must be glued or taped together, the glue and tape would be expense items rather than products typically available for sale. Most applications accommodate expense items by creating them as miscellaneous inventory, but not allowing them to be sold individually. This permits the costs to be rolled into the assembly like other materials. Pre-assembled Kits Pre-assembled kits are kept in stock as a finished good and can be used to immediately fulfill orders. The individual components of a pre-assembled kit will not appear as quantity on hand and will not be reflected in inventory as individual carrying costs. Instead, the on-hand balance and rolled-up costs are reflected in the finished kit stock. Pre-assembled kits can be used to immediately fulfill orders. In some instances, distributors may want to purchase fully assembled kits from their vendors without any value added in-house. This can be particularly valuable with more advanced software systems that handle component-level substitutions and returns. The purchase of assembled kits is also important for distributors who create multi-level kits; that is to say they use a kit as a component to create another kit. Some software applications also enable multiple levels of assembly, or kits within kits. If a component item of a finished good is made up of several kit items, it is referred to as a subassembly. An electric scooter manufacturer, for example, may sub-assemble a standard motor that is used for finished products. The wheels, motor, platform, and handles make up the rest of a final assembled item. Build-to-Order (BTO) Kits When a kit is not assembled until a customer orders it, it is referred to as a build-to-order (BTO) kit. These are common for products that offer customers configuration options prior to purchase, such as dishwashers. Systems may stock the components in inventory, but the kit is not assembled and recognized as a kit until it is picked and shipped. BTO kits never have an on-hand balance or carrying costs. BTO kits are also sometimes called sales kits, as the individual components are recorded in inventory on-hand balances until sold. The BTO kit part never has an on-hand balance and therefore does not have any inventory carrying cost. It is rare to track actual labor with BTO kits. 5
Do Kit Components Need to Display on Internal and External Documents? Kits can potentially contain a lengthy list of components. In these situations, organizations need to determine who needs to see what level of information. There are internal employees to consider: for example, do customer service representatives need to see all components exploded as soon as they enter an order? Do warehouse employees need to see all of the component materials on a pick list? The customers need for detail must also be considered. Do customers need to see the components on quotations, order acknowledgements, packing lists, or invoices? If assembled kits are ordered directly from a vendor, does the purchase order need to have that level of detail? Finally, if a company is shipping kits and their transportation company requires a bill of lading (BOL), do they need to see components? All of the interested parties in a business relationship can have varying requirements as to what they need to see on component lists. Ideally, the software system should track kit substitutions. Modifying Kits Depending on the complexity of kitting requirements, companies may need to modify kit components. If, for example, a company runs out of a #10 brass washer in an assembly, they may be able to substitute a steel washer of the same size temporarily. Rather than creating a new, finished good in inventory, some systems can accommodate substitute items and even quantities as a one-time modification, without having to create a new part number. Ideally, the system should track these substitutions. For example, if a quality issue ever arises, it s best to know exactly how a specific item was built. The system should also track the cost of the component items, particularly if actual costing is being used. This will provide the most accurate picture of profitability, especially if the change to the components is materially significant. Disassembly If assembled kits are kept in stock, they may need to be disassembled at some point in time. This can occur if components are common to other products. If one product goes out of stock, the common component may be taken from another overstocked product to fulfill orders. Also, if a kit component needs to be returned to a vendor, it may first need to be disassembled. 6
Customer Kit Returns The reality of any business engaged in product sales is that occasionally customers return items, including those that are stocked as kits. Many systems provide a broad range of features supporting kit returns, kit component returns, and associated transactions. Most systems allow you to return kits, and some systems even incorporate kits into the Return Merchandise Authorization (RMA) processes. More advanced systems will enable the return of kit components so that customers do not have to return an entire item if something is damaged, defective, or no longer desired for some other reason. In our previous dishwasher example, if a customer can return just the Avocado Green faceplate for something more stylish rather than returning an entire dishwasher, there would be significant savings in potential shipping and other charges. If the system permits the modifications of kits, it should also allow for the return of components that were substituted into the initial material list. Tracking Kits and Components As with many inventory items, kits need to be tracked by lot, serial number, or both. In addition, components may need to be serial and lot tracked as well. This is particularly true when quality is an issue. If a quality defect is reported on a particular lot of a component, it may be necessary to trace the defective parts to the finished product assemblies where it was used. Another common example of tracking components is if a product is returned from a customer for defective reasons. The finished kit could be disassembled and the component item returned to the vendor. This disassembly may require appropriate serial tracking. If the system permits the modification of kits, it should also allow for the return of components that were substituted into the initial material list. 7
Best Software Solutions Best Software has more than 60,000 U.S. companies who use its distribution solutions to run their core business. Best Software has over 60,000 companies in the U.S. using its software products to run their distribution business every day. Best offers a full range of products to suit a variety of business needs because distribution and kitting requirements vary by industry, company size, and business requirements. Better yet, as your needs evolve, Best Software can offer a solution to transition with you. The chart below shows just a few kitting features of three popular Best Software products: Peachtree Complete Accounting, MAS 90, and MAS 500. Peachtre e MAS 90 MAS 500 Kits/Assemblies Component List/BOM Material Tracking Quantity tracking Multiple units of measure Labor as a component Standard labor / backflushing Actual labor reporting Costing: LIFO Costing: FIFO Costing: Actual Costing: Standard Costing: Replacement Pre-assembled kits Built to Order/BTO kits One time modifications Without using new part # Kit disassembly Return of entire kit Return of kit component Serial/lot kit tracking Serial/lot component tracking 8
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