Powder Processing: Toll Manufacturing vs. Contract Manufacturing
Ceramic manufacturers should consider many factors when determining if a processing company will be a good fit for their business needs.
Many people would say that the economy is picking up—or at a minimum, no longer stagnant. As their businesses grow, ceramic manufacturers can choose to handle external and internal growth requirements in different ways. Many times, the decision to outsource powder processing stems from a research and development need, a request that cannot be handled internally, the inability to make a capital expenditure (or a business decision to avoid one), or a process issue that needs to be addressed. Whatever the reason, many factors should be considered when determining if a processing company will be a good fit for specific business needs.
Once the decision is made to partner with a processing company, the first issue to consider is whether you are in need of a toll manufacturer or a contract manufacturer. These terms are very similar and often incorrectly used interchangeably.
In toll manufacturing, a ceramic manufacturer provides a raw material to a third-party processing company to complete a defined manufacturing process. The toll processor then charges the company a fee (toll) to complete the production process.
Contract manufacturing, while similar, is when the third-party company is responsible for also procuring the raw material(s), in addition to completing the requested product. In some cases, the third-party vendor may act as both a toll manufacturer and a contract manufacturer, depending on the customer need. Identifying how the transaction is to happen early in the process can save time and stress in finding a vendor.
The advantages of contract manufacturing, since the ceramic manufacturer is purchasing a finished good from a single provider, include not having to manage, set up, or pay different vendors; not having to handle the transportation of the raw goods to the third-party processor; and having single accountability in terms of quality, ISO, conference calls, supplier scorecards, and delivery time requirements. (Depending on the ceramic manufacturer’s perspective, there may be value or potential liability exposure with a single source.)
One thing that seems to be certain is that companies will continue to try to do more with less, despite customers still being accustomed to getting what they want and in the timeframe they want it. For those individuals juggling multiple demands, contract manufacturing may be worthy of consideration.
Whether the decision to process is toll or contract, both options allow ceramic manufacturers to respond to specific needs without the requirements of additional equipment, facilities and employees. Material can be supplied when needed while saving time and money, whether during plant construction, product development, research and development, A/B testing relating to particle size or raw material composition, assistance in high-quantity orders, or overflow production.
One thing to consider with toll processing is that the cost is very transparent. The quotation includes the processing of the material (which typically includes labor, utilities, analyses, packaging labor, and labeling). Related packaging such as drums or super sacks will also be included, along with possibly filtration or collector filter elements, as needed.
With contract manufacturing, in addition to the toll processing cost, the processing company must also add the cost (or perceived cost) of ordering the raw material. Transparency becomes more difficult in this situation. Typically, the raw material vendor’s quote will be valid for a period of time, while the processing quote will be valid for a longer duration. As a result, the third party will likely factor in variability and cost increases.
Other costs that might be factored in include raw material packaging, shipping, potential tax, carrying cost of financials (assuming the raw material vendor might be net 30 and the customer is net 60), an administrative cost for purchasing the material and cutting a purchase order, receiving and potentially warehousing material, setting up the raw material vendor, etc. The dollar amounts that processing companies assign for these services can vary greatly, with some charging a hefty premium for what they may consider a benefit to the ceramic manufacturer, but a hassle to themselves.
Once the decision has been made regarding how to best process the material in a toll vs. contract setting, several additional factors should be considered. One of the first topics to discuss is capabilities and capacities. It is important that the processing company can support needs ranging from small lab or pilot-scale trials to full production runs.
It is typical for ceramic manufacturers to require more than one process in order to meet final product requirements. It’s important to consider if the company provides the full range of service needed for each specific project. Requirements may include milling, blending, pelletization, air classification, screening, analysis, packaging, and labeling. Manufacturers should enquire if the provider can not only accommodate the services needed, but also schedule the production flow to meet their needs. Other frequent considerations relate to ISO certification, safety reporting and history, lead times for both trial- and industrial-size campaigns, focus on quality, staff and technician training, and years in business.
The provider’s responsiveness from initial inquiry, turnaround time for non-disclosures to be signed, and final production reporting should also be evaluated. If a company is not responsive during the on-boarding stages, it is highly probable that communication will also be lacking during production scheduling, processing time, and timely recapping and shipping of campaigns.