When it comes to production, companies face many dilemmas that should be solved as better as possible. Sometimes the question is where to set up the company; others, what type of operating model is better; many times, how to manufacture. If you are facing the toll manufacturing vs contract manufacturing dilemma, here we will talk about each one, the similarities and differences between them, and which one is better for your operations.
What is Toll Manufacturing?
Also called toll processing, toll manufacturing is defined as the arrangement in which a company processes materials for another company. The third-party company has specialized machinery and equipment to carry out the set tasks, but the raw materials and/or semi-finished goods are always provided by the first company.
The toll manufacturer basically provides an on-demand service, and it is the one that invests in the necessary tools, equipment, and process for which a toll is included in order to give the appropriate service.
What is Contract Manufacturing?
Contract manufacturing is the production of goods by one company under the name or brand of another one. Contract manufacturers follow the guidelines and specifications of the contracting party; however, unlike toll manufacturing, the latter is not in charge of providing the necessary raw materials for production. They create an efficient supply chain to fulfill the needs of the company
Contract manufacturing is a very common service provided by maquiladoras in Mexico, which has been a success for foreign companies that seek to reduce their manufacturing costs.
Similarities and Differences
In both manufacturing types, the contracting company pays more, but they do not have to invest in the equipment that the third-party companies already have in order to provide the service.
A key difference is that in contract manufacturing, the contracting company does not have to worry about supplying the raw materials, since the other company will take care of it while meeting the requirements and specs of the contractor.
In our experience, we can tell you that contract manufacturing is generally better for most companies. If you want to get more information on this subject and analyze if this applies to your company, do not hesitate to contact the experts. At Tijuana EDC, we provide professional business advice for your needs.
