Tolling Agreement Manufacturing and Its Alternatives
Contract manufacturing, tolling agreement manufacturing, OEM manufacturing… You’ve probably heard of all of these third party manufacturing options at one point or the other. But what do they all mean on a practical level? As a business owner, you’ll probably consider third party manufacturing as your business grows bigger and better. When you scale up, outsourcing becomes somewhat inevitable. However, not every third party manufacturing process works for every business owner. It’s important that you make your selection from an informed perspective. With that in mind we’re walking you through tolling agreement manufacturing and OEM manufacturing in comparison to contract manufacturing. Let’s find out what they really mean!
What is the difference between tolling agreement manufacturing and contract manufacturing?
Generally speaking, you’ll hear about two main types of third party manufacturing: contract manufacturing and tolling agreement manufacturing. While on the surface it may seem like these options are quite similar, we find a couple of key differences that matter in a huge way. Especially from a client perspective.
When you make an agreement with a contract manufacturer, you’re agreeing to outsource to them, while they agree to make the products you need. From the beginning of production, the manufacturer carries out the process in their own facilities. That means the manufacturer procures the goods as well. You don’t have to obtain the goods, and you don’t have to worry about the actual production process either.
In comparison, tolling agreement manufacturing also involves outsourcing. You won’t have to use your own facilities, and you won’t have to select employees to work with. Your manufacturer has that all figured out for you, just as you would experience with contract manufacturing. However, when you make a tolling agreement, you maintain a higher degree of control. That control lies in the fact that you get to select the raw materials.
When you choose your own raw materials for a project, it means more than you might think. Not only is it about quality—choosing the materials you think work the best for your project—it’s about controlling the cost as well. While some contract manufacturers have deals with suppliers, you may have your own arrangements. At times, it’s less expensive to pay for the raw materials yourself than it is to leave that to a tolling manufacturer.
What does tolling mean in manufacturing?
Now that we’ve covered the main differences between tolling agreement manufacturing and contract manufacturing, let’s dig a little deeper into the concept of “tolling”. While tolling means different things in different industries, in manufacturing it’s fairly straightforward.
With tolling, you not only get to select the raw materials. You also get to select the specific formulations if you wish. You’re paying a fee—a toll—and the manufacturer refines or mills those materials for you. Depending on your agreement, the final product will be either fully finished or semi-finished. Controlling the formula along with the raw materials empowers you with an additional degree of power. Consider your relationship with a tolling manufacturer to be a symbiotic, collaborative one. You’re not stepping back and going completely hands-off. You’re working with a manufacturer to create the best possible product.
For many small business owners, this is one big reason why they prefer tolling agreement manufacturing to contract manufacturing. Giving up control to a third party can be intimidating, even when you know that third party can be trusted and comes highly recommended. With this type of compromise, you can tell your clients and customers that you remain involved in the process. Furthermore, the connection you make with a good tolling manufacturer may last for the long term, affording you more than just peace of mind.
What is the difference between contract manufacturing and OEM manufacturing?
Stepping away from tolling agreement manufacturing for a moment, let’s discuss another process that differentiates itself from contract manufacturing: OEM manufacturing.
OEM manufacturers focus on creating a product as close to your specifications as possible. This means an even greater attention to detail when it comes to your formulas and specs. Keep in mind that you may have to make compromises with even the best third party manufacturers. You’ll find these factors dependent on your specific needs as a client—often impacted by issues like supply, budget, and equipment.
With OEM, a company makes a product that’s truly customized. Alternatively, some OEM manufacturers offer products they’ve already created, customized to fit your specific needs. You’ll get guidance throughout the process, ensuring that you know exactly what’s going on.
As a client, with an OEM manufacturer you’re responsible for product design and testing, market research, and ultimately, of course, marketing. With contract manufacturing, you’re giving up much more responsibility to the manufacturer—but you’re giving up a lot of control as well.
In comparison to all an OEM manufacturer does, a contract manufacturer really only manufactures the product. It’s a much simpler approach, which may work for some projects, but won’t be ideal for all clients.
The great thing about these three separate approaches to third party manufacturing is that you have options. You’re not constrained to a specific type of manufacturing strategy, and you can choose different strategies for different projects. Additionally, you’re liberated from the physical and financial responsibilities that come with manufacturing a product line in house.