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 toller in this case may not own the raw material or the components. They are simply required to use their equipment and manpower to handle a specific production function(s). This system has quite a few advantages as compared to entirely outsourcing the production of goods, or going the other way and doing it entirely in-house.
It might be easy to grasp if the concept is explained as an industry-specific example. Consider two companies A and B that are manufacturers in the consumer electronics industry. This sector is well known for its frequent use of toll processing across borders. Assume that A is a brand-name company that makes and sells television sets, and has asked B to be their toller.
The parts and components required are purchased by A and shipped over to B’s facility. It’s also possible that B may do the production work in a leased space within A’s facility to reduce shipping costs and other logistics issues. It is not a requirement, though, and B’s facility could theoretically be anywhere across the world.
R2 sends raw material to D2, who produces television sets and ships them back to R2. During this entire to and fro process, ownership of the material, parts and the finished goods remains with R2. Upon receiving the TV sets, R2 adds branding, logos, packaging, etc. And starts moving the product to market through distributors and retailers.
It’s understandable that all this seems very similar to outsourcing production entirely, except for the ownership part. However, other key differences here include the fact that X is able to control the entire process and maintain quality, meet deadlines and scale production up or down quickly as required. In other words, it has all the advantages of in-house manufacturing, but without the associated investments and ongoing costs.
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 is therefore a transparent process where the manufacturer controls what the toller is doing and knows exactly how much it will cost. The price does not change every other day, and the whole process can be automated and managed using the manufacturer’s own internal ERP system. It makes compliance easier, and benefits can be accrued in everything from inventory and transportation to accounting, quality control and product pricing.
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