DEFINITION of 'Manufacturing'

The processing of raw materials into finished goods through the use of tools and processes. Manufacturing is a value-add process, allowing businesses to sell finished products at a premium over the value of raw materials used.

BREAKING DOWN 'Manufacturing'

Humans have sought ways to turn raw materials, such as ore, wood, and foodstuff, into finished products for most of history. By refining and processing this raw material into something more useful, individuals and businesses were adding value. This added value carried with it a higher price, making manufacturing a profitable endeavor. People began to specialize in the skills needed to manufacture goods, while others provided funds to businesses to purchase tools and materials.

How products are manufactured has changed over time. The amount and type of labor required in manufacturing varies according to the type of product being produced. On one end of the spectrum, products are manufactured by hand or through the use of basic tools using more traditional processes. This type of manufacturing is associated with decorative art, textile or leather work, carpentry, and some metal work. On the other end of the spectrum, mechanization is used to produce items on a more industrial scale. This type of manufacturing does not require as much manual manipulation of materials, and is often associated with mass production.

The industrial process used to turn raw materials into products in high volumes emerged during the Industrial Revolution of the 19th century. Prior to this period, handmade products dominated the market. The development of steam engines and related technologies allowed companies to use machines in the manufacturing process, reducing the number of personnel needed to produce goods while also increasing the volume of goods that could be produced.

Mass production and assembly line manufacturing allowed companies to create parts that could be used interchangeably, allowing finished products to be made more readily by reducing the need for part customization. The use of mass production techniques in manufacturing was popularized by the Ford Motor Company in the early 20th century. Computers and precision electronic equipment have since allowed companies to pioneer high tech manufacturing methods. Products made using these methods typically carry a higher price, but also require more specialized labor and more expensive capital inputs.

The skills needed to operate the machines and develop the processes used in manufacturing have changed drastically over time. Many low skill manufacturing jobs have shifted from developed countries to developing countries, as labor in developing countries tends to be less expensive. More skilled manufacturing, especially of precision and high-end products, tends to be undertaken in developed economies. Technology has made manufacturing more efficient and employees more productive, meaning that, even as the volume and number of goods manufactured has increased, the number of workers required has declined.

Economists and government statisticians use various ratios when evaluating the role manufacturing plays in the economy. Manufacturing value added (MVA), for example, is an indicator that compares manufacturing output to the size of the overall economy. It is expressed as a percentage of GDP - Gross Domestic Product. The ISM Manufacturing Index uses surveys of manufacturing firms to estimate employment, inventories, and new orders, and is an indicator of the health of the manufacturing sector.