Specialty Chemical Manufacturing Models
According to the Bureau of Labor Statistics, the Chemical Manufacturing sector is a sub-sector of the manufacturing sector as a whole and is based on the transformation of organic and inorganic raw materials by a chemical process and the formulation of products. The products of the chemical manufacturing process can be solids, liquids, or gases, and for these products to be useful, they often need to be further processed or formulated into finished products by other manufacturers.
This is where contract and toll manufacturing comes in. Contract chemical manufacturing and toll manufacturing are both types of outsourcing chemical production that boost costs while also ensuring higher-quality products for the manufacturer’s customers. Given the similarities between these two manufacturing models, they are often used interchangeably, although there are very clear distinctions and advantages between them.
In this article, we’ll dive deep into both models and outline the differences, the advantages, ideal uses cases, and more so that you have all the information you need to decide which specialty chemical manufacturing process is right for you.
Contract vs Toll Manufacturing
Contract manufacturing is defined as “the outsourcing of the production of components or products to a third-party manufacturer”. Toll manufacturing, on the other hand, is defined as “a business arrangement in which one company pays another company to manufacture its products for it”.
Let’s look at each model a little closer.
Fundamentally, the difference between the two models comes down to the sourcing or acquisition of the raw materials used in the production/manufacturing process. In the case of a toll manufacturing operation, the chemical manufacturer is responsible for procuring and purifying the raw materials needed to produce the final product. The inherent flexibility of this approach allows the manufacturer to not be constrained by a rigid formula to work with and is free to innovate in terms of input materials, most often resulting in a better product. At Applied Chemistries, this is the model that we prefer, given our expertise in research, experimentation, and the capabilities of our state-of-the-art, in-house analytical laboratory. Additionally, having been in this industry for over fifteen years, our connections within the raw material supplier community would usually allow us to source materials at a competitive advantage when compared to other manufacturers.
On the other hand, in Contract Manufacturing the client is responsible for providing all the necessary inputs (raw materials) as well as the production/manufacturing process for the chemical manufacturer to follow. As the definition above suggests, there’s very little room to innovate, and even if a better process or better-quality raw materials exist, the chemical manufacturer has to follow a lengthy approval process before changes in the manufacturing system can be implemented. Additionally, the chemical manufacturer’s production cycles are at the client’s mercy, as they are dependent on the client for the timely supply of raw material and critical ingredients.
Key Advantages vs Disadvantages
From a strategic perspective, companies opt for Contract or Toll Manufacturing for a variety of reasons that range from capital investments to production capacity, to reducing manufacturing costs. However, each model does have a clear set of advantages and disadvantages that are outlined below:
Toll Manufacturing: Advantages
Greater manufacturing flexibility
By not being constrained to follow a set process or production methodology (for the most part), the chemical manufacturer is free to innovate to create a more cost-effective, higher-quality product.
Increased production capacity
In circumstances where scaling up production requires increased production capacity that isn’t available or demands on existing supply chains that are already constrained, toll manufacturing is an ideal alternative.
Lower inventory carrying costs
In a toll manufacturing relationship, the client only pays for the product when it is delivered, as opposed to having to pay upfront for inventory that may or may not be used. Additionally, the burden of purchasing and storing raw material is shifted onto the chemical manufacturer, freeing up valuable physical inventory space and cashflows.
Toll Manufacturing: Disadvantages
Raw Material Quality
As the chemical manufacturer is responsible for procuring the raw materials needed for production, there is a greater risk that lower-quality materials will be used to cut costs. However, this is usually overcome through detailed contracts and working with a properly verified, and experienced chemical manufacturer/supplier like Applied Chemistries.
Lack of transparency
In some cases, the client may not have visibility into the manufacturing process which could lead to potential quality issues down the road. However, these issues can be resolved through closer working relationships and are usually not a concern.
As with any industry, given the current economic turmoil, there are situations where manufacturing partners within the supply chain are forced to either halt operations temporarily, as was the case during the COVID-19 crises in China or close entirely. While remote, these situations can cause clients problems if their supply chain is entirely dependent on external partners.
Contract Manufacturing: Advantages
Improved cash flow
By essentially outsourcing the manufacturing and production process to a third party, the client can save a considerable amount of money by not having to invest in or maintain expensive capital-intensive plants, machinery, and highly-skilled manpower.
In many cases, contract manufacturers have greater experience and expertise in the production process which leads to improved quality overall.
As was the case with toll manufacturing, another strategic advantage of contract manufacturing is having access to the latest technologies and processes that the contract manufacturer has developed through its research and development.
By not being restrained with in-house production capabilities, the client can quickly achieve economies of scale by working with a partner like Applied Chemistries who has the required infrastructure and manpower already in place.
Contract Manufacturing: Disadvantages
Less control over the manufacturing process
As the client is not directly involved in the manufacturing process, there is less control over the quality, timeliness, and other important factors.
Dependence on the contract manufacturer
Another potential disadvantage of contract manufacturing is that the client may become too dependent on the partner and may have difficulty making a switch if needed.
Potential for increased costs
While in many cases, contract manufacturing can save the client money, there are situations where the opposite may be true. If the contract manufacturer is not managed properly, costs can quickly spiral out of control.
Ideal Use Cases
So, when is it ideal to use a Toll Manufacturing arrangement and when should you opt for Contract Manufacturing?
Toll Manufacturing is usually the best option when:
- There are stringent quality requirements
- When speed to market is critical
- When manufacturing processes need to be optimized
- When companies don’t want the hassle and cost of maintaining an in-house manufacturing operation
On the other hand, Contract Manufacturing is ideal when:
- Capital investment needs to be minimized
- When companies want to outsource all or part of the manufacturing process
- When quality requirements are not as stringent
- When companies want access to the latest technologies and processes
Choosing the Right Toll / Contract Chemical Manufacturing Partner
If you are looking for a contract or toll manufacturer, there are a few things to keep in mind.
First, it is important to find a reputable and experienced company that has a good track record. Things to ask would be references of clients worked with in the past, details on the different kinds of projects handled, complex chemistry requirements managed, and so on.
Second, you should make sure that the company has the required infrastructure and manpower in place to meet your needs. While easy to verify if the chemical manufacturer is located in the US, this verification becomes slightly more complicated when the manufacturer is located abroad. At Applied Chemistries, we’re big on the Made In the USA movement. That’s why we’ve taken great pains to ensure that all our plants, equipment, and manpower are locally available.
And finally, you should ensure that there is a good working relationship between you and the company so that any potential issues can be quickly resolved.
At Applied Chemistries, we’re proud of our history of working with some of the biggest companies and industries both in the US and abroad as their chosen manufacturer of chemicals. When brands have complex chemical challenges they need to overcome, they turn to us for our expertise in finding solutions that are efficient & economical and turning those solutions into finished products.