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'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.
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.
After receiving the raw material and components, B produces the TV sets and ships them over to A. At no point in this entire process does B have ownership of the components or the finished goods. After receiving the television sets, A will add their branding, logos and packaging before shipping the products off to market through retail outlets and distributors.
No doubt this system is suspiciously similar to outsourcing, with the exception of the ownership aspect. However, it is important to remember that R2 is able to exert much more control and ensure that quality levels and production deadlines are not compromised. The whole operation can be scaled up and down very quickly whenever required. In short, the manufacturer retains all the advantages of in-house production without having to make capital investments and bear the 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.
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'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.
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.
After receiving the raw material and components, B produces the TV sets and ships them over to A. At no point in this entire process does B have ownership of the components or the finished goods. After receiving the television sets, A will add their branding, logos and packaging before shipping the products off to market through retail outlets and distributors.
No doubt this system is suspiciously similar to outsourcing, with the exception of the ownership aspect. However, it is important to remember that R2 is able to exert much more control and ensure that quality levels and production deadlines are not compromised. The whole operation can be scaled up and down very quickly whenever required. In short, the manufacturer retains all the advantages of in-house production without having to make capital investments and bear the 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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