Shine,
Yes, this is a standard process in BC. You have the process correct, as you would use the "Exchange Production BOM Items" function to replace an existing component in your Production BOMs.
I think you are running into an issue because your Number Series doesn't have a Starting No. (but read on before you make this change)
The issue with the current process is lack of control and some limitations. The "Exchange Production BOM Items" will create a new BOM Version for the existing Production BOM. It will replace the defined Item with the new Item outlined during the process. You do have some settings around quantity relationship between previous Item and replacement Item, and whether you want to Certify that new BOM Version upon creation.
However, it comes with some limitations. The biggest is the Version No. series. Instead of the individual BOM having V1, V2, V3 and another BOM having V1, V2, V3...the Version No. applies to every new BOM Version created. Which means, unless you create a new Number Series for every BOM, you'll have some BOM Versions that start at 5 or V1200, even though it is the first BOM Version for that unique BOM. It would be better logic to increment the previous BOM Version for each BOM by 1, since the Primary Key involves the BOM and the Version Number, but this is sadly not an out-of-the-box option.
Another flaw in the process is BOMs with the same Item listed multiple times, but with different Routing Link Codes. The process doesn't handle this scenario and will throw an error message. The work-around is to Close that BOM, run the process, then re-certify and manually create the BOM version for that BOM.
I would love if Microsoft added some filtering capabilities to this process to better control the BOM updates, but that could be something you discuss with your partner/developer.
I hope this helps clarify the process.
Best Regards,
Ben Baxter
Accent Software Inc