# Understanding Manufacturing: Definitions, Processes, and Economic Insights

![Manufacturing: The process of turning raw materials or parts into finished goods.](https://www.investopedia.com/thmb/13HsZ_JVvJ1A7DEB8eKRGog-qLc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/manufacturing.aspfinal-246c15cbb03c4d21a4e477c18f6ad58c.jpg)

*— Investopedia / Candra Huff*

> **Definition**
>
> Manufacturing is the process of transforming raw materials into finished goods.

## What Is Manufacturing?

Manufacturing is the conversion of raw materials into finished products through the use of tools, human labor, machinery, and chemical processing. The amount of manufacturing conducted within a country is generally a sign of its economic health and strength.

Manufacturing lets businesses sell finished products for more than the raw materials' cost. Large-scale manufacturing supports mass production using assembly lines and advanced technology. Efficient manufacturing techniques help manufacturers use economies of scale to produce more units at lower costs.  

### Key Takeaways

*   Manufacturing has evolved significantly since the Industrial Revolution, shifting from hand-crafted goods to mass production through assembly line processes, allowing for greater efficiency and lower costs.  
*   Various types of manufacturing, such as additive (3D printing), advanced, and contract manufacturing, highlight the diversity and specialization within the industry, offering tailored solutions for different market needs.  
    
*   Manufacturing processes are distinct from broader production methods; while both create output from input, manufacturing specifically converts raw materials into tangible finished goods using machinery and labor.  
    
*   The role of manufacturing in the economy can be measured through indicators like Manufacturing Value Added (MVA) and the ISM Manufacturing Report, which serve as early indicators of economic health and guide market analysis.  
    
*   Lean manufacturing, exemplified by Toyota, emphasizes efficiency and waste reduction by employing concepts like Jidoka and Just-in-time manufacturing to enhance productivity and response to market demand.

## Manufacturing's Role in the Economy

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

Turning raw materials into useful products adds value and raises their selling price, making manufacturing profitable. 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](https://www.investopedia.com/terms/e/efficiency.asp) in manufacturing can lead to higher [productivity](https://www.investopedia.com/terms/p/productivity.asp) 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](https://www.investopedia.com/terms/s/supplychain.asp), and distribution channels  
    

### Note

Manufacturing is often reported on by the [conference board](https://www.investopedia.com/terms/c/conferenceboard.asp) and is examined by economists.

## Different Forms 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 uses basic tools and traditional processes, commonly linked to decorative art, textiles, leatherwork, carpentry, and 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](https://www.investopedia.com/articles/personal-finance/120914/8-federal-laws-protect-employees.asp) are lax and demand for jobs is high.

Larger businesses use machines to [mass-produce](https://www.investopedia.com/terms/m/mass-production.asp) items on a larger scale, reducing the need for manual labor. Very little [human capital](https://www.investopedia.com/terms/h/humancapital.asp) 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](https://www.investopedia.com/terms/1/3d-printing.asp). 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](https://www.investopedia.com/terms/f/flexible-manufacturing-system.asp) process. Companies can add even more value to the raw materials they use to better serve their [target markets](https://www.investopedia.com/terms/t/target-market.asp). 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.  

> **Fast Fact**
>
> 3D printing has been around since the 1980s.

## Key Manufacturing Techniques

### Make to Stock (MTS)

A traditional production technique is make-to-stock, the manufacturing of a standard product based on [forecast](https://www.investopedia.com/terms/f/forecasting.asp) demand. A company estimates how many units will be sold over a given period of time and plans 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 the scales of the 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 expectations leaves a company with unusable products, surplus inventory, and committed yet underutilized fixed costs.

### Make to Order (MTO)

Opposite of MTS, [make-to-order](https://www.investopedia.com/terms/m/make-to-order.asp) 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](https://www.investopedia.com/terms/l/letterofintent.asp). In addition, manufacturers may generate light prototypes but will often hold off on starting manufacturing until full product specifications have been delivered.

MTO is common in industries like aerospace and construction, where specialized products are made for specific purposes, often after a purchase agreement.

On one hand, MTO manufacturers can often charge a premium for their products as the goods 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, they often never carry 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, there is still 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.

## An Overview 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 uses a [bill of materials](https://www.investopedia.com/terms/b/bill-of-materials.asp) to track the components in each unit. In discrete manufacturing processes, units are often made on a production line where [assembly line](https://www.investopedia.com/terms/a/assembly-line.asp-0) 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](https://www.investopedia.com/ask/answers/071015/what-profit-margin-usual-company-food-and-beverage-sector.asp) 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 clock 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 manufacturing and process manufacturing modes. This is often the case for goods manufactured using batch processing before these standardized goods are converted to more specific individual packages. 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 from 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 a 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**
>
> As of March 2024, an estimated 12.95 million Americans worked in the manufacturing sector.

## History of Modern Manufacturing

Handmade products dominated the market before the [Industrial Revolution](https://www.investopedia.com/terms/i/industrial-revolution.asp). 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](https://www.investopedia.com/terms/c/capital-investment.asp).

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](https://www.investopedia.com/updates/top-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.  

## Evaluating Manufacturing's Economic Impact

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](https://www.investopedia.com/terms/m/metrics.asp) is expressed as a percentage of [gross domestic product](https://www.investopedia.com/terms/g/gdp.asp) (GDP).

The [Institute for Supply Management](https://www.investopedia.com/terms/i/institute-for-supply-management.asp) (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 and a sign of where the stock market may be going.

> **Fast Fact**
>
> Manufacturing has always been a key contributor to the United States economy. The industry's contribution to GDP was a little more than $2.85 trillion for the third quarter of 2023, about 10.3% of output.

## Key Steps in the Manufacturing Process

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

1.  **Develop the Idea**: Concept development and defining the product vision.
2.  **Perform Market Research**: Explore potential materials and production methods.
3.  **Design the Product**: Create design plans while considering limitations and costs.
4.  **Finalize and Prototype**: Make final decisions and create a test product.
5.  **Prototype Testing**: Analyze the prototype for cost-effectiveness and efficiency.
6.  **Manufacture the Good**: Transition to full-scale production and process optimization.
7.  **Monitor the Process**: Evaluate manufacturing performance and adjust as necessary.

## Comparing Manufacturing and Production

Though sometimes referred to as the same thing, there are subtle differences between manufacturing and production processes. In manufacturing, a company must often solicit raw materials from third-party or [external vendors](https://www.investopedia.com/terms/v/vendor.asp) 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 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 relies heavily 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
    
*   Is a more specific type of process
    

Production

*   Often entails previous ownership of the inputs for the process
    
*   Output may be tangible or intangible goods
    
*   Machinery may or may not be required
    
*   Is a less specific type of process
    

## Real-World Manufacturing Example: Toyota

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 customer vehicle orders in the quickest and most efficient way possible.

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 production approach that reduces system time to boost efficiency. Implementing a lean manufacturing approach means that a company wants to boost productivity while eliminating as much waste as possible.

## How Do You Calculate Manufacturing Overhead?

Manufacturing overhead is the total indirect cost associated with manufacturing. This includes expenses like employee wages, asset depreciation, rent, leases, and utilities. Costs like materials are not included. 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 to be 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.

## The Bottom Line

Manufacturing is the process of turning raw materials into valuable, finished goods. Manufacturing has progressed from manual methods to mechanized and advanced techniques, using tools and technology. The Industrial Revolution and modern innovations, such as 3D printing, contract manufacturing, and mass production, have significantly accelerated and simplified the process of manufacturing finished goods at scale.

Manufacturing is an important indicator of an economy's health and strength, notably in the measurement of gross domestic product and economic reports, which help investors and policy-makers in making decisions.

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>
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>     
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>     
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>     
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>     
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>     
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>      
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