Toll manufacturing and contract manufacturing are commonly used options for outsourcing manufacturing.
While the terms are often used interchangeably, they each represent a distinctly different process.
In toll manufacturing, one company sends raw materials or partly-finished goods to a third-party toll processing company who has the equipment and expertise necessary to finish the product in exchange for a fee or “toll.”
Contract manufacturing also involves outsourcing manufacturing, but in these arrangements, the contracted manufacturers will source the raw materials needed for production and will generally have control over vendor selection and quality management.
Both toll and contract manufacturing allow companies to respond to customer demands faster and eliminate any immediate need for overhead investments in equipment, facilities, and experienced labor, but each also has its own unique advantages and disadvantages.
- Toll processing solutions allow the source company to have complete control over the price, nature, and quality of raw materials.
- Pricing is very transparent
- Toll agreements typically include product processing, labeling, and packaging.
- The source company gains the benefit of process-specific experience/expertise that it does not possess itself.
- Because the primary company provides all raw materials, the primary company must procure those materials and handle transportation of those materials to the third-party toll manufacturer.
- The primary company is actually purchasing a finished product from the contract manufacturer and thus avoids all the expenses of managing multiple vendors and handling transportation of raw materials to a third party.
- The primary company cedes some control over raw materials and quality control procedures. Contract agreements should include specific language about these issues, but that fact remains that someone else is doing the purchasing and quality control.
- Pricing can be complicated and more fluid as the price of raw materials fluctuates.
What Else Should You Consider?
In addition to weighing the advantages and disadvantages of each manufacturing solution, there are a number of additional factors to consider.
- Does the manufacturer have the capacity to handle all your production needs? Do they have the ability to make large AND small production runs?
- Does the manufacturer provide the full range of processes necessary to finish your product?
- Can they schedule the production flow to meet your needs?
- What are their lead times?
- Is the manufacturer ISO certified and do they have a long history of safety and quality?
Toll and contract manufacturing are certainly both available methods of finishing your product without immediate capital outlays. Choosing the path that’s right for you may only require a conversation with the potential third-party manufacturer. In the end, your customers will receive a product that reflects the perfect combination of your strength in innovation and your toll manufacturer’s production power.
If you would like to explore your options further, contact Fluid Energy today!