For most manufacturers, semi-finished goods play an essential role in the production process. Semi-finished goods such as materials and components are the key building blocks of products as varied as automobiles, pizza and bedding. Strategic use of semi-finished goods can help companies streamline production processes, save time and accelerate time to market.
What Are Semi-Finished Goods?
Semi-finished goods (SFGs) — also known as sub-assemblies — are goods that have already undergone some processing and are then used as inventory inputs in the manufacture of finished goods, which are products ready for sale to consumers. Also known as intermediate goods, semi-finished goods include a wide variety of components, materials and other items. For example, semi-finished goods ranging from steel sheets and electronic components to complete engines may be used in the car manufacturing process.
- Semi-finished goods are goods that have undergone some processing and are used as inputs in the production of finished goods.
- Examples of semi-finished goods include materials such as steel and sugar, as well as components ranging from computer chips to car engines.
- Companies may buy semi-finished goods from other companies, make their own or produce semi-finished goods for sale to other companies.
- Calculations of gross domestic product (GDP) do not include semi-finished goods because their value is already included in the value of finished products.
Semi-Finished Goods Explained
Semi-finished products include any partially finished goods that are incorporated into finished goods sold to consumers or businesses. Semi-finished goods are essential for most production processes — in fact, a manufacturing process may consist largely of assembling a set of semi-finished goods. By using production-ready components and materials, manufacturers can build products more quickly and accelerate time to market.
Some semi-finished goods, such as electronic components, may be incorporated into finished products without further transformation. Others, like steel sheets, may be altered during the production process until they are no longer recognizable.
In general, there are three ways that semi-finished goods are made and used:
- A manufacturer buys semi-finished goods from suppliers.
- A manufacturer makes semi-finished goods and uses them in its own products. For example, a chocolate maker might own the cocoa-bean processor that produces ingredients for its chocolate bars.
- Manufacturers make semi-finished goods that are sold to other companies.
Semi-Finished Goods and Production
Raw materials may go through several processing stages, each of which adds value and results in a semi-finished product. For example, yarn and fabric are both semi-finished goods. Yarn comes from a raw material such as wool, polyester or cotton. After the raw material is spun into yarn, its value increases. The yarn may also be processed into fabric. The fabric and yarn can then be used to make clothing, upholstery or other home goods.
Note that in some cases a product could be categorized as either a finished good or a semi-finished good, depending on how it’s used. For example, a supplier might sell fabric directly to consumers as a finished good. It could also sell the same fabric to clothing manufacturers that use it to make clothes, in which case it would be considered a semi-finished good.
Economists do not count semi-finished goods in a country’s gross domestic product (GDP) so as to avoid double-counting the contribution of these goods to the economy. GDP is a key measure of productivity that’s calculated by totaling all goods and services that a country or region produces. Semi-finished goods are not included in this calculation because their value is already included in the total value of finished products. Double-counting semi-finished goods would result in overestimating GDP. Additionally, semi-finished goods are accounted for under the inventory line item on balance sheets.
Examples of Semi-Finished Goods
Semi-finished goods are used to make an enormous range of different products. Here are three common examples:
- Manufacturing. Car makers use many semi-finished goods. Sheets of carbon steel are an example. Steel undergoes processing in a mill to create sheets that the car manufacturer uses to make different parts of a car’s body. To make a car door, for example, the manufacturer must mold and cut the sheet to the desired shape and size. During the final assembly of the door, the manufacturer also uses other semi-finished goods obtained from suppliers, such as car window glass.
- Baking. The production of a loaf of bread also uses multiple semi-finished goods including flour, which is an intermediate good created by milling grain. Other semi-finished goods used in the process include sugar and yeast. The baking process transforms these ingredients into the final product.
- Construction. Many materials used by construction firms, including wooden planks and plywood, roofing shingles and windows, are semi-finished products.
Track and Manage Semi-Finished Goods With Inventory Management Software
Inventory management software enables businesses to accurately track and maintain stock of raw materials, semi-finished goods and other inventory used in production. It helps businesses keep inventory costs low while ensuring they have enough inventory on hand to meet demand. Leading solutions provide real-time visibility into inventory across all locations, including warehouses, retail stores and third-party logistics providers. Businesses can use demand-based planning to maintain the right stock levels based on historical demand, sales forecasts and seasonality. With inventory software that’s part of an integrated suite of enterprise resource planning (ERP) applications, companies can automate business processes across the entire company, gaining better visibility into data and control over supply chain, warehouse and manufacturing operations.
Semi-finished goods are critical in the manufacturing of nearly every type of product, from clothing to cars. Inventory management software helps companies accurately track semi-finished goods and other production inventory, minimize cost and ensure they maintain enough stock to meet demand.
Semi-Finished Goods FAQs
Which goods are known as semi-finished goods?
Products that are sub-assemblies or other items that are an integral part of another larger, more complex product are considered semi-finished or intermediate goods. An example is an engine that goes into a lawn mower.
Do semi-finished goods count in GDP?
Semi-finished goods are not included in GDP. GDP measures the market value of all final goods and services produced by a country. The value of finished goods includes the value of the semi-finished goods used in their manufacture. Therefore, counting the value of semi-finished goods as well as the total value of finished products would double-count the value of the semi-finished goods, resulting in an incorrect estimate of GDP.