What are Raw Materials? A Guide for Manufacturers.
If you are a small manufacturer, it is important to understand what raw materials are and how they are used in a bill of materials (BoM). This article covers the basics of raw materials and includes some tips on how to simplify your operations.
Raw materials are the substances and ingredients that go into every product you manufacture. Understanding them, and tracking them properly, is foundational to running any product-based business well.
This guide covers what raw materials are, how they’re categorised (direct vs. indirect), how they fit into a Bill of Materials, and why tracking them matters for production planning, bookkeeping, and keeping costs under control.
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What are raw materials?
In short, raw materials are the substances and ingredients you use in your manufacturing process to create a finished product.
In this context, “raw” denotes that the material has not been processed or changed since you received it into your supply chain. It doesn’t necessarily mean that it has not been modified and constructed in a previous process before you purchased it.
Raw materials can be anything from clasps, fabric, and lumber to metals to chemicals: your coconut oil, your sterling silver, your beeswax. They obviously differ based on your industry and manufacturing process.
Manufacturers also commonly call them:
- “ingredients” (food production typically uses this term)
- “stock” (common when discussing inventory levels)
- “unprocessed material” (to clarify that the material hasn’t yet entered your production process)
Indirect vs. Direct Raw Materials
Once you have a grasp of what a raw material is, you’ll want to note that these are categorized into two main types: indirect and direct.
Direct materials
Direct materials are simply a subset of raw materials that specifically refers to the materials that become part of the final product.
For example, if you were making a cake, some of the direct materials would be flour, sugar, eggs, etc. The manufacturing process consumes these materials entirely.
Indirect materials
On the other hand, there are also indirect materials. Your process consumes indirect materials during manufacturing, but they don’t end up in the finished product.
Some examples of indirect materials include:
- packaging
- cleaning supplies
- office supplies
To further illustrate the difference between direct and indirect materials, let’s say you run a small furniture business and you want to make a coffee table.
The direct raw materials you would need for this project would be wood, screws, nails, sandpaper, paint, and varnish. These are all materials that you will use to create the finished product (the coffee table).
The indirect raw materials you may need for this project may be cardboard and foam, to securely package the coffee table for shipping to the customer. These materials don’t go into the finished product itself, but you do use them as part of the packaging process.
How are raw materials different to sub-assemblies?
You might be wondering how raw materials differ from sub-assemblies. After all, both enter the manufacturing process and end up in the final product. So what’s the difference?
The main distinction is that you use raw materials to create sub-assemblies. A raw material can become part of the final product directly; a sub-assembly cannot.
Confused? Let’s use an example to make this clearer.
Say you were making a pair of shoes. The direct materials would be things like the leather for the upper, the fabric for the lining, and the soles.
The raw materials would be things like the chemicals for treating the leather, the thread for stitching, and the glue for bonding.
The sub-assemblies would be things like the upper (which combines direct materials), the lining (also from direct materials), and the insole (a combination of direct and raw materials).
You can design and track sub-assembly processes using multi-level BOMs.
Why is it important to track your raw materials as a small manufacturing business?
For any manufacturer working with raw materials, having a solid system for tracking inventory is non-negotiable.
If you don’t track what raw materials you have on hand, it can be difficult to know what you need to order and when. This can lead to production delays, unhappy customers as well as extra costs associated with rush shipping or expedited fees.
There are many other benefits of tracking your raw materials, including:
Improved production planning and coordination: By understanding what raw materials you have on hand, you can better plan and coordinate your production. This can help you avoid manufacturing delays and disruptions.
Reduced risk of stock outs and production delays: By tracking your raw materials, you can avoid stock outs and production delays. Setting reorder points for each material is the most reliable way to make sure you always know what to order and when.
Increased visibility into the manufacturing process: Tracking raw materials can give you greater visibility into your manufacturing process. This can help you identify bottlenecks and improve your process.
More accurate bookkeeping and financial reporting: Tracking raw materials can also help you with your bookkeeping and financial reporting. This is because you will have a more accurate picture of your inventory and what it is worth.
Simplified inventory management: Tracking raw materials can help you simplify your inventory management. This is because you will have a complete picture of what raw materials you have on hand and what you need to order. This can save you time and money.
As a small manufacturer, tracking your raw materials is how you stay in control of your complete supply chain.
How are raw materials used in a bill of materials?
Let’s now cover how raw materials are used in a Bill of Materials.
Before we do, let’s briefly take a look at what a Bill of Materials is. A Bill of Materials (aka “BoM”) is a list of all the raw materials, components, and assemblies required to build a product.
This list includes the finished products and sub-assemblies, what type of raw material is needed (i.e. wood, fabric etc.), how much is needed, who the supplier is, and any other pertinent information.
Your BoM specifies which raw materials to use to build each product or sub-assembly. It lists the finished product, what type of raw material you need, how much, who the supplier is, and any other pertinent details.
How are raw materials tracked in bookkeeping?
In bookkeeping, you track raw materials on your accounting balance sheet as inventory. Like finished goods, raw materials are a physical asset your company owns.
When you purchase raw materials, your accounting system records a credit to Accounts Payable and a debit to the Inventory account. When you use those materials in manufacturing, they move to the Work in Progress inventory account.
When the finished product is ready to sell, it transfers to the Finished Goods inventory account.
Tracking raw materials through the manufacturing process takes some setup, but it gives your business a clear picture of what materials you have on hand, what you need to complete production, and when products will be ready for sale.
If you manufacture products from raw materials, chances are you already have some sort of system in place to track your inventory. However, if you’re still using manual methods like paper spreadsheets or even a whiteboard, it might be time to consider upgrading to a perpetual inventory software solution.
Perpetual inventory software is built specifically for manufacturers who need to track inventory levels in real time. As soon as you use a raw material in production, the software automatically updates the inventory records.
Not only does this make it easier to keep track of what materials you have on hand, but it can also help prevent errors in your bookkeeping.
Using MRP software to track your raw materials
If you find that tracking your raw materials manually is proving to be too complex and time-consuming, you may want to consider using MRP software.
MRP (Material Requirements Planning) software is designed specifically for manufacturing businesses and can automate many of the tasks associated with managing inventory. This includes things like creating and updating BOMs, generating purchase orders, and tracking material usage.
If you are a small manufacturer that is looking to simplify your operations, MRP software may be a good solution for you.
Stocksmith is MRP software that includes bill of materials and perpetual inventory tracking. Stocksmith is designed for small manufacturers to take control of their inventory and simplify their operations.
With Stocksmith, you can easily create and update your BOM, generate purchase orders, and track material usage. This gives you a clear understanding of what raw materials you have on hand, what is needed to complete production, and when products will be finished and ready for sale.
Stocksmith also offers a free 14 day trial — so you can test it against your real inventory before committing. If you’re a small manufacturer looking for an MRP solution, it’s worth a look.
Frequently Asked Questions
What are raw materials in manufacturing?
Raw materials are the unprocessed substances or ingredients you use to create a finished product. For product businesses, this means things like coconut oil for soap, sterling silver for jewellery, or beeswax for candles. They are recorded as inventory on your balance sheet and transferred to Work in Progress when production begins.
What's the difference between direct and indirect materials?
Direct materials become part of the finished product (flour and eggs in a cake, leather in a shoe). Indirect materials support the production process but don't end up in the final product (packaging, cleaning supplies, tape). Both types should be tracked, but only direct materials feed into your cost of goods sold (COGS) calculation.
How do I track raw materials in my small manufacturing business?
The most reliable method is perpetual inventory tracking, where stock levels update automatically each time a material is purchased or consumed in production. Spreadsheets work at small scale, but once you're managing multiple products and suppliers, dedicated manufacturing software like Stocksmith gives you real-time stock levels, automatic deductions, and reorder alerts without the manual upkeep.
How do raw materials fit into a Bill of Materials?
A Bill of Materials (BoM) lists every raw material, component, and sub-assembly needed to build a product, along with quantities and supplier details. Raw materials are the lowest-level inputs in the BoM; they get consumed when you run a production run. Stocksmith lets you build BoMs for each product and automatically deducts raw material stock as you manufacture.
Does Stocksmith track raw materials?
Yes. Stocksmith is built specifically for small manufacturers and tracks raw material stock in real-time. As you record production runs, it automatically deducts the materials consumed based on your BoM recipe. You can set reorder thresholds, track supplier costs, calculate COGS, and generate inventory reports, all from one place.
