Toll Production and Production Outsourcing
is referred to the practice of a company subcontracting another similar company in the same industry making the same or very similar product to manufacture a product for the first company with its label or logo making the product look like it was originally made by the first company. Normally the company subcontracting the work is unable to produce the product due to capacity constraints
or other limiting factors. Toll production involves manufacturing the whole product, in some cases including packaging and shipping as well, and should not be confused with component manufacturing outsourcing.
Toll Production is common in products which have few intellectual property or specialized technical challenges. It is common in commodity or commoditized industries such as fuel refining, plastic products, building materials and some simple or common computer chip manufacturing. Some companies will sometimes sub contract other competitors which have spare capacity to manufacture their less complex products and use their production capacity to produce their complex higher value added products
where they can extract higher profit margins.
Examples of Toll Production and Production Outsourcing
Supermarket Home-brand production outsourcing
One of the most common Toll Production/outsourcing examples we encounter in everyday life is the house-brand products that major supermarket chains sell under their own brand. It is quite common to see in UK and Australian supermarkets house brand products next to the branded equivalent, made by the same manufacturer sometimes in the same plant.
These products range from cereals, jams, and bread to frozen foods and even household products like paper and potting mix. Supermarkets generally do not own food manufacturing facilities but they have done the analysis of what product lines sell well and use this information to negotiate competitive prices with manufacturers for similar quality products, thus exploiting their channel to market and pressing manufacturer profit margins
by selling their home brand items as viable alternatives. This in some cases has driven suppliers and manufacturers to produce these products almost at no margin and only to cover fixed costs of running their manufacturing facilities. The objective in this case of toll production is for the supermarket chains to transfer profit margin from their suppliers to themselves.
Building Materials Toll production
Another example of Toll or outsourcing production is in the building material industry where at times manufacturers of commoditized products such as some product lines of wallboard or bricks are able to sell more than they can produce or face other production or geographic constraints. Producers will generally have an overview of production capacity in the region they operate and will negotiate toll production deals with producers who may have spare production capacity for some of their products to free up production capacity to produce their higher margin product lines or enable the contracting company deliver product more efficiently in other geographic locations.
The objective in this case is a simple maximization of sales and being able to supply all of their customer's needs. Sometimes manufacturers may enter into toll production arrangements for strategic reasons
such as to build sales volumes, capture enough market share
to justify expanding its own manufacturing facilities or investing in new production lines for new products.
Toll Production and Production outsourcing has lately been heavily used by businesses that traditionally had manufacturing plants in first world countries, high cost regions. During the last decade thousands of companies around the world have shifted production or subcontracted the bulk of manufacturing to lower cost regions such as China, Thailand, Vietnam, Indonesia Sri Lanka, India and other countries with lower labour costs. Although technically toll production is one company producing a competitor's product for them, it is sometimes used interchangeably with Production outsourcing, which is why we have covered both terms in the same article.
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