Toll manufacturing, simply put, is the arrangement where one company processes materials for another.
Outsourcing your manufacturing process or part of it to a reputable company is a cost-efficient way to produce your product or raw materials. It would help if you had a partner with specialized equipment, organizational systems, and skilled labor already in place.
When you outsource, you do not have to worry about manufacturing dilemmas facing many companies—for instance, lack of capital investments, operating models, and sometimes how to manufacture, among others.
In addition, the toll manufacturer has experience in processing different products. Since they work for different companies across various industries, they can help you overcome challenges in the processing and formulating of your products.
This article will tell you everything you should consider about toll manufacturing.
- What is Toll Manufacturing?
- Contract vs. Toll Manufacturing
- Pros and Cons of Toll Manufacturing
- Pros and Cons of Contracting Companies
- What is a Toll Manufacturing Agreement?
What Is Toll Manufacturing?
Toll manufacturing or tolling is outsourcing all the production or part of it to a third-party company where you provide all the raw materials or semi-finished products.
The work of the third-party company is to process the products or raw materials to the required specification. Full toll manufacturers often offer warehousing and shipping services.
The manufacturer receives a fee or toll, a flat fee agreed upon before commencement of processing. They are only responsible for the final product’s quality as far as the processing is concerned. The source company is responsible for the quality of materials and the vendors. Here at Lamart we ensure the toll manufacturing process is transparent at the component and material levels.
The main reason for toll manufacturing is to utilize specialized equipment and labor or technicalities in the production process. Sometimes you may have to divulge trade secrets and knowhow to the toll company about your product. But this is generally protected by a toll manufacturing agreement – which we will speak more about below.
Contract vs. Toll Manufacturing
Contract and toll manufacturing are sometimes confused with each other.
Contract manufacturing is another way of outsourcing production. But here, the third-party company is responsible for sourcing the materials and manufacturing.
It will oversee the process from beginning to end, ensuring the final product is according to the provided specifications. A company can outsource the production of the whole product or part of it. The fee to be paid is pre-agreed beforehand.
Contract manufacturing is a fast and effective way of making branded or custom-made products without engaging in production. Companies can produce products even overseas without needing to set up expensive factories or buy special equipment.
Pros and Cons of Toll Manufacturing
- Save on capital equipment: Eliminate capital investments such as special equipment, production lines, and workforce.
- Handling raw materials is taken care of by the toll company: The toll company can handle the sensitive raw materials from the source, eliminating chances of contamination.
- They charge a flat fee: The company will not change the toll because it is predetermined whether your product sells for more.
- Increased production efficiency as the toll company specializes in processing: They already have systems to ensure optimum efficiency.
- The toll companies offer customization: Even when you can’t invest in the processes and equipment, they offer customized products, whether in the packaging or product formulation.
- You reduce labor cost: In today’s labor market, skilled workers are at a high-time shortage. You use skilled workers from the toll company at a fraction of the fee it would take to hire them.
- Control over the quality and cost of raw materials remains with you: Since you source the raw materials, you decide where to buy and negotiate deals with your suppliers.
- It gives you production convenience, especially for chemical toll manufacturing: Chemical toll manufacturing companies are usually certified or permitted to produce chemicals and have the necessary equipment. They will handle large volumes for you, and you don’t need to go through strict certification processes.
- On-demand capabilities allow you to seek services on a need basis: Instead of investing in equipment, you can approach a toll company for special projects and product testing.
- You risk losing your trade secrets when you share them with the toll company to enable production. It is a considerable risk as they may even pass them on to your competitors or start manufacturing the products in the future.
- Also, delays may cost your company. If their facilities are busy with another order, you may have to wait, affecting your delivery timelines.
- From the toll company’s point of view, the source company may outsource only complex and low-margin processes while remaining with the easier ones.
Pros and Cons of Contracting Companies
- Specialized skill-sets and equipment can be advantageous for special processes and the use of the manufacturer’s patented processes for a fraction of the fee.
- Contracting companies save you money as you do not need to invest in expensive production factors.
- If the demand for a product is high, contracting several companies helps you satisfy it. This way, you increase the revenues and profits for your company.
- Suppose you have to divulge important trade secrets vital for the production process. In that case, you risk losing them to the competition or, worse, having the contracting company use them to manufacture the product.
- Additionally, contracting takes away your control over the entire process. You rely on decisions made by the manufacturer.
What Is a Toll Manufacturing Agreement?
A toll manufacturing agreement is between two companies.
One owns a design or idea for a product and supplies materials to the other to manufacture the product or parts of it. It is essential in protecting intellectual rights and trade secrets from being passed on to competitors or used to make competing products.
You can also refer to the document as a tolling agreement or a tolling process agreement. Even though the agreement needs tailoring to specific needs, toll manufacturing agreement templates are an excellent place to start.
Toll manufacturing is an effective way to outsource your production process. You can eliminate a considerable capital investment from your production budget and replace it with a flat fee or toll.
The toll manufacturing company also provides skilled labor and organizational systems.
To eliminate misunderstandings, sign a toll agreement before any work begins.
That said, Lamart offers a variety of toll manufacturing, whether it be 100%, customer-supplied materials, or any combination thereof. We are here to manage inventory and partner to manufacture for you! Feel free to contact us or visit our services page to learn more about our offerings.