Manufacturing

A system in which raw materials are transformed into finished products while adding value in the process

What is Manufacturing?

Manufacturing refers to the processing of finished products from raw materials using various methods, human labor, and equipment according to a detailed plan in a cost-effective way. Large-scale manufacturing uses core assets, including assembly line processes and sophisticated technologies for the mass production of goods.

 

Manufacturing

 

Manufacturers take advantage of the economies of scale to enhance efficiency and produce more units at reduced costs. As a value-adding process, manufacturing allows raw materials to undergo a change process to become part of a product and eventually sell at a higher price than the value of raw materials. Information about manufacturing is compiled and disseminated by the Conference Board (CB) and is intensively examined by economists.

 

Summary

  • Manufacturing is a system in which raw materials are transformed into finished products while adding value in the process.
  • While individuals traditionally added value to raw materials by altering their structure, refining, and processing them into more useful finished products, the 19th century Industrial Revolution led to the mechanization of the manufacturing process.
  • Manufacturing significantly contributes to the growth of the economy based on its unique properties.

 

Understanding Manufacturing

Humans are historically linked with making artifacts from materials such as ceramics, stone, wood, and metal ore. Businesses and individuals add value to raw materials by altering their form, refining, and processing them into more useful finished products.

By adding value to raw materials, manufacturing creates wealth in the form of a profit, rendering it a profitable venture. While people started to specialize in the skills classical to manufacturing goods, other people provided businesses with funds to acquire materials and equipment.

The characteristics of manufacturing processes and operations continue to change over time. The type and amount of the workforce needed varies depending on the nature of the desired finished product. At one extreme, products are manufactured using more traditional processes, such as by hand or through the use of basic equipment. The method is associated with traditional artifacts comprising carpentry, metalwork, leatherwork, or textile production.

At the other, companies use special purpose machines to facilitate large-scale manufacturing. The latter process does not require as many manual operations.

 

Manufacturing Process

 

History of Modern Manufacturing

The history of manufacturing can be traced back to the Industrial Revolution during the 19th century, where raw materials were converted into finished goods. The period marked the transition from human labor technology into machinery and chemical manufacturing processes, turning artisans into wage laborers. Previously, outputs of handmade goods dominated the market.

The invention and improvement of steam engines and other technologies created an early modern industrial era where companies adopted machines in the manufacturing process. While the change increased the volume of finished products, it also reduced the number of workers needed to produce them.

For example, assembly line manufacturing and mass-production reduced the need for part customization. Instead, it allowed companies to manufacture replaceable parts while promoting the availability of goods.

One such company that popularized mass production techniques in the early 20th century is Ford Motor Company. Computer-controlled systems and electronic equipment used for precision help synchronize operations, enabling companies to adopt high-tech manufacturing processes.

Because of the specialized workforce and higher capital investment, the value added to products using the approaches usually bears a higher price. Developed economies tend to undertake high-skill manufacturing jobs required in more advanced technology and whose finished products are intended to serve mid- and high-end consumers.

Today, rapid technological changes are boosting efficiency in the manufacturing sector. In particular, product life cycles are becoming increasingly shorter without compromising quality. Also, the flexibility and responsiveness of technology help boost employee productivity.

 

Impact and Measure of Manufacturing in the Economy

Historical evidence points to the association between manufacturing and economic growth. Economists advance two sets of explanations for manufacturing as the engine of economic growth.

The first explanation centers on the special properties of manufacturing, while the second one looks at how the properties influence returns and economic growth. In the first case, manufacturing provides relatively broader opportunities for intensification and capital accumulation.

Also, manufacturing exploits economies of scale induced by technical indivisibilities and large-scale production. The higher learning opportunities offered in manufacturing production enhances technological advancement.

In the second case, economic growth is based on the premise that each economic sector causes “push” and “pull” effects on the rest of the economy. For example, the intermediate purchase and sale of productive inputs by the manufacturing firms impact the rest of the economic system.

Government agencies and economies use different types of ratios when assessing the significant role of manufacturing in the economy. For example, to compare manufacturing output to the economy’s overall size, the Manufacturing Value Added (MVA) ratio is used, which is a percentage of the gross domestic product (GDP).

Surveys of manufacturing companies are also used by agencies to estimate new orders, employment, and inventories. A typical example is the Institute for Supply Management, which compiles and publishes findings dubbed the ISM Manufacturing Report every month. Researchers and financial analysts use the report to determine the health of the economy and predict the stock market’s general direction.

 

Additional Resources

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

  • Cost of Goods Manufactured (COGM)
  • Economies of Scale
  • Manufacturer’s Suggested Retail Price (MSRP)
  • Master-Feeder Structure

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!