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.
  • Manufacturing is integral to the economy.
  • 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.

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.

Manufacturing can fall into a few different categories, including:

  • 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.

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.

Technology has made manufacturing more efficient and employees more productive. Although the volume and number of goods manufactured have increased, the number of workers required has declined.

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.

Example of Manufacturing

Look around you and you'll find many examples of goods that have been manufactured. Clothing is just one example. Manufacturing clothing involves a number of steps and processes to go from raw materials to finished goods. The industry uses natural raw (cotton, silks, etc.) and synthetic materials (like rayon and polyester) to manufacture clothing. Companies may need both human labor and machinery to produce their goods through cutting, sewing, and other finishing techniques before they are sold to the public.

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 Additive Manufacturing?

Additive manufacturing is another way of saying 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.

What Is Advanced Manufacturing?

Advanced manufacturing is a process that involves new technology to improve the way products can be made. This manufacturing process allows companies to add increased value to the raw materials that are used and to better serve their target markets. Newer technologies also help bring new products to market faster while increasing output.

What Is Contract Manufacturing?

Contract manufacturing occurs when one company hires another firm, usually a third party, to execute certain portions of their manufacturing process. For instance, an automotive company may hire another company to produce parts that it will use to manufacture cars.

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.