Raw Materials

Definition

Raw materials are the basic components used in the production of goods, which are typically converted into finished products through manufacturing processes. These materials can be either naturally occurring, like minerals and agricultural products, or artificially created, such as chemicals and metals. In financial contexts, raw materials can impact industries, such as manufacturing and construction, and play a crucial role in determining the costs and profitability of companies.

Phonetic

The phonetic pronunciation of “Raw Materials” is: /rɔː məˈtɪriəlz/

Key Takeaways

1. 1. Raw materials are the primary, unprocessed substances that are extracted or harvested from the earth, which are used to manufacture finished products.
   2. These materials can be divided into two broad categories: biotic (derived from plants and animals, e.g. timber, wool) and abiotic (from non-living sources, e.g. minerals, metals).
   3. Raw materials play an essential role in various industries, including construction, manufacturing, and energy production, with their availability and fluctuating costs significantly impacting global supply chains and economies.

Importance

The term “Raw Materials” is important in business/finance because it refers to the fundamental and unprocessed components that are required for producing finished goods or services. Understanding and managing raw materials is crucial for businesses as these components can significantly impact production processes, supply chain efficiency, manufacturing costs, and consequently, the overall profitability of a company. Efficient procurement and utilization of raw materials can lead to competitive advantages by reducing production lead times, ensuring product quality, and optimizing resource allocation, ultimately contributing to a company’s success in its respective industry.

Explanation

Raw materials are the fundamental building blocks for any business engaged in manufacturing or production, as they are the essential components that undergo transformation to create a final product. The purpose of these unprocessed or minimally processed materials is to provide the basic substances needed to create a wide variety of goods, ranging from day-to-day consumer items like electronic devices, clothing, and food, to heavy industrial equipment, vehicles, and infrastructure. They play a critical role in driving economic growth, as a steady and dependable supply of raw materials is indispensable for businesses to maintain efficient production cycles, cater to consumer demands, and remain competitive in the marketplace. The use of raw materials can determine multiple aspects of a company’s operations, such as costs, profitability, and sustainability. Quality, availability, and affordability of these materials directly impact the production process, shaping the nature of products created and, ultimately, their value to consumers. Companies often source raw materials from different regions as part of their global supply chain, which may be influenced by factors like commodity prices, geopolitical issues, and environmental concerns. An efficient and well-managed raw materials procurement strategy is essential, as it not only ensures cost-effectiveness but also promotes sustainable practices that minimize negative impacts on the environment and society. Consequently, raw materials remain a cornerstone of business and economic activity, highlighting their pivotal role in overall commercial success and progress.

Examples

1. Iron ore: Iron ore is a key raw material used in steel production. Mining companies like Rio Tinto, BHP Billiton, and Vale extract iron ore from the earth, which is then processed and combined with other elements to produce steel. This steel is used in various industries, including automotive, construction, and infrastructure. 2. Crude oil: Crude oil is a naturally occurring, unrefined petroleum product composed of hydrocarbon deposits and other organic materials. Oil companies such as ExxonMobil, Chevron, and BP drill for and extract crude oil, which is then refined into various petroleum products like gasoline, diesel, and jet fuel. These products are crucial for transportation, manufacturing, and power generation. 3. Cotton: Cotton is a soft, fluffy staple fiber harvested from the cotton plant’s protective case around its seeds. It is a critical input for textile and clothing industries as a raw material for producing fabrics, clothing, and other woven products. Agricultural companies and farmers grow and harvest the cotton, which is then processed and sold to textile mills and garment manufacturers to create various products like shirts, jeans, and towels.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Inventory
• Supply Chain Management
• Commodities
• Cost of Goods Sold (COGS)
• Procurement

Sources for More Information

• Investopedia
• AccountingTools
• BDC
• WallStreetMojo