Raw material is defined as the crudest form of product possible, which is used as an input for making another product. Raw material is essentially the unprocessed product and is the chief constituent of the primary product that is processed or manufactured.
Raw materials are also an important part of a firm’s inventory management. They are component parts of the stock of inventories carried by a manufacturing firm at a given time. Every organization has inventories of some type and the economics and techniques of inventory management are critical for efficient operation, profitability and survival; especially in a highly competitive environment.
There are mainly 4 factors of production. Raw material falls in the category along with labor and capital. This crucial element makes these goods an indispensible commodity for a manufacturing enterprise and a country. If a country has succinct raw materials, it need not import them from other countries. Thus, it can improve its current account deficit. Abundance of these goods is directly linked with the prosperity of a region.
The basic classification of raw materials are:
1. Direct: These are basic unprocessed materials or resources. Goods like metals, wood, sand etc are direct raw materials i.e. they are in their natural form.
2. Indirect: Materials, which are not required to make the finished product, but without which production of final goods cannot be done. Goods like helmet, gloves, tools, office chairs etc.
Raw material is bottleneck assets as the production of other materials depends directly on their availability. Commonly used basic goods in industry are crude oil; used in various industries like pharmaceuticals, chemical and plastic, lumber; used in wood and furniture etc. In industrial parlance, they are often called commodities. That makes them eligible for trading across various Commodity Exchanges round the world.
Hence, this concludes the definition of Raw Material along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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