915728, 11:26 PM ‘Manufacturing: Defntion, Types, Examples, and Use as Indicator
TRADE
Manufacturing: Definition, Types,
Examples, and Use as Indicator
By WILL KENTON Updated September 16, 2022
Reviewed by GORDON SCOTT
Fact checked by
Manufacturing
[man-ya-fak-cha-rin]
The process of turning raw
materials or parts into
finished goods.
@ Investopedia
Investopedia / Candra Huff
What Is Manufacturing?
The term manufacturing refers to the processing of 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 than
the value of the raw materials used, Large-scale manufacturing allows for goods
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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:
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* Reduce redundancies
* Improve the quality of work
* Update equipment and procedures
* Set realistic goals
* Streamline intake, supply chain, and distribution channels!)
FAST FACT
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.
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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, 2]
‘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. 2
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.“
FAST FACT
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
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Accompany 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 ora 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.
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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.
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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.
Important: In 2021, an estimated 12.1 million Americans work in the
manufacturing sector. !°!
History of Modern Manufacturing
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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
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§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. 2°!
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
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will be. itis 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
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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.
Manufacturing
+ Often requires procurement of a raw material
+ Output is physical, tangible goods
+ Machinery and labor are essential to the process
+ Isa more specific type of process
Production
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+ Machinery may or may not be required
« Isa 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. !1"! 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).!"2)
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, (11)
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". '"4) 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.
ees
What Is Lean Manufacturing?
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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
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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.
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Related Terms
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required to construct, manufacture, or repair a product or service. more
Mass Production: Examples, Advantages, and
Disadvantages
Mass production is the manufacturing of large quantities of standardized products, often
using assembly lines or automated technology. more
What Is a Vendor? Definition, Types, and Example
Avendoris a party in the supply chain that makes goods and services available to
companies or consumers, more
Understanding Manufacturing Production and Its Different
Types
Manufacturing production refers to methods used to manufacture and produce goods for
sale, Read how efficient manufacturing production increases profits. more
What Is Total Quality Management (TQM) and Why Is It
Important?
Total quality management (TQM) aims to hold all parties involved in the production
process as accountable for the overall quality of the final product or service. more
Raw Materials: Definition, Accounting, and Direct vs.
Indirect
Raw materials are commodities companies use in the primary production or
manufacturing of goods. more
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