Toll manufacturing is a business approach that relies on outsourcing manufacturing processes. Using this strategy, a business enters into a partnership with a specialized manufacturing facility and supplies that facility with raw materials or semi-finished products. Afterwards, the business receives the finished products in exchange for a “toll” or fee.
Globalization and the emergence of new digital technologies have made the practice a more accessible option for enterprises. Today, companies of all sizes can use the toll manufacturing approach to create the entirety or just a part of their product line. With someone else taking care of the manufacturing process for them, businesses can focus their attention on origination, innovation, design, and research and development.
How Can Toll Manufacturing Be a Viable Business Model for Modern Companies?
Adopting toll manufacturing offers many advantages throughout the business lifecycle. From launch to maturity, it can aid businesses in achieving their goals and reaching the next stage of their growth by offering the following benefits:
Cost-Effective Setup and Operations
Outsourcing manufacturing to an established facility is a cost-effective way of starting a business. A partnership with a manufacturing facility means that a startup no longer has to invest extra time and money in setting up and maintaining a manufacturing arm for its operation. The business can depend on its manufacturing partner’s existing facility and staff for this particular function.
In addition to reducing initial capital costs, toll manufacturing also implies that the business can do away with designing manufacturing processes, ordering and setting up machinery, and hiring workers to oversee and maintain the production facility. By cutting these costs for setting up its business, a company can spend more on maintaining its operations and expanding its product lineup.
More Space to Focus on Core Competencies
Putting up and maintaining a manufacturing facility is a significant undertaking, as it requires the company to grow its manpower and manage an entire production team. This is especially true for small to mid-sized businesses, as it can be a challenge for companies of this size to pursue rapid growth.
However, this is not an issue for a company that has adopted a toll manufacturing strategy. Such a business can stay lean and focus on the core competencies of its company, like designing innovative products or expanding its market. The labor-intensive part of the production process can then be relegated to a capable manufacturing facility.
Easily Adopt Green Manufacturing Processes
For a growing number of environmentally conscious consumers, it’s no longer enough for businesses to simply replace problematic ingredients like petroleum-based synthetics with sustainable, natural alternatives in today’s consumer products. More than ever, these customers are scrutinizing the processes that go into making the products they consume.
Toll manufacturing allows businesses to more easily address this consumer demand, as they can simply choose to only engage manufacturers who can commit to environmentally sound processes. Fortunately, a growing number of manufacturers are currently transitioning to more sustainable practices, lowering the entry barrier for businesses looking for a green manufacturing partner.
Scale Operations Up or Down Based on Market Demand
Toll marketing is a great fit for businesses that have seasonal demands and cyclical processes. A company with a traditional manufacturing setup has to invest in additional manufacturing equipment and pay for extra man-hours to keep up with an increase in demand for its products and services. When demand drops, they may have to scale back their workforce and continue paying for the upkeep of their manufacturing assets. Neither of these scenarios will be an issue for businesses that have chosen to outsource their manufacturing.
To respond to changes in demand level, a business that has adopted a toll manufacturing process can simply change its order volumes from the manufacturing facility that it has partnered with. And in case the said facility cannot completely shoulder the additional orders, the company has the option to get in touch with other manufacturers to meet market demand.
No Need to Compromise on Product Standards
Working with a manufacturing facility does not mean that the client business does not have a say in the processes used to make the products that bear its brand.
At the start of their relationship, the business and the manufacturing facility must agree to the procedures materials or semi-finished goods will go through as well as the standards that the final product must meet. Meeting these expectations is a requisite in the partnership between these two parties.
Also, in toll manufacturing, the quality of the final product is not entirely reliant on the manufacturing facility. The business is still in charge of supplying the manufacturer with raw or semi-finished materials which make up the final product. This gives the business a measure of control over the quality of the output. The right manufacturing partner should be able to observe this balance and tailor their approaches to what their client business needs.
Should You Adopt a Toll Manufacturing Strategy?
More and more businesses are adopting toll manufacturing to adapt to Industry 4.0. It’s an attractive strategy for businesses keen on protecting their intellectual property and trade secrets, and preventing other companies from stealing or profiting off their innovations.
At the same time, toll manufacturing frees businesses of the constraints of managing an in-house manufacturing facility and hiring a competent team. It’s an arrangement worth checking out, especially for businesses that aim to break new ground in the digital age.
