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.