What are intermediate goods? An introductory guide
Most products we buy are a single item — a smartphone, a loaf of bread, or a new car.
But manufacturers require diverse materials to create the final consumer-ready product — and these materials are intermediate goods, also known as intermediate products.
Learn more about intermediate products’ role in creating finished goods and how they impact the gross domestic product (GDP).
What is an intermediate good?
Complex products rarely go from raw materials to finished goods. Instead, they’re manufactured in stages. Intermediate goods are the products used to produce other goods, whether it’s the flour in a loaf of bread or the battery in a smartphone.
Manufacturers have several options for sourcing intermediate goods. One is to purchase them outright, which requires a significant upfront investment. They can also rely on consigned inventory to manage the supply and availability of necessary components.
To consign inventory, manufacturers enter agreements with suppliers and store the supplier’s stock in their warehouse or facility. The manufacturers don’t actually purchase the goods until they use them, meaning they can return any unused product to the supplier. It lets them access these materials whenever they need without the large upfront costs, streamlining their production and inventory management processes.
Intermediate versus final goods
Intermediate goods and final goods represent different stages in the production process. As mentioned, intermediate materials are the components used to make other products. They aren’t usually sold directly to consumers but are essential for creating final goods.
Final goods, also known as consumer goods, are ready for purchase or consumption. They’re the end result of the production process.
Categories of intermediate goods
Three primary types of intermediate goods support different types of operations:
In-house
A company produces these goods for its own use in creating another product. For example, a company might make its own paint to use in toy production instead of buying it elsewhere.
Typically, manufacturers rely on in-house and externally produced intermediate goods to obtain the inputs they need to create finished products.
B2B finished
In business-to-business (B2B) finished good transactions, one company sells a product to another business for use in a final product. Items in this category stand out — some B2B finished goods are independent products but are usually an input for more complex items.
For example, tire manufacturers sell tires to car manufacturers for the automakers to complete the vehicle assembly process — but the tire company could also sell them directly to consumers as a finished product.
B2B intermediate
B2B intermediate goods are those sold during the production workflow that require further processing before becoming part of the final product. For instance, a steel manufacturer sells steel to a car manufacturer, who then uses it to create care bodies. The steel isn’t a finished product, but it moves between businesses before creating a final product.
5 examples of intermediate goods
Here are some widely used intermediate goods and a few that act as final products, including both raw and manufactured items:
1. Sugar
Sugar is a staple in kitchens and food manufacturing processes. It’s a functional ingredient in a wide range of products. Commercially, it’s crucial for making everything from pastries and chocolates to soft drinks and canned goods. Its versatility and manufacturing-friendly properties make it a go-to ingredient in both sweet and savory dishes.
But, like many other baking supplies, sugar is a dual-purpose item. Manufacturers use it as an input to create finished goods, but it’s also sold directly to consumers for personal consumption and use.
2. Paint
Paint contributes both to a product’s aesthetic value and to protecting and preserving various products. In the automotive sector, paint not only gives vehicles their vibrant colors but also provides a protective layer against dirt, corrosion, and wear.
Paint is applied to countless other products, like toys, buildings, and furniture in construction and manufacturing to serve both functional and decorative purposes. And, like sugar, you can buy paint as a consumer good.
3. Car parts
Automakers must orchestrate the combination of numerous complex parts to assemble a fully operational vehicle. Whether it’s the battery providing the power, the tires gripping the road, or the engine driving the vehicle forward, each part has an indispensable role to play.
These components are manufactured separately, often by different companies. Vehicle manufacturers then source the necessary parts to facilitate final assembly. The sheer number of parts necessary to create a vehicle makes the automotive industry’s supply chain one of the most complex in the world.
Although some car parts double as finished goods — like tires, wheels, windshield wipers, and oil filters — other components, such as semiconductors or the steel used to create vehicle bodies, are just intermediate goods.
4. Gold, silver, and other metals
Gold’s conductivity makes it valuable for electronics, while silver’s reflective and antibacterial properties lend it to use in medical devices and mirrors. Other metals, like copper and aluminum, are fundamental in the construction, automotive, and packaging industries.
Unlike sugar and paint, most metals are rarely a finished product — they’re almost always used as intermediate goods in the manufacturing workflow. That said, precious metals like gold, silver, and platinum have a high intrinsic value, which makes stocking up on these raw materials less risky for manufacturers.
5. Glass
Glass is everywhere. It’s found in the screens of our smartphones and televisions, the bottles containing our beverages, and the clear planes that fill our windows. Glass is a critical intermediate good in both everyday objects and sophisticated technologies. It’s a common B2B intermediate since most consumers would buy a final output involving glass, not the glass itself.
Tracking and managing intermediate goods
From an operational standpoint, optimizing the stock of your intermediate products is just as important as the way you manage your completed goods.
For example, if you produce toys but understock on the materials necessary to create a final good, you’ll experience production delays and may encounter stock outs. But overstocking on intermediate goods increases your carrying costs and could result in dead stock.
The best way to achieve and maintain balance in your inventory is to invest in cloud-based inventory management software. A leading software solution is your single source of truth, providing real-time transparency into stock levels, demand trends, and other variables that impact your inventory.
With tools like Fishbowl, you can align your stock management strategy with customer preferences, ensuring you have enough intermediate goods to maintain steady production levels and avoid stock outs.
Intermediate goods and gross domestic product (GDP)
Economists don’t consider intermediate goods part of gross domestic product (GDP) — it only measures the market value of the services and final goods an economy generates.
There are two reasons why intermediate goods aren’t included in GDP calculations.
First, they aren’t final goods since they aren’t usually sold to consumers. If a product can act as both a final and an intermediate good, like tires or sugar, the direct to consumer sales count as final goods.
Second, adding intermediate goods to GDP calculations would result in double-counting those items. Here’s how: Before adding tires to a new SUV, a vehicle has a market value of $39,000, and the tires have a value of $1,000. After adding the tires, the SUV’s market value would increase to $40,000. If economists factored the intermediate goods into their GDP calculations, they would have a total value of $41,000, when the cumulative market of the SUV with tires is only $40,000.
Optimize your intermediate goods inventory with Fishbowl
Intermediate goods add layers of complexity to inventory control. To manage the flow of critical components and raw materials, you need a dynamic inventory management solution like Fishbowl.
With Fishbowl, you’ll enjoy unprecedented visibility into your stock levels and achieve newfound success in managing intermediate goods. The platform also integrates with QuickBooks, offering end-to-end transparency in bookkeeping, expense tracking, invoicing, and financial reporting.
Unlock the power of cloud-based inventory tracking with Fishbowl. Book your demo today to learn more about how our platform takes the guesswork out of tracking intermediate goods.