Toll manufacturing is a B2B deal between a manufacturer and supplier. The supplier (toller) has the equipment, know-how and manpower required for carrying out certain functions that are a part of the manufacturer's production process. This is not the same as a supplier getting a traditional vendor contract to provide goods.
The key difference is that the toller is not responsible for purchase of raw material and other components, and does not at any time own the finished goods. They simply step in to fulfill a part of the production workflow, and let the manufacturer handle it before and after that. It is an advantageous system for manufacturers as compared to doing it in-house by themselves, or going the other way to fully outsource production.
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.
All the parts and individual components required for producing television sets are purchased by X and sent over to Y. It may also be possible that Y has leased some space within the same premises as X, or has set up a facility nearby. It's not a hard and fast rule, though, and Y's facility can be anywhere in 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 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.
The relationship between R2 and D2 is much stronger than normal buyer-supplier relations. The supplier virtually becomes one of the manufacturer's in-house divisions. They can't just be arbitrarily replaced with another supplier at a moment's notice. From the manufacturer's point of view, the supplier is just charging for a service, and this creates a lot of transparency. Pricing will be stable since the costs for raw materials, insurance, etc. Are not factored in.
Toll manufacturing is an excellent way for a manufacturer to exert a lot of control on what suppliers do and how much they charge for it. An ERP system that covers all the company's divisions can cover toll processing too, and this makes management and automation a lot easier than having outside vendors. The resultant benefits can be seen not just in product pricing, but also other business operations such as inventory, transportation, quality control and accounting.
The key difference is that the toller is not responsible for purchase of raw material and other components, and does not at any time own the finished goods. They simply step in to fulfill a part of the production workflow, and let the manufacturer handle it before and after that. It is an advantageous system for manufacturers as compared to doing it in-house by themselves, or going the other way to fully outsource production.
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.
All the parts and individual components required for producing television sets are purchased by X and sent over to Y. It may also be possible that Y has leased some space within the same premises as X, or has set up a facility nearby. It's not a hard and fast rule, though, and Y's facility can be anywhere in 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 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.
The relationship between R2 and D2 is much stronger than normal buyer-supplier relations. The supplier virtually becomes one of the manufacturer's in-house divisions. They can't just be arbitrarily replaced with another supplier at a moment's notice. From the manufacturer's point of view, the supplier is just charging for a service, and this creates a lot of transparency. Pricing will be stable since the costs for raw materials, insurance, etc. Are not factored in.
Toll manufacturing is an excellent way for a manufacturer to exert a lot of control on what suppliers do and how much they charge for it. An ERP system that covers all the company's divisions can cover toll processing too, and this makes management and automation a lot easier than having outside vendors. The resultant benefits can be seen not just in product pricing, but also other business operations such as inventory, transportation, quality control and accounting.
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