Debitoor Dictionary

Accounting terms explained in a simple way

Over 150 Articles for Founders and Entrepreneurs

  1. Inventory
  2. Retailer
  3. Wholesaler

Manufacturer - What is a manufacturer?

A manufacturer is a company that produces goods for sale.

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Manufacturers usually sell their goods to wholesalers for redistribution, but some manufacturing companies might also sell directly to retailers. It is uncommon for manufacturers to sell directly to end consumers.

Types of manufacturing strategies

It’s important for manufacturers to take a strategic approach to producing goods. There are a few different approaches to manufacturing; some of the most common ones include:

  • Make-to-stock, a traditional production strategy that draws on past data and sales forecasts to match production with predicted demand. This is an efficient way of producing goods if demand can be accurately forecasted; if not, the manufacturer might have too much or too little stock.
  • Make-to-order, a production strategy that is tailored to each customer’s specifications. While this approach reduces the risk of having excessive stock the manufacturing process does take longer and can be more expensive.
  • Make-to-assemble, this hybrid production strategy combines the make-to-stock and make-to-order approaches; it relies on forecasts to produce the basic components of various goods, but does not fully assemble the products until an order is received. This approach is quicker than make-to-order, but can leave the manufacturer with unwanted parts if orders aren’t made.

As a manufacturer, you’ll be responsible for weighing up the pros and cons of each manufacturing method. All three approaches involve some element of risk, but these risks can be reduced by keeping production costs low, finding an effective approach to stock management, and ensuring a high standard of quality control.

Inventory and manufacturing

All businesses have inventories, but unlike retail and wholesale inventories that only consist of completed goods that are ready for resale, manufacturing inventories contain materials and goods at different stages of the production process. To reflect this, a manufacturer’s inventory is usually divided into three categories:

  1. Raw materials: the materials and resources used to create goods or products
  2. Work in process: partially completed goods.
  3. Finished goods: completed products that are ready for sale.

Although manufacturers' inventories consist of three different categories, inventory should be recorded as a single line on the balance sheet.