What are raw materials?
Manufacturers depend on raw materials because production cannot begin without the right inputs ready to use. These items sit in inventory as assets until a build starts, so keeping them stocked and accurately counted has a direct effect on output.
Once they enter production, they become work-in-progress and eventually finished goods. Strong raw materials inventory management keeps the right stock on hand and prevents stalled lines or missed deadlines.
Key characteristics
- Inventory assets: raw materials appear on the balance sheet as inventory, valued at their purchase cost until they enter production.
- Direct and indirect types: direct raw materials become part of the finished product, while indirect raw materials support production without ending up in the final item.
- Tracked on a bill of materials (BOM): every product carries a bill of materials that lists each component, and bill of materials software keeps those lists current.
- Material flow: stock moves along a defined path, from raw materials to work-in-progress to finished goods.
- Price volatility and supply risk: the U.S. Bureau of Labor Statistics reported that its unprocessed goods index rose 12.8% for the 12 months ended in August. Looking ahead, 83.3% of manufacturers expect raw material prices to rise over the next year (National Association of Manufacturers, Q1 2026 Manufacturers’ Outlook Survey).
Example
Picture a craft furniture maker that turns lumber, hardware, and wood finish into a finished dining table. Those inputs move from stock to work-in-progress on the shop floor, then ship as a completed table.
When stock runs short for a scheduled build, manufacturing inventory software can automatically create a purchase order for the missing item, ready for your review. Sourcing risk matters too: among supply chain leaders affected by tariffs, 39% are pursuing dual-sourcing raw materials strategies for components or raw materials (McKinsey 2025).
Related terms
- finished goods inventory for products that are complete and packaged.
- multi-level BOM for products built from sub-assemblies.
- materials management for the broader practice of sourcing and moving inputs.
FAQ
What is the difference between raw materials and finished goods? Raw materials are unprocessed inputs waiting to be used, while finished goods are completed products ready to sell.
What are direct and indirect raw materials? Direct raw materials end up inside the product, like the wood in a table, while indirect raw materials, such as machine lubricant, only help make it.
Why is managing raw materials important for manufacturers? Running short stalls production and delays orders, and rising costs raise the stakes. Increased raw material costs came in second as a top challenge for manufacturers, cited by 62.3% of those surveyed (NAM Q1 2025 survey).