Toll manufacturing is a business-to-business deal between two parties. One of them has the know-how, manpower and equipment to handle certain functions within the overall production process of the other party. This arrangement has several key differences as compared to traditional supplier-buyer transactions.
The one with the know-how is called the toller, and is not responsible for purchase of raw material and parts required for the process in question. They are given all this by the manufacturer, and the toller simply deploys manpower and equipment to complete a step in the process. Let's take a deeper look at how this works, along with the benefits relative to outsourcing or complete in-house production.
It's a lot easier to understand if a specific example pertaining to an industry is used to illustrate how the system works. Let's take two companies (X and Y) in the consumer electronics sector, where toll processing is quite commonly used within and across borders. X is a manufacturer of branded television sets in this scenario, and has asked Y to be the toller.
R2 purchases the components and material required for producing TV sets and sends it all over to D2. Shipping may not be required if D2 leases space inside R2's facility. It is not mandatory that R2 ad D2 must be in the same complex, or even in the same region. They could easily be on separate continents and the process would still work just as well, although the shipping costs would go up.
Upon receiving the components, Y starts making the TV sets and then ships them back to X. Throughout this process of components and goods being shipped to and fro, the safety and ownership responsibilities remain with X. When the television sets are received by X, they will add their branding and packaging and then send it out to market through their distributors and retail outlets.
It's easy to confuse this with outsourcing, since the only major difference seems to be the ownership part described above. But there are other key differences, such as the fact that Company A controls the whole process. They are able to ensure quality, meet tight deadlines, and quickly scale production up and down as required. These are usually traits of in-house manufacturing, available in this case to A without the attendant costs and capital investments.
A and B end up in a tighter relationship than both have with other manufacturers and suppliers. Tolling is highly beneficial for B because it virtually becomes an in-house division of A, rather than just an external vendor who can be replaced at any time. The most important thing that keeps them together is the transparency, because B is charging for a service. The price will not vary due to changes in the cost of raw material and other things that traditional vendors add on to the tab.
Toll manufacturing allows the manufacturer to exert complete over the process and its costs. The whole thing can be managed and automated through a company-wide ERP that can include the toller into the workflow. Compliance becomes a lot easier, and there are benefits to be had in every area of the business including accounting, quality control, inventory, transportation and product pricing.
The one with the know-how is called the toller, and is not responsible for purchase of raw material and parts required for the process in question. They are given all this by the manufacturer, and the toller simply deploys manpower and equipment to complete a step in the process. Let's take a deeper look at how this works, along with the benefits relative to outsourcing or complete in-house production.
It's a lot easier to understand if a specific example pertaining to an industry is used to illustrate how the system works. Let's take two companies (X and Y) in the consumer electronics sector, where toll processing is quite commonly used within and across borders. X is a manufacturer of branded television sets in this scenario, and has asked Y to be the toller.
R2 purchases the components and material required for producing TV sets and sends it all over to D2. Shipping may not be required if D2 leases space inside R2's facility. It is not mandatory that R2 ad D2 must be in the same complex, or even in the same region. They could easily be on separate continents and the process would still work just as well, although the shipping costs would go up.
Upon receiving the components, Y starts making the TV sets and then ships them back to X. Throughout this process of components and goods being shipped to and fro, the safety and ownership responsibilities remain with X. When the television sets are received by X, they will add their branding and packaging and then send it out to market through their distributors and retail outlets.
It's easy to confuse this with outsourcing, since the only major difference seems to be the ownership part described above. But there are other key differences, such as the fact that Company A controls the whole process. They are able to ensure quality, meet tight deadlines, and quickly scale production up and down as required. These are usually traits of in-house manufacturing, available in this case to A without the attendant costs and capital investments.
A and B end up in a tighter relationship than both have with other manufacturers and suppliers. Tolling is highly beneficial for B because it virtually becomes an in-house division of A, rather than just an external vendor who can be replaced at any time. The most important thing that keeps them together is the transparency, because B is charging for a service. The price will not vary due to changes in the cost of raw material and other things that traditional vendors add on to the tab.
Toll manufacturing allows the manufacturer to exert complete over the process and its costs. The whole thing can be managed and automated through a company-wide ERP that can include the toller into the workflow. Compliance becomes a lot easier, and there are benefits to be had in every area of the business including accounting, quality control, inventory, transportation and product pricing.
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