The Ultimate Guide to What is Manufacturing for Small Businesses
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Are you someone who lays awake at night, being pestered by an innovative and brilliant idea for a product which will change the world, but you’re unsure on how to make this dream a reality? Or are you someone who has taken the plunge and already delved into the industry, but need a helping hand with running your business? Perhaps you’re an expert and just want to refresh your knowledge with some easy to follow literature to keep your business running at 100% efficiency.
Whoever you are, ambitious hopeful, newbie or a seasoned veteran, here is our comprehensive mini-encyclopedia on the manufacturing industry. Easily broken down for manufacturers.
In the guide we’ll cover the industry and explore the nitty-gritty details of running and organizing a small manufacturing business.
So, let’s get started!
Manufacturing is when a person or machine transforms raw materials, components, or parts into a final product that meets a customer’s demand and satisfaction.
The manufacturing definition given by Dictionary.com on the term manufacture reads “the making of goods or wares by manual labor or by machinery, especially on a large scale.”
We’d like to be so bold as to disagree with the use of ‘especially’. It could be argued as an archaic view on manufacturing as there’s now demand from customers for more personalized products. Something which is more difficult to achieve on a larger scale. Our preferred word of choice would have been ‘usually’ instead.
But, we digress. Once a final product has been finished, built using workers, machines or both, these goods can be sold directly from the manufacturer or via a wholesaler.
Traditionally, manufacturers would sell their wares through a wholesaler. But, if you’re a small business manufacturer, this could be extremely counter-productive and even expensive, since a wholesaler is likely to buy in bulk and have their own fees for selling your wares.
What does that mean? A lot of people are starting to cut out the middleman… Nothing personal wholesalers, it’s just business. It might be an alternative which you would want to look into, just like many other small business owners have done, as it puts you in control of your own production rates. Selling independently has been made even easier with the emergence of E-commerce websites such as Shopify.
The manufacturing industry is constantly expanding. If you use your wits, you can seize this opportunity because, as demand increases for skilled workers and customers are seeking customizable options on their products, it’s quickly becoming a profitable market to start operating within.
However, demand is one thing. If you can’t efficiently organize and maintain your business, you won’t be able to tap into the potential this market has to offer, and risk going under.
No one wants that! Especially when there’s Smart Manufacturing Software such as Katanawhich can help you avoid being overburdened by inefficient management practices.
Small Scale Manufacturers
In 2015, there were3,813 small manufacturers in the industry, with a total of 12.75 million jobs in the US alone. Manufacturing makes for 8.6% of the total workforce in the United States.
That’s just looking at the statistics. Include millennials misunderstanding the manufacturing industry and the baby boomers quickly retiring, there’re tons of new career prospects, unfilled from a shortage of skilled workers.
You don’t need to be an industrial powerhouse to produce products.
Maybe you’re a baker with a small local business who makes customized cakes for special occasions. You can corner the market by designing personalized treats for your customers, as opposed to them just getting a generic Victoria sponge from the supermarket which was produced by some large-scale, faceless, manufacturer.
That being said, there’s a reason that a large-scale business can produce such quantities of their cakes. Having an assembly line as a manufacturing process is a viable option for you, only if there is demand for your sponges and your available resources can cope with that method.
If this surprises you, maybe you have a hobby that can make you money but you just never realized.
What Is Lean Manufacturing?
Lean Manufacturing is the technique of eliminating waste from the manufacturing process and giving the customer the biggest bang for their buck!
The concept originated from Japan, and the idea was that by eliminating muda (futility, uselessness, wastefulness) from your business, the value of your products are increased due to it being made strictly for the customers’ requirements.
Those who practice lean manufacturing will look to remove waste from their business by examining the 7 types of mudas:
1. Transport
Moving products cost money and adds no value.
2. Inventory
Products take up space, need to be moved and can become damaged.
3. Motion
Getting to work or moving equipment around wastes time.
4. Waiting
Waiting for repairs or waiting for a delivery of material.
5. Overproduction
Making too much product and/or making it too soon.
6. Over processing
Using a machine or methods that takes longer and doesn’t add more value.
7. Defects
Products being replaced, repaired or, worse, recalled.
For you to achieve lean manufacturing the idea is that you view your production from the point of view of the consumer.
Lean manufacturing allows you to identify where your own production methods can be improved. You will always be examining and changing approaches to your process as maybe you’re not operating at your most efficient or an external factor has affected your business and you need to adapt to survive.
Take Toyota Motor Corporation for example, which took a made to order approach and had continuous evaluations on its production. Being more analytical of its manufacturing processes meant it was able to survive, even in a post-war Japanese economy, by adapting to different trends in demand and the changing climate of the economy.
You may not be operating on the same scale as Toyota, but application of lean manufacturing means that you can operate at your most efficient. Which increases the chances of your company growing, instead of fizzling away from poor management habits.
If you’re thinking “Well, it’s just building stuff, isn’t it?” you’d be very wrong.
Firstly, and this ties back into the question of what is manufacturing, let’s look at how the North American Industry Classification System determines if a business belongs in the manufacturing sector:
“The Manufacturing sector comprises establishments engaged in the mechanical, physical, or chemical transformation of materials, substances, or components into new products.
Establishments in the Manufacturing sector are often described as plants, factories, or mills and characteristically use power-driven machines and materials-handling equipment.
However, establishments that transform materials or substances into new products by hand or in the worker’s home and those engaged in selling to the general public products made on the same premises from which they are sold, such as bakeries, candy stores, and custom tailors, may also be included in this sector.
Manufacturing establishments may process materials or may contract with other establishments to process their materials for them. Both types of establishments are included in manufacturing.”
Here’s a list of all those sub-sectors:
1. Food manufacturing
2. Beverage and Tobacco Product Manufacturing
3. Textile Mills
4. Textile Product Mills
5. Apparel Manufacturing
6. Leather and Allied Product Manufacturing
7. Wood Product Manufacturing
8. Paper Manufacturing
9. Printing and Related Support Activities
10. Petroleum and Coal Products Manufacturing
11. Chemical Manufacturing
12. Plastics and Rubber Products Manufacturing
13. Nonmetallic Mineral Product Manufacturing
14. Primary Metal Manufacturing
15. Fabricated Metal Product Manufacturing
16. Electronic Equipment
17. Appliance, and Component Manufacturing
18. Transportation Equipment Manufacturing
19. Furniture and Related Product Manufacturing
20. Miscellaneous Manufacturing
These sub-sectors can be broken down even further as one will encompass companies that use different manufacturing processes.
Take for example food manufacturing. This covers:
1. Animal Food Manufacturing
2. Grain and Oilseed Milling
3. Sugar and Confectionery Product Manufacturing
4. Fruit and Vegetable Preserving and Specialty Food Manufacturing
5. Dairy Product Manufacturing
6. Animal Slaughtering and Processing
7. Seafood Product Preparation
8. Packaging, Bakeries and Tortilla Manufacturing
9. Other Food Manufacturing.
Extensive, wouldn’t you agree?
This should cover up any misunderstandings that you may have and give you a better scope on the diversity of the industry.
You can explore these categories yourself at the Bureau of Labor Statisticsas they will also have the relevant sic codes which you will need when incorporating your business (in the USA that is).
Do Small Manufacturers Earn Megabucks?
Honestly, it’s difficult to say just because of the size of the industry, it’s hard to quantify that information.
Certainly, as a whole, the industry has a lot of potential for someone to make a decent living because in 2012, manufacturers contributed $2.03 trillion to the economy.
That’s a lot of ka-ching!
But, obviously, you can imagine that if you’re mining coal, your profits are going to be significantly higher than someone who produces tortillas.
IRS figures show that, in 2008, the average revenue of a sole proprietorship ranged from$11,862 for unclassified establishments to $1,073,406 for coal mines.
All this being said, in 2017, the average manufacturing worker in the United States earned $84,832 annually.
Or, if you have the time, you could look across each different sub-sector to try and get a better understating of the potential for earning money in that field.
For example, we could look at the fashion industry, which in 2015 was calculated to be a 1.2 trillion global industry, with more than $250 billion spent annually on fashion in the United States.
There are around 17,000 fashion designers operating in the industry, each earning on average $73,600.
The money is out there, it’s just figuring out how to tap into it through your section and through your products.
There exist several ways in which your business can operate when completing the manufacturing of your products.
Here are thefive different types of manufacturing processes which you could adopt:
1. Repetitive Manufacturing
Repetitive manufacturing is an assembly or production line. It runs 24/7, manufacturing for a repeated production that commits to a production rate.
2. Discrete Manufacturing
Discrete manufacturing is also an assembly or production line. However, the difference is products will vary, requiring operations to change to compensate.
3. Job Shop Manufacturing
Job shop manufacturing makes use of production areas. This process creates smaller batches which can be manufactured at different and more desirable rates.
4. Manufacturing Process (continuous)
Manufacturing Process (continuous) is the same as repetitive manufacturing, as in it uses a 24/7 production line. However, its production materials consist of gases, liquids and chemicals. In mining, the material can be more granule.
5. Manufacturing Process (batch)
Manufacturing process (batch) uses batch manufacturing to meet customer demand. This can be met with one batch, several or the batch process can be continuous in nature.
We hope that you’ve found the information useful for yourself thus far.
The manufacturing industry Is huge and quite misunderstood. Using the above information can help you decide your place in the industry and how you could possibly operate.
Obviously, with the spectrum of the industry being as large as it is, you can probably imagine that there is more than one way in which a business will organize and manufacture its items.
A lot of these processes or inventory management techniques will depend on the type of business you run and what you find most beneficial.
Firstly, how you prepare your product for your customers will depend on your production workflow.
Are your products:
1. Made to Stock (MTS)
2. Made to Order (MTO) or
3. Assembled to Order (ATO)
Made to Stock (MTS)
Made to stock inventory will be products that are created based upon your companies forecasts and customer demand.
The idea is to have products in stock in preparation for a customer’s order. But this can run the risk of not meeting demands by either producing too much or not enough products.
This option doesn’t leave much room for customizing customers products.
Made to Order (MTO)
Made to Order inventory means instead of stocking products, a company will begin production on an item once a manufacturing order is received.
This technique aims to maximize storage space to avoid the potential to acquire deadstock. This allows for greater personalization.
Although, a downside is that a spike in demand could put strain on your business whilst trying to fulfill orders.
Assembled to Order (ATO)
Assemble to Order means the components to make the final finished product are stocked, ready for assembly when a sales order is received.
This means the products might have some customizability, but not to the same extent as made to order.
Once you’ve figured out the ideal method of inventory management, how are you going to monitor stock-levels and material availability? Through spreadsheets!? Yuck!
Katana is a live-updating inventory management software that frees up your resources so you can stay focused on manufacturing your products.
We’re not going to stop there however, now we’re going to investigate the inner workings of a small manufacturing business, seeing how they operate and highlighting any areas that will be useful for you to know.
Now you have a better understanding of the industry and are maybe feeling more confident to pursue your fantasy of becoming a small business manufacturer, where the hell do you start!?
Or maybe you’ve already started but something doesn’t appear to be working and you just can’t figure out where the issue hides.
In this section we’re going to explain what a small business manufacturer will have to do, consider and, more importantly, how to prepare if they wish to survive in this highly-competitive industry. We’ll also try to achieve this in the logical order, from the very beginning (your idea) to selling your goods.
One way you can be sure to stay ahead of the curve is by utilizing a cloud-based manufacturing software like Katana, this way you can make sure all your businesses operations run smoothly and without a hitch.
Prototyping
You have your idea and even though you’d love to instantly invest everything you have to get this out into the public sphere, you simply can’t!
Patience is a virtue… Just, don’t use that one on your customers.
Maybe it’d be a good idea to attend showrooms and conventions to see if anyone is manufacturing a similar product to you. It might be that you could need to contract a manufacturer, and this would be a good place to look if you’re unable to create a prototype yourself.
Either way, as soon as you have the prototype: test, improve, test, improve, test, improve… getting feedback from others is invaluable.
If you’re onto an invention that’s revolutionary, it might also be worth looking into securing a patent on your design.
Bill of Materials
Once you have perfected your prototype and now have a final product, you’ll be left (unless you for some reason never documented the alterations to your original recipe) with a bill of materials (BOM) which is essential for your manufacturing processes.
A BOM is a list of raw materials, sub-assemblies, intermediate assemblies, sub-components, parts and quantities needed to create your product.
Depending on your products construction requirements, you’ll be using one of three types of BOMs:
1. Modular BOM
Modular BOMs are used for products that require completion through sub-assemblies.
2. Configurable BOM or CBOM
Configurable BOMs are used in industries that have multiple options with customizable goods.
3. Multi-level BOM
Multi-level BOMs contain lists of the components, assemblies, and parts required to make a product. Sometimes referred to as a top-down method as the relation between the finished product and its parts are highlighted.
Think of it like a family tree.
The BOM, just like the prototype, can also go through reiterations as you perfect the process of manufacturing your product.
Routing Manufacturing
So you’ve finished your bill of materials. If your items are customizable and have tons of different variations, you’ve probably realized that it’s going to be complicated manufacturing these products since they’re going to be traveling all over the shop floor.
Routing manufacturing is the route, or map, that you’re products are going to follow around your shop floor whilst passing through each process.
Your routing manufacturing is going to very much depend on what type of production workflow you follow.
Once you’ve completed your routings, you’re going to be able to identify the tasks which need to be completed, the order in which those tasks will need to be completed, the processes the item will go through, and the work centers which they will pass through.
For a simpler explanation:
Routing = lists of tasks needed for a manufacturing process that is used in making a product.
Manufacturing Cost
From your BOM you’ll be able to calculate your manufacturing costs (MC). The sooner you calculate this, the faster you can get you, and your customers, a fairer price (something which we will go into more detail further down the narrative under cost of goods).
The manufacturing cost is determined by the amount of resources spent on creating your wares. This is figured out by looking at two types of expenses:
1. Direct Manufacturing Cost
Direct manufacturing cost comes from money spent on material and the cost from time spent manufacturing.
2. Indirect Manufacturing Cost
Indirect manufacturing expenses from utility bills, salary of non-manufacturing staff, and Maintenance, Repair, and Operating items (MRO).
Another thing you should be aware of is the cost of consumables, like if your product needs to be assembled with nails and glues.
To calculate your manufacturing costs, you will need to look at the three types of manufacturing costs which are, direct materials, direct labor and manufacturing overheads.
Your manufacturing cost formula should look something like this:
MC = Raw Materials + Direct Labor + Allocated Manufacturing Overhead = $$$
Figuring out your manufacturing cost will allow you to see if you’re being fair to yourself and not giving your product away for free.
What Are Manufacturing Overheads?
The manufacturing overhead costs are the expenses from indirect factory-related costs incurred from products being manufactured.
Examples of manufacturing overheads are the costs for using machinery during production, rent and property taxes of the business’s premises, salaries and wages of workers and utilities for the factory.
However, it should quickly be mentioned that this does not include administrative costs, salaries and debts.
Manufacturing overheads are also known as factory overhead, production overhead and factory burden.
It is mandatory to assign manufacturing overhead to the cost of products, both for reporting their cost of goods sold (we’ll look into COGS a little later), and their cost within the inventory asset account (reported on the balance sheet).
Manufacturing Order
You know how to build your product. You’ve completed your BOM and know exactly how much the manufacturing cost is going to be.
Now it’s time to look at your manufacturing order.
The manufacturing order, depending on how you prepare your products (MTS, MTO or ATO) will come through either due to stock levels or from a sales order and will be prepared as the manufacturing instructions.
Manufacturing orders can be classified into an internal order (to be manufactured by the company itself) and subcontract order (to be manufactured by subcontractors).
But what happens if you create a manufacturing order, but don’t have the materials to fulfill the order?
The next trick is to stay ahead of your manufacturing orders, as to not create delays and keep your customers waiting.
Throughput Time
There’s another metric very similar to manufacturing lead time which can be valuable to the small maker.
It’s known as throughput time, and basically tracks how long it takes you to get a product made from when the manufacturing order comes in, to the second it’s ready in the stock room.
The main difference with lead time is that it doesn’t include any of the waiting time before manufacturing or the delivery times after it.
But getting intimate with this number is going to let you know how well you’re doing on the production side, and even give you some ideas on how to improve efficiency too!
Here’s the basic formula to get you started:
Throughput time = The time taken to complete manufacturing / each unit of product
But, when calculating your throughput time you should be mindful of:
Processes;
Inspection;
Moving; and
Queuing.
These all affect how long it will take to manufacture an item.
Manufacturing Lead Time
The manufacturing lead time is the calculation of the time the sales order comes in, up until its creation.
You can calculate your manufacturing lead time by adding together the different production times for your product:
Order preparation time + queue time + setup time + run time + move time + inspection time + put-away time
The method in which you forecast your lead time will determine on if you’re an MTO or MTS business.
MTO = creating manufacturing order to production and shipment
MTS = creating manufacturing order to production, receiving sales order and inventory stock
So, you have a plan of attack formulated, but now it’s time for the execution.
Manufacturing Floor-Level Control
The manufacturing floor-level control is the prioritized task list for every production employee and production line.
Consider it like a manager role, where they’ll need to schedule, monitor workflow and delegate responsibilities to employees.
How you implement this is up to you, however, you’ll want to use a system where workers can easily access a schedule calendar, so they know exactly where they need to be and what needs to be done.
You can go that extra step by looking into making this easier with production scheduling software.
Smart Manufacturing Software
There are multiple ways in which you can handle your manufacturing floor-level control, and the most used tactic is making scheduling timetables through excel.
Which takes time, resources and, believe it or not, will cost your business money!
Smart Manufacturing Software means you can manage your inventory, production processes, and sales orders from one easy-to-use dashboard.
Every little detail in a Smart Manufacturing System has been designed with the precise needs of the growing business in mind.
Why don’t you try it out for yourself? Katana — the Smart Manufacturing Software — offers 14-days free trial, and you don’t need to type in any debit or credit card details.
Master Production Scheduling
Your master production scheduling will inform you what you need to produce, the quantity, the deadlines and everything that is related to production, even production lead time.
It is crucial that you have a master production scheduling if you want your business to operate properly. Also, it’s a good habit to instill early as it will help when your business scales up.
Other master production schedule objectives are:
1. Making your demand flow smoother
2. Keeping your lead-time low
3. Standardizing communication across your business
4. Helping you to prioritize workloads
5. Keeping production stable
6. Generating workable plans for your manufacturing orders
7. Assisting in making accurate purchase and transfer orders.
You can figure out your master production scheduling by product list, variation sub-lists for each product, year, month and week and production quantities.
The sooner you design your manufacturing production scheduling, the quicker you can optimize your businesses work flow and take advantage of the benefits.
Supply Chain Management
Supply chain management is quite simply getting your product from Point A to Point B.
A supply chain manager is concerned with the “design, planning, execution, control, and monitoring of the supply-chain activities with the objective of creating net value, and building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally.”
Their other responsibilities will include negotiating with suppliers to get materials, shipment of materials as efferently as possible and to get the product on the store shelves as quickly as possible.
Essentially, they make, source and dispatch products.
If you’re a small business manufacturer, you will almost likely be doing this already, but at least now you know the term of what you’re doing!
However, this could be a role of one or more individuals when your business expands into an empire.
We hope you’re still with us, because we’re going to move onto the next thing you should take into account, which will help you with making sure you don’t under or over price yourself.
Cost of Goods Sold (COGS)
The cost of goods sold(COGS) examines how much it costs your business to sell inventory over a given period of time. However, there’s no set time when a business should make these calculations. The frequency is completely up to you.
However, it is essential for you to look into your COGS as it can be used in reporting your business income tax and, most importantly, study your companies’ expenses.
When you’ll be figuring out your COGS, you’ll want to include income and expenses:
Income = The sale income from manufactured goods and the sale income from any resold goods
Expenses = Raw materials and direct labor costs
Be cautious when making these calculations, as some manufacturers have made the mistake of including the incorrect income and expenses.
Your formula should look something like this:
COGS formula – COGS = (Beginning Inventory + Additional Inventory) – Ending Inventory
Which about completes it on the narrative. It’s one thing to know all this, but how do you actually use all the techniques listed?
We hope that you found this manufacturing guide for small businesses helpful. As previously stated, it was written in mind for small business manufacturers, but can be used across the industry as a helping hand for better understanding the areas you work in.
To reiterate what we went through in this guide, since we understand that the material was helpful, but chunky, we looked at:
1.What is Manufacturing?
We also looked the manufacturing definition, the scale of the industry and the opportunities available for you.
2. What is Lean Manufacturing?
We analyzed lean manufacturing as a method of organizing a business and the different manufacturing processes.
3. What is Manufacturing Overhead and Manufacturing Costs
The expenses associated with operating within this industry.
4. The Narrative of a Small Business Manufacturer
A step-by-step guide of the considerations a small business (or large scale) manufacturer will have to consider when organizing their business and operations.
Essentially a useful list of terminology, definitions, and links for further reading to assist you with your company.
Now that you’ve witnessed the amount of work one would have to do when running their business, we imagine that your head is probably spinning.
“How the hell do I keep on top of this!? What happens if I forget a step and disorganize my business?”
Honestly, and we’re not trying to scare you, it is quite likely that you will make some fumbles along the way that might affect your business in one way or the other.
But, how would you feel if we told you that you don’t need to manually organize your business with spreadsheets or some other inefficient method of working?
The cloud-based Smart Manufacturing Software provided by Katana can assist you with all of the points that’s been mentioned in this manufacturing guide for small businesses.
A Smart Manufacturing Software provides:
1. Means of Managing Inventory
Real-time inventory control and optimization means you can check finished products and raw materials from one dashboard.
Automated inventory transactions give you up-to-date information on current inventory stocked.
2. Storing Your Bill of Materials
A page dedicated to your products recipes, including all its possible variations, with as detailed a breakdown as you wish to specify when adding your own bill of materials (BOMs).
3. Calculating Direct Manufacturing Costs
Tracks manufacturing costs based on your BOMs and production operations.
4. Calculating Manufacturing Lead Time
Track the availability of required products to decide whether you need to make a manufacturing order or fulfill an order from product stock.
5. Production Scheduling
Prioritized task list for every production employee and production line with real-time production status overview information from the floor-level
6. Cost of Goods Sold (COGS)
Make accurate pricing decisions based on actual product margins.
Also, sales history and receipts are saved on the software.
Congratulations! You’ve finally reached the end of this comprehensive guide on what is manufacturing for small businesses. We sure hope you found it useful! If you’d like to save it for further reference, just go ahead and download our free e-book on “Small Business Manufacturing 101”.
Also, if you want to take your business to the next level, save time, hassle and money, you can’t miss on integrating the Katana software into your business.
Still unsure if it’ll meet your manufacturing needs? Why not pop a message to one of our friendly team members or give the software a try for yourself! We offer a 14-day free trial and you don’t need to input your debit or credit card details. Just sign up and you’re away! You won’t lose anything, but you might gain a hell of a lot.
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