Contract manufacturing and toll manufacturing are terms that are often thrown around together, and it’s easy to confuse the two. And while some people do use the terms interchangeably, this is not truly the case and there are differences between them.
To be fair, contract manufacturing and toll manufacturing are very similar. They are both processes by which a company hires a third-party to handle the production of a product or good. Businesses choose one of these two methods when they lack an in-house manufacturing team, or when they cannot afford the hire one. They are both ways to outsource the manufacturing process to an outside company.
The difference between contract manufacturing and toll manufacturing comes down to the supply. In toll manufacturing, the company hiring the third-party manufacturer will supply the raw materials or components needed to create the product. The toll manufacturer is not responsible for that aspect of the process. The hiring company will provide both the design and materials needed for a product, and the manufacturer simply handles completing the process.
In contract manufacturing, the manufacturer handles acquiring the materials or ingredients in addition to the production. The hiring company simply provides the designs or formulas for the product, and the third-party will handle the rest.
Because of these supply differences, the way each type of manufacturer charges their clients is also vary. A toll manufacturer will usually charge a pre-determined fee for their services. Since they do not need to worry about supply costs, they can simply calculate their labor fee to complete production.
A contract manufacturer will usually quote the client a price for a project initially. But if the cost of the raw goods or materials needed for production change, the final price may as well.
Considering the similarities between the two, why would a company choose contract manufacturing over toll manufacturing, or vice versa?
The obvious advantage with contract manufacturing is less work for the hiring company. The contracted business handles acquiring the raw materials or ingredients to make the product, which means the hiring entity can focus their time and attention on other matters. They also do not need to worry about transporting those materials to the manufacturer either, which again cuts down on costs. Contract manufacturers will also often have better access to the raw materials and ingredients needed for a product since they handle similar projects for other clients. This means they can potentially avoid supply shortages or other similar issues that the hiring company would potentially run into while acquiring the materials themselves.
For toll manufacturing, the biggest advantage is the hiring company controls the raw material price and quality themselves. A less reliable contract manufacturer may opt for a cheaper material that yields an inferior product. Or they may pay more for a raw material than the hiring company would pay when acquiring it themselves. Toll manufacturing ensures that the raw materials sent to the manufacturer are the exact price and quality that the client wishes. Although hiring a reliable and responsible contract manufacturer could yield a superior raw material as well.
Toll manufacturing and contract manufacturing are very similar, but a crucial difference in how raw materials is handled separates the two. A business needs to consider how they want to handle these materials when deciding whether to opt for one or the other.