What type of business operations converts raw materials to finished goods?

From phones to clothing to vehicles, manufacturing transforms raw materials into products using machinery. Different styles of manufacturing serve different needs, whether custom small-batch production or fully automated factories that run around the clock. Modern manufacturing was made possible by advances in technology — and technology continues to transform manufacturing operations worldwide.

What Is Manufacturing?

Manufacturing is the process of turning raw materials and components into tangible products using machinery, usually in volume. Manufacturing makes it possible for an inventor’s brainchild to complete the journey to becoming a consumer’s favorite gadget. An optimized manufacturing process can mean the difference between success and failure for any product.

What is a manufacturing business?

A manufacturing business is any company that uses raw materials or components to create finished goods. Manufacturing businesses make most of the products we use, including electronic devices, furniture, medical equipment and aircraft. Those products can be distributed either directly to customers or through intermediaries, such as retail stores. Some manufacturers make components that are incorporated into other companies’ products.

Manufacturing vs. wholesaling: Wholesalers serve as intermediaries between manufacturers and retailers. They buy products in bulk from manufacturers, then store and resell them to retailers and other businesses in smaller quantities at a higher per-unit price.

• Key differences: While manufacturers design and build products, wholesalers focus on distributing those products. Using wholesalers to handle distribution allows manufacturers to reach customers with less investment and enables them to direct their energies into design and manufacture. Wholesalers may also add value by helping to market and support products.

Manufacturing vs. production. The terms manufacturing and production are often used interchangeably. However, manufacturing is just one type of production. While manufacturing refers to the process of making products from raw materials with machinery, production is a broader term that can be applied to the creation of many different products and services using manual as well as automated processes.

• Key differences: While manufacturing results in physical, tangible products, the term production can apply to less-tangible outputs as well. These include the outputs of service businesses, such as stock market analysts, house cleaners, dentists and authors.

Key Takeaways

• Manufacturing is the process of assembling raw materials into products using machinery, typically on a large scale.
• Manufacturing generates more than 11% of total U.S. economic output — and manufactured products account for the bulk of worldwide trade in goods.
• Three key types of manufacturing are make to stock (MTS), make to order (MTO) and make to assemble (MTA).
• Manufacturing systems are tailored to different product volumes and customer requirements, from systems for custom small-batch products to fully automated, high-volume factories.
• Technologies poised to transform manufacturing include the Internet of Things (IoT), artificial intelligence, blockchain and robotics.

Manufacturing Explained

Manufacturing aims to create as many products as the market will purchase at the lowest cost. This is only possible through the use of machines and automation.

Manufacturing can be classified into two broad categories: discrete and process manufacturing. Discrete manufacturing converts raw materials and components into items ranging from cars to cell phones and clothing. Process manufacturing, in contrast, combines ingredients according to formulas or recipes to generate bulk quantities of goods, such as beverages, chemicals and pharmaceuticals.

Manufacturing involves multiple steps to turn raw materials into finished products, including product planning and design, prototyping, commercial production, inspection and delivery. Manufacturers often use assembly lines to produce goods faster with lower labor costs and skill requirements. With this approach, products are manufactured in stages as they move along successive workstations along an assembly line.

Why Is Manufacturing Important?

Manufacturing remains an extremely important part of the economy in the U.S. and worldwide. Manufacturers account for more than 11% of total U.S. economic output, employing 12.8 million people and producing output of $2.3 trillion in 2018, according to the National Association of Manufacturers. Most of those companies are small: Of the nearly 250,000 firms in the U.S. manufacturing sector, three-quarters have fewer than 20 employees.

Manufactured goods also account for the bulk of global trade. They comprised 71% of total merchandise exports in 2020, with a total value of $12.1 trillion, based on World Trade Organization analysis. Worldwide, manufacturing is key to increased productivity and economic growth, according to the United Nations Industrial Development Organization (UNIDO), which says there’s a strong relationship between economic growth driven by manufacturing and lower levels of national poverty.

History of Manufacturing

Though production innovations such as printing appeared during the Middle Ages, the history of modern manufacturing began in earnest with the Industrial Revolution. In the late 1700s, many artisan-based industries were revolutionized by the introduction of machines. Those industries included textile making, which was transformed by three machines: the spinning jenny, the power loom and the cotton gin.

For centuries, textile manufacturing had relied on the conversion of wool and, later, cotton into yarn using manually operated spinning wheels. Spinners operated a spindle to generate a single thread that was then delivered to a weaver.

In the late 1700s, James Hargreaves invented the spinning jenny, which combined a steam engine with other innovations to enable a single operator to spin eight spindles of thread at one time. Subsequent improvements increased this to 80 spindles. Meanwhile, Edmund Cartwright’s power loom mechanized the slow, manual process of converting thread into fabric. Across the Atlantic, Eli Whitney developed the cotton gin to accelerate the slow process of separating cotton from its seeds.

The advent of these machines transformed textile manufacturing from an artisan-based craft to a factory-based industry — and the increased productivity made clothing more affordable for many more people.

Automation similarly transformed how many other products were made, and new techniques and technologies continued to spur further advances. Mass production was popularized in the early 20th century by Henry Ford, who applied assembly-line techniques to build cars at low cost. Lean manufacturing, pioneered by Toyota in Japan during the 1970s, aimed to make manufacturing faster and more efficient while reducing defects. Today, robotics and process automation continue to transform manufacturing, increase productivity and reduce production costs.

Types of Manufacturing

Manufacturing strategies can be categorized into three types, each designed to support different business requirements: make to stock, make to order and make to assemble.

Make to stock (MTS): Make to stock (MTS) is a widely used manufacturing strategy in which the manufacturer determines how much of a product to make based on demand forecasts. Products are then stored as inventory by the company or at the distributor or retailer until they are sold. MTS benefits are twofold: Customers can take immediate delivery of products, while manufacturers benefit from economies of scale. Accurately predicting demand is critical to the success of this method. Producing too few items results in unmet customer needs and missed revenue opportunities, while producing too many results in surplus stock that may go unsold.

Make to order (MTO): With make to order (MTO), a manufacturer makes goods only after it receives an order for them. This means the company doesn’t risk creating unsold products and can customize products to customer specifications. MTO is commonly used for labor-intensive, high-value manufactured goods and in situations where stocking products would be impractical. Commercial aircraft, for example, are MTO products.

Make to assemble (MTA): Sometimes called assemble-to-order, the make-to-assemble (MTA) method is a combination of MTS and MTO. The manufacturer builds an inventory of components in advance of receiving customer orders but only assembles them into products based on orders it receives. This strategy is often used in situations where it takes significant effort and cost to make the components, but it’s relatively quick and easy to assemble them into final products. The benefit of MTA is that manufacturers can offer customers a broader selection of options while not risking final assembly until they receive a firm order.

Manufacturing Systems

Manufacturing systems are generally divided into four main types, ranging from systems designed to handle small-batch, low-volume products to fully automated factories that can produce enormous volumes of products cheaply.

• Custom manufacturing system: In a custom manufacturing system, products are made to order for each customer. A single skilled craftsperson or small group of workers produces individual, high-value items largely by hand or with specialized machines. Because custom manufacturing focuses on quality rather than volume, this system has the highest per-unit costs.
• Intermittent manufacturing system: In this approach, a single production line is designed with the flexibility to make different products. Products are manufactured in batches based on customer orders, with the production line reconfigured after each batch to make the next set of products. Intermittent manufacturing systems generally handle small volumes of each product.
• Continuous manufacturing system: This is designed for mass production of a single product. Semi-skilled workers at each station along an assembly line complete successive stages of assembling a product as it goes by. This approach is ideal for high-volume manufacturing, but it requires massive upfront costs.
• Flexible manufacturing system: This is a modern approach to creating a high-volume system that can be reconfigured relatively easily to produce different products. It aims to automate every step in production and includes the use of robots that can be reprogrammed to make different products. Since the whole process is designed to be automatic and use as few people as possible, these systems can run 24 hours a day and produce huge volumes of products at very low unit cost.

Manufacturing Examples

As businesses grow, they need to adapt their manufacturing strategies and technologies to manage increased operational complexity, support higher demand and capitalize on new revenue opportunities. Here are two examples:

• Corkcicle started life by developing an innovative in-bottle chilling product that enabled consumers to cool wine and other beverages without an ice bucket. With that success in hand, the company expanded to create a whole line of cooling products, from lunchboxes to sports canteens. As business complexity increased, Corkcicle implemented an integrated ERP system that provided greater visibility and control over inventory management and demand planning, as well as omnichannel commerce. The company also drove additional revenue with customized manufacturing options, such as branded and team logos.
• Saddleback Leather began its journey with a single product: a custom leather bag that its founder designed to carry his schoolbooks. Fast forward to today, and the company produces dozens of leather products, including briefcases, wallets, purses, belts and jewelry sold directly to consumers on its website. With widely fluctuating seasonal demand, inventory management is critical. To meet that demand without overstocking, Saddleback implemented a cloud-based inventory planning solution along with an integrated ERP system, which supports manufacturing, ecommerce and other functions.

Manufacturing Risks

Manufacturing is a complex and often capital-intensive business that’s vulnerable to many risks. Factors that can derail manufacturing operations range from supply chain interruptions to forecasting errors.

• Fluctuating raw materials prices: Prices of raw materials and components can fluctuate rapidly and unpredictably due to factors such as changes in global supply and demand. Even when manufacturers lock in the price of the materials themselves, they may be vulnerable to fluctuating global shipping costs.
• Supply chain woes: Supply-chain problems can cause delays in obtaining critical components. The unavailability of components can hold up an entire manufacturing process.
• Product recalls: Product defects can lead to expensive recalls, lawsuits and reputational damage. It’s important to maintain strict and consistent quality control efforts throughout the production process, including a final inspection before products are shipped.
• Regulatory compliance: Strict local regulations determine whether many products can be sold in markets worldwide. It’s vital for manufacturers to analyze the regulatory requirements in their target markets before selling their products or risk being forced to pay costly fines.
• Forecasting errors: Inaccurate forecasting can result in making more products than can be sold or not enough to meet demand. Manufacturers can minimize the risk by using software that takes into account historical and seasonal sales patterns, as well as external factors.
• Cyber risks: Hackers routinely target manufacturing systems with ransomware and other malicious attacks. Focusing on cybersecurity is critical for manufacturing companies.

Future of Manufacturing

Technology continues to transform manufacturing, just as it is transforming other industries. Here are four of the most important technologies that will shape the future of manufacturing, according to EY:

• Internet of Things (IoT): Manufacturing systems increasingly are able to connect to the Internet and to each other, so they can communicate critical information that is used to monitor and optimize manufacturing processes. For example, machines can provide continuous information about environmental operating conditions or provide alerts when supplies of a specific component run low.
• Artificial intelligence (AI): The promise of AI to provide intelligent awareness of complex processes has considerable potential in manufacturing. Applications include predictive maintenance: By analyzing historical data to reveal patterns associated with failure, AI may predict when maintenance is needed, helping to avoid costly production stoppages. AI could also be applied to the supply chain to analyze the huge range of factors that might affect the availability of raw materials.
• Blockchain: Blockchain — the technology underlying cryptocurrencies like Bitcoin — provides an immutable record of activities and transactions. In manufacturing, blockchain could be used to track items used in production, identify counterfeit components, and verify inspection and other process steps for regulatory compliance.
• Robotics: Robotics encompasses a lot of different futuristic technologies; their application to manufacturing is clear. Robotics can be used to automate processes, reduce labor costs and, since they can work 24 hours a day, can lead to spectacular productivity gains.

Manage and Scale Your Manufacturing Business With NetSuite

Modern manufacturing companies need technology that can scale with their business while providing the flexibility to adapt to changing business conditions. NetSuite’s cloud-based ERP software provides a single platform for managing complex business processes, such as planning, procurement, manufacturing, supply chain, product data management, sales and support.

NetSuite’s integrated applications help companies reduce time to market, enhance product quality and improve support and services productivity. Support for multiple subsidiaries worldwide helps streamline global operations and increases visibility at the regional and corporate level. Businesses can improve productivity by automating error-prone spreadsheet-based processes, while customizable dashboards provide real-time visibility into performance across all areas of the business.

Conclusion

Technology continues to transform manufacturing, just as it is transforming other vital sectors of the economy. Cloud-based applications can help manufacturers increase efficiency, manage complex supply chains and deliver products more quickly.

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Manufacturing FAQs

What does manufacturing mean?

Manufacturing is the assembly and transformation of raw materials into products using machinery. It typically involves automating the production process in order to make products on a large scale at lower cost.

What is manufacturing in simple words?

Manufacturing uses machines to make products that people or businesses can buy.

What are 3 types of manufacturing?

The three types of manufacturing are:

• Make to stock (MTS): Products are manufactured based on demand forecasts. They are then held as inventory in a warehouse or retail location until purchased by a customer.
• Make to order (MTO): Products are manufactured only when a customer places an order.
• Make to assemble (MTA): A company manufactures a stock of components but only assembles them into products when a customer places an order. MTA is sometimes called assemble to order (ATO).

What are the different types of manufacturing?

The primary types of manufacturing are make to stock (MTS), make to order (MTO) and make to assemble (MTA). With make to stock, manufacturers build products based on demand forecasts. With make to order, they build products based on orders they receive. With make to assemble, they make components based on forecast demand but only assemble when they receive firm orders.