Manufacturing: Definition, Types, Examples, and Use as Indicator

Manufacturing: The process of turning raw materials or parts into finished goods.

Investopedia / Candra Huff

What Is Manufacturing?

The term manufacturing refers to the processing of raw materials or parts into finished goods through the use of tools, human labor, machinery, and chemical processing.

Manufacturing allows businesses to sell finished products at a higher cost than the value of the raw materials used. Large-scale manufacturing allows for goods to be mass-produced using assembly line processes and advanced technologies as core assets. Efficient manufacturing techniques enable manufacturers to take advantage of economies of scale, producing more units at a lower cost.

Key Takeaways

  • Manufacturing is the process of turning raw materials or parts into finished goods through the use of tools, human labor, machinery, and chemical processing.
  • Most products were handmade using human labor and basic tools before the Industrial Revolution.
  • The Industrial Revolution led to mass production, assembly line manufacturing, and the use of mechanization to manufacture larger quantities of goods at a lower cost.
  • Financial analysts study the ISM Manufacturing Report each month as a potential early indicator of the economy's health and where the stock market might be headed.
  • Manufacturing can be defined and classified under different types, processes, or techniques.

Understanding Manufacturing

Manufacturing is an integral and huge part of the economy. It involves the processing and refinement of raw materials, such as ore, wood, and foodstuffs, into finished products, such as metal goods, furniture, and processed foods.

Converting these raw materials into something more useful adds value. This added value increases the price of finished products, making manufacturing a very profitable part of the business chain. Some people specialize in the skills required to manufacture goods, while others provide the funds that businesses need to purchase the tools and materials.

As noted above, efficiency in manufacturing can lead to higher productivity and cost savings. Manufacturers are able to accomplish this if they are able to:

  • Reduce redundancies
  • Improve the quality of work
  • Update equipment and procedures
  • Set realistic goals
  • Streamline intake, supply chain, and distribution channels

Manufacturing is often reported on by the conference board and is well examined by economists.

Types of Manufacturing

How products are manufactured has changed over time. People have historically manufactured goods using raw materials. And in certain cases, they still do. Hand manufacturing involves the use of basic tools through more traditional processes. This form of manufacturing is often associated with decorative art, textile production, leatherwork, carpentry, and some metalwork.

Handmade goods are labor-intensive and require a lot of time. In some cases, they can command a high price, depending on the supplier and the type of goods. For instance, one-of-a-kind handmade fashion items can be sold at a higher price compared to something mass-produced. There are cases, though, where people who make goods using these techniques can be exploited, especially where labor laws are lax and demand for jobs is high.

Larger businesses use mechanization to mass-produce items on a much grander scale. This process involves the use of machines, which means that the manual manipulation of materials isn't necessarily required. Very little human capital is needed in the production process, although highly skilled individuals may be required to operate and ensure that machinery is running properly.

Additive Manufacturing

This type of manufacturing is commonly referred to as 3D printing. It involves the use of layers that are built up upon each other to create shapes and patterns in a three-dimensional process using a special piece of equipment, such as a 3D printer.

Advanced Manufacturing

This method involves new forms of technology to improve the production process. Companies can add even more value to the raw materials they use to better serve their target markets. Newer technologies also help bring new products to market faster while increasing output.

Contract Manufacturing

This is common in the manufacturing industry. Companies will enter into partnerships and business relationships with other firms to outsource certain manufacturing processes. For example, an automotive company may hire a third party to make parts that it will use in its assembly lines to make cars.

3D printing has been around since the 1980s.

Types of Manufacturing Techniques

Make to Stock (MTS)

The traditional production technique is make-to-stock, the manufacturing of a standard product based on forecast demand. A company estimates how many units will be sold over a given period of time, then plan in advance to manufacture that many goods. Goods are often held as inventory leading up to the release and broad distribution of the goods.

A company must have sufficient information in advance of a product release to understand how many goods it will need to manufacture. This includes using historical data from similar goods, understanding macroeconomic conditions, and considering customer expectations for specific product features.

The advantage of MTS is companies can often capitalize on scales of economy. Because a company sets a target level of manufacturing, it can plan in advance how much raw materials, labor, or equipment it will need and can often build the most robust manufacturing plans. On the downside, not meeting expectation leaves a company with unusable product, surplus inventory, and committed yet underutilized fixed costs.

Make to Order (MTO)

Opposite of MTS, make-to-order manufacturing entails working directly with a customer to understand their need and desired product specifications. Manufacturing typically only starts after a signed contract or letter of intent. In addition, manufacturers may generate light prototypes but will often hold off on starting manufacturing until full product specifications have been delivered.

MTO is most common in industries where specialized products are being made for a very specific purpose. Aerospace, construction, or technology (to a lesser degree) are examples of industries where manufacturers will often not manufacture a good until a government entity has agreed to purchase the aircraft or a tenant has signed a long-term lease agreement.

On one hand, MTO manufacturers can often charge a premium for their products as the good may not be easily acquired in a marketplace. This is especially true for highly-specified goods. In addition, MTO manufacturers often only make a good if a sale is lined up; therefore, it often never carries inventory. As a downside, MTO manufacturing often comes with uneven product demand that may result in slower periods of business.

Make to Assemble (MTA)

The third type of manufacturing technique is a make-to-assemble process. Companies try to get a head start by starting production on component parts. Then, as customers begin to place orders, companies assemble previously-manufactured components.

Because the company had partially completed the manufacturing process, the good can often be delivered faster to customers than under MTO processes. However, the company still runs the risk of being stuck with an inventory of forecast demand that does not materialize. In addition, the company risks losing the benefits of MTO and MTS by trying to balance each type of process.

Types of Manufacturing Processes

Finally, manufacturing can be divided into different production methods. Each method results in a uniquely different end product.

Discrete Manufacturing

Discrete manufacturing is aptly named because each product manufactured can be specifically identified. The manufacturing process leverages a bill of materials to track what raw materials or components go into each specific unit. In discrete manufacturing processes, units are often made on a production line where assembly line workers follow a production schedule and record material usage.

Process Manufacturing

There are two main types of process manufacturing. First, batch process manufacturing entails manufacturing a product based on a specific standard that uses a recipe or formula. Batch process manufacturing is often used in the food and beverage industry to make easily replicable goods of a specific quantity (i.e. a specific vessel of teriyaki sauce).

Alternatively, continuous process manufacturing entails consistent, ongoing operations that often manufacture a good around the click for a long period. Then, manufacturing is halted for a period of time before being resumed. Continuous process manufacturing is heavily used in the oil and gas industry when drilling for natural resources.

Mixed Mode Manufacturing

Some goods may entail a combination of both discrete and manufacturing processes. This is often the case for goods manufactured using batch process before these standardized goods are converted to more specific individual package. The initial stage to generate a product uses process manufacturing, while the unique specifics of the delivery method (including any customer customizations) are added in the second half.

Job Shop Manufacturing

An even more specific type of manufacturing process, goods can be manufactured using job shop manufacturing. This process is most often used when there is a batch to process yet the batch is different than a company's normal product. For this specialized, customized good, a company must often perform unique set-up and process steps including converting existing equipment to a more usable structure.

Repetitive Manufacturing

A potential subset of other manufacturing processes, repetitive manufacturing often breaks long manufacturing processes into smaller parts. Each part, often called a dedicated assembly line or manufacturing cell, is intended to manufacture only their specific part of the unit. Then, units are continuously transferred to the next subsequent dedicated assembly line. Any work in material resides within the manufacturing line as temporary storage areas are often not used.

In 2021, an estimated 12.1 million Americans work in the manufacturing sector.

History of Modern Manufacturing

Handmade products dominated the market before the Industrial Revolution. This period ushered in the industrial process, where raw materials were made into finished products in high volumes. The development of steam engines and newer technologies allowed companies to use machines in the manufacturing process. This reduced the need for human capital while increasing the sheer volume of goods that could be produced.

Mass production and assembly line manufacturing allowed companies to create parts that could be used interchangeably and allowed finished products to be easily made by reducing the need for part customization. Ford popularized mass-production techniques in the early 20th century.

Computers and precision electronic equipment have since allowed companies to pioneer high-tech manufacturing methods. Companies that use these methods typically carry a higher price but also require more specialized labor and higher capital investment.

The skills required to operate machines and develop manufacturing processes have drastically changed over time. Many low-skill manufacturing jobs have shifted from developed to developing countries because labor in developing countries tends to be less expensive. As such, high-end products that require precision and skilled manufacturing are typically produced in developed economies.

Measuring Manufacturing in the Economy

Economists and government statisticians use various ratios when evaluating the role manufacturing plays in the economy. For example, manufacturing value added (MVA) is an indicator that compares an economy's manufacturing output to its overall size. This metric is expressed as a percentage of gross domestic product (GDP).

The Institute for Supply Management (ISM) surveys manufacturing firms to estimate employment, inventories, and new orders. The ISM publishes the ISM Manufacturing Report each month to summarize its findings. Financial analysts and researchers eagerly await this report as they see it as a potential early indicator of the economy's health as well as a sign of where the stock market may be going.

$2.2 Trillion

Manufacturing has always been a key contributor to the United States economy. It's estimated that 10.8% of the U.S. GDP in 2020 was contributed to manufacturing. This was equal to a little over $2.2 trillion.

Steps of Manufacturing

These seven steps, following in sequential order, encompass not only the physical manufacturing of a good but the stages before and after a tangible good is made.

Step 1: Develop the Idea

Before any tangible good is made, manufacturing begins with concept development and the growth of the product vision. This product vision defines what the product is, who the target audience is, what the need for the good is, and what competitors exist. Many of these types of questions may define the good and help refine what characteristics will go into the actual product.

Step 2: Perform Market Research

Though many believe manufacturing only entails the physical aspect of making a good, the manufacturing process still incorporates researching the potential product to explore ways to make it better. This includes understanding what raw materials can be used, what equipment is needed, what conditions the good must be made under, and how the good will differentiate from competing goods.

Step 3: Design the Product

With research considerations in-hand, it's time to design the product. This should always be done in consideration of what the customer will need and use. This also should incorporate any manufacturing limitations discovered during the research stage. This also includes understanding the costs that will go into this product design so you can forecast what your product profitability will be. It is during this stage that the manufacturing process is most deeply rooted in research and development.

Step 4: Finalize and Prototype

With the design stage now complete, it's time to make final decisions on what the product will be. This includes making choices of what raw materials to use or how to define the manufacturing process. These decisions are implemented by creating an initial prototype. This means drafting a smaller-scale test product that mirrors what the true manufacturing product will be.

Step 5: Prototype Testing

Once the prototype is complete, it's time to test it. This includes analyzing actual resources that went into the good to better understand how much the actual product will cost and what its profit margin will be. This also includes finding weaknesses or inefficiencies in the manufacturing process. This is often the final stage before mass production begins; though changes can be made in the future, this is the time for big changes to be made without major implications on the product or manufacturing process.

Step 6: Manufacture the Good

Enough time, testing, and research has been done; it's now time to make the good. The company acquires the machinery and equipment necessary to make full-scale processes to manufacture the good. The company also invests in the full amount of labor, storage, insurance, and other costs related to a full manufacturing line.

Companies may choose to continually improve their processes; instead of returning back to prototype stages, they often review and implement smaller changes during the actual manufacturing step.

Step 7: Monitor the Process

In order to continually improve, the company must continually evaluate how the process is going and whether expectations are being met. The company must analyze how much the good costs to make and compare this against sale prices. The company must also evaluate product demand and scale up (or scale down) based on consumer preference.

Manufacturing vs. Production

Though sometimes referred to as the same thing, there are subtle differences between the manufacturing process and the production process. In manufacturing, a company must often solicit raw materials from third-party or external vendors to be processed into finished goods. For production, the company often has ownership of those raw materials.

The definition of each encompasses different processes. Production is broader and encompasses manufacturing, as production is simply taking input and yielding an output. Manufacturing, a more specific type of production, is the act of taking a raw material and transforming it into a tangible finished good.

The manufacturing process ends with a tangible good. Alternatively, production can end with a tangible or intangible good. Consider the theatrical example that is aptly named. A show or theater production literally ends with public entertainment to be consumed by the general public.

Because the manufacturing process is heavily reliant on raw materials, the manufacturing process often relies on heavy machinery or equipment. It also relies on set-up time and labor to establish the process. During production, machinery may not be required depending on the output.

  • Often requires procurement of a raw material

  • Output is physical, tangible goods

  • Machinery and labor are essential to the process

  • Is a more specific type of process

  • Often entails previous ownership of the inputs for the process

  • Output may be tangible or intangible good

  • Machinery may or may not be required

  • Is a less specific type of process

Example of Manufacturing

Known for its efficient manufacturing process, Toyota Motor Corporation is a historically well-known and successful manufacturer. The company uses a lean manufacturing system to produce vehicle order by customers in the quickest and most efficient way possible. At the end of 2021, Toyota announced it was increasing its long-term forecast of battery electric vehicle sales, planning for 3.5 million units sold in 2030 (up from the previous plan of 2.0 million).

The company's manufacturing process is based on two core concepts:

  1. Jidoka: When there is a production issue, the equipment stops immediately to prevent future defective products.
  2. Just-in-Time: Each process manufactures only what is essential for the current process. This includes sourcing just enough material without carrying excessive amounts of reserves.

Under jidoka, engineers design and build systems by hand to intricately understand the manufacturing process. Then, they carefully simplify operations and transition to leveraging machines. The goal is for the manufacturing process to leverage repetitive processes that make the manufacturing process more simple and less expensive.

Under just-in-time, Toyota strives to eliminate "waste, inconsistencies, and unreasonable requirements on the production line". When an order is received, the production instructions must go to the manufacturing line immediately. The manufacturing line must have the required materials and parts available. Any deficiencies are quickly resolved by swapping similar parts.

What Is Lean Manufacturing?

Lean manufacturing is a form production that can be used by manufacturers that want to reduce production system time in order to increase their efficiency. Implementing a lean manufacturing approach means that a company wants to boost productivity while eliminating as much waste as possible. This could mean cutting back on operating costs and lead times.

How Do You Calculate Manufacturing Overhead?

Manufacturing overhead is the total indirect cost associated with manufacturing. This includes any expenses like employee wages, asset depreciation, rent, leases, and utilities. Costs like materials are not included.
In order to calculate your manufacturing overhead, take your monthly overhead expenses and divide that total by your monthly sales. You can multiply the result by 100 to get the total percent of monthly overhead.

What Is the Purpose of Manufacturing?

Manufacturing is the process of converting a raw material into a finished, tangible product. Manufacturing entails making a process efficient as it converts specific resources into a different resource, often for the purpose of being sold to a customer.

What Are the Steps of Manufacturing?

The manufacturing process often begins with an information-gathering stage where engineers and management learn about a process. Prototypes are often created and evaluated. Then, specific designs are implemented, and commercial production begins. As goods are made, they are inspected, shipped, and delivered to the next user of the finished good.

Why Is Manufacturing Important?

Manufacturing is critical for most, if not all, of the goods around you. Without a formal process to convert raw materials into more complex goods, we would be without electronics, appliances, transportation, and many facets of life that make our days more efficient, safe, and productive. Manufacturing is the backbone of the items we interact with, rely on, enjoy, and consume.

The Bottom Line

Humans have traditionally turned raw materials into finished goods for as long as we can remember. This process, which converts raw materials into finished goods, is called manufacturing. Businesses can still use human labor to convert these materials by hand. But they now also have the option to purchase machinery to mass-produce goods on a much larger scale. Technology has helped the way we manufacture our goods and continues to evolve. The advent of 3D printing is making it easier for individuals to produce finished goods themselves, without ever leaving their own homes.

Article Sources
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