Manufacturing requires the incorporation or transformation of one or more "ingredients" into a finished product. Businesses call those ingredients intermediate goods. Intermediate goods may be one company's finished products sold as a manufacturing input to another company, or they may be produced by one company that incorporates them into its own finished products. Here's a look at the important role intermediate goods play in the overall production process.
What Are Intermediate Goods?
Intermediate goods — interchangeably known as producer goods and semifinished goods — are items used in the production of another item, which could be a finished good or another intermediate good that is further along the value chain. Intermediate goods are always either incorporated into another product or transformed in some way as part of the manufacturing process.
Intermediate goods can be produced by the same company that will use them as a manufacturing input for its finished products, or they might be sold to another company. In the latter case, the good in question is its maker's finished good — but it's an intermediate good for the manufacturer that buys and uses the item in its own finished products.
Intermediate vs. Consumer Goods
While intermediate goods are the components used to manufacture a given product, consumer goods are the finished products ready for customer purchase and consumption. Consumer goods often incorporate intermediate goods. But keep in mind that goods can be intermediate or consumer goods, depending on context — in other words, the good's intended purpose and where it is in the supply chain or manufacturing process. Salt and sugar, for example, are intermediate goods when they're ingredients in the production of pasta or desserts in a restaurant, but they are consumer goods when they're purchased in a supermarket by a home cook who's preparing a family dinner.
Intermediate vs. Capital Goods
Capital goods are assets used in the production of finished goods — the factories, tools and equipment used to make products or provide services. Unlike intermediate goods, they're not changed during production but, rather, assist in manufacturing. For example, the pot and stove needed to boil the pasta in a restaurant are considered capital goods; likewise, robots on a car manufacturer's assembly line are capital goods. However, the engines, body panels, doors and brake systems purchased by the carmaker would be intermediate goods within the inventory management process, while the finished car you buy is a consumer good.
Intermediate Goods Explained
A key aspect of intermediate goods is that they undergo a transformation as part of a manufacturing production process, resulting in production of a consumer good or "secondary" intermediate good (i.e., something used in a subsequent manufacturing process). In other words, they're either incorporated into a finished product or changed beyond recognition in the process. Of note, partially finished goods awaiting completion on the factory floor are not considered intermediate goods — they're deemed "work in process."
Because intermediate goods are components of finished goods, they're excluded by economists when calculating a country's gross domestic product (GDP). Inclusion of intermediate goods in GDP would be considered double-counting, as the value of intermediate goods is captured as part of the total value of finished goods. In business accounting, on the other hand, intermediate goods are factored into a company's cost of goods sold (COGS) calculations. COGS includes all the direct costs of the inputs needed to produce a finished good.
How Do Intermediate Goods Work?
Except for the few cases in which an intermediate good might also be a consumer good (depending on context), intermediate goods usually "disappear" into the final product. They either become a component of a larger product — like the brake fluid in a car — or are completely transformed, like the baking soda used in manufacturing pretzels.
Furthermore, intermediate goods can undergo multiple transformations in the course of producing a finished good. Steel, for example, can be produced in sheets, some of which may be shaped into body panels, then fitted with fasteners and painted, before being assembled with other steel panels into the body of a car. Steel is also combined with rubber to create a car's brake lines.
Intermediate Good Categories
Economists usually view intermediate goods in three categories:
- In-house: Produced by a company and used in that same company's finished goods.
- Business-to-business (B2B), finished: Produced and sold to another manufacturer to make finished goods.
- B2B, intermediate: Produced and sold to another company, but used in making other intermediate goods.
To illustrate these categories, consider the automobile industry. Some makers of high-performance cars — think, Lamborghini — produce most or all of their components themselves. For example, Lamborghini fabricates and assembles its engines in-house. In this case, Lamborghini produces and uses its own intermediate goods as input into its finished/consumer goods.
But more commonly, one company produces intermediate goods and sells them to other manufacturers that use them in the production of their finished products. Often in the auto industry, one company builds the engine (an intermediate good) and sells it to a car manufacturer that will, in turn, use it to produce cars and sell them to the consumer.
It is also common in the auto industry for intermediate goods to be sold from one manufacturer to another and used as input for making a secondary intermediate good that will, in turn, be used to produce another intermediate or final good. A small company that specializes in pistons (intermediate good) may sell it to a maker of custom engines (secondary intermediate good) that are, in the end, built into a car (consumer good) before it is eventually sold to the ultimate consumer.
Examples of Intermediate Goods
When thinking of components that go into a finished product, we usually think of physical raw materials like wood, metal, glass or cloth. While this isn't wrong, intermediate goods are not necessarily only physical goods. Services can also be considered intermediate goods if they're used as input in the production process of other goods. Here are some examples of both physical goods and services acting as intermediate goods:
- Sugar. Sugar is a main ingredient in a myriad of consumer goods. It also acts as a consumer good itself when it's bought and used by the consumer.
- Photography. This is an example of a service used as intermediate good, if the photographer is, for example, providing images to a newspaper, magazine or television station that includes them in their ultimate product. In this example, the camera used to shoot the pictures would be a capital good.
- Car parts and engines. As already mentioned, car engines are typical examples of intermediate goods. They can be produced and used by the same car manufacturer or, most commonly, produced and sold to other companies for the production of automobiles.
- Silver, gold and other metals. Metal-derived products like jewelry, kitchen utensils, tools and car parts need metallic intermediate goods in their production.
- Paint. Usually manufactured and sold among various industries, paint is also a good example of an intermediate good that can be a consumer product when sold directly to homeowners.
- Glass. Glass is an intermediate good when used in the production of windows, furniture and tableware, for example.
As you can see, most intermediate goods can be used for multiple purposes, depending on the product and the industry. The same wood supplier, for example, can be part of the supply chain for both a flooring and a furniture manufacturer. The wood will be used for different purposes but will still be categorized as an intermediate good in both instances.
Intermediate Goods and GDP
GDP measures the monetary market value of all services and goods produced in a country within a specific period. In the U.S., the government releases GDP estimates for each fiscal quarter and for the whole year. Only finished goods' values are counted in the calculation of GDP — not intermediate goods.
GDP is calculated this way to prevent the value of intermediate goods being counted twice — once when sold by their original manufacturers or suppliers and again when the value of the final good is measured. For example, consider a small pasta manufacturer that uses three eggs to produce one box of pasta. It buys a dozen eggs for $1 and produces four boxes of pasta, which it sells for $3, bringing the total to $12. GDP is calculated using only the $12 value, as the $1 value of the dozen eggs was already counted as part of the cost of the finished pasta boxes. Adding the cost of all separate ingredients — eggs, flour, salt — plus the value of the consumer good would result in an overestimation of GDP.
Track & Manage Intermediate Goods With Inventory Management Software
Intermediate goods usually have their own place in an organization's inventory management process. For example, in terms of physical storage, intermediate goods are typically stored close together and in an order that makes sense for the production process. Operationally, optimizing intermediate goods inventory is just as important as optimizing finished goods inventory. Overstocking will result in higher carrying costs and risk the possibility of ingredients spoiling or becoming obsolete; understocking may cause production delays for finished goods, which can lead to stockouts — i.e., not enough product to fulfill customer demand.
NetSuite Inventory Management software allows for a holistic view of inventory, collecting data that will be essential for planning and forecasting, every step of the way, from raw materials through intermediate goods to finished products. The cloud-based solution automates inventory tracking, keeping all quantities up-to-date and feeding the business with the information necessary to prevent over- or understocks, avoid unnecessarily high holding costs and set up optimal reorder points for intermediate goods.
Conclusion
Intermediate goods are the crucial ingredients necessary in the production of any manufactured product, and they also contribute to many different services. Companies may produce intermediate goods for the manufacture of their own finished goods or sell intermediate goods to others. Tracking and monitoring intermediate goods involved in production is usually best accomplished with inventory management software.
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Intermediate Goods FAQs
What is an intermediate good example?
Intermediate goods are items used as ingredients in the making of finished products. A good example of an intermediate good is wood. Wood is used in the manufacturing of tools, furniture, paper and decorations, among other things.
What are intermediate and capital goods?
Intermediate goods are items used as input in the production process of finished goods. They are transformed beyond recognition in the process or incorporated into the finished good as a component. Capital goods are the tools used in the production process — the factories, equipment and tools used to make the finished goods.
Is equipment an intermediate good?
Equipment is considered a capital good, not an intermediate good.
Is gasoline an intermediate good?
Gasoline is often a final good, bought and used by consumers for their cars and lawnmowers. But it can also be an intermediate good, for example, when used in a taxicab. In that case, it's being used as input into the final good or service — the ride.
