Why Do Companies Use Toll Chemical Manufacturing Services

Most people are familiar with the term ‘outsourcing.’  It simply means that you have obtained goods or services from an outside supplier instead of using an internal source. The chemical industry is no stranger to outsourcing, and many companies have their own internal business function that manages outsourcing activities.

The companies that produce outsourced products go by a few different names; tollers, external manufacturing partners, contract manufacturing organizations (CMO’s), and third-party manufacturers (3PM’s).

Tolling vs. Contract Manufacturing

There are a variety of terms used to describe outsourcing activities. Tolling and contract manufacturing are two of the most common. While they both describe the same basic idea, there are differences in what these terms mean. The difference in the precise definitions typically comes down to which party provides the raw materials and packaging.

Tolling is quite simple.  A customer will provide all the raw materials, packaging, and intellectual property (IP) needed to convert the product.  The toller will invoice the client for an agreed upon conversion fee.  Think of it like renting a hotel room.  You pay based on the number of nights you stay at the hotel.  Tollers pricing will typically be tied back to how long their assets are utilized for your production.

Contract manufacturing will require a customer to provide the intellectual property (IP) to the contract manufacturing organization (CMO). The CMO will take this information and procure the raw materials, and packaging. Once the raw materials are on site, they’ll convert the raws and then provide the customer with an ‘all-in’ price. The pricing will include conversion fees, raw material costs, waste costs, packaging costs, and sometimes even freight costs (depending on the delivery terms agreed upon). Price = conversion fee + raw materials+ packaging + waste.

Why Would You Engage a Toller?

Chemical companies like to utilize tollers, etc. for a variety of reasons.  Popular reasons are:

• Capital cost avoidance
• Strengthening and increasing the flexibility of existing supply chains
• Meeting the different needs of a product as it progresses through the stages in its life cycle
• Localizing production
• Reducing time and resource management

Capital Cost & Time Avoidance

Putting steel in the ground is expensive.  The equipment, installation, engineering, and permitting all require significant investments in both time and money.  Upgrading, or putting new equipment in can also cause major disruptions to a plants operating schedule.  Once a capital improvement has been completely installed, it can take years to fully recover the associated costs. 

When working on major capital improvements it is not uncommon for it to take 12-18 months from approval to completion.  During this time companies may be missing out on potential sales, and their competitors will have time to consolidate their place in the market.

Finding a toll chemical manufacturer that already has the needed assets eliminates these problems.  Engaging with a toll manufacturer can allow you avoid capital cost and scale production much more quickly than you could if you’d have waited to complete your own capital project.

Surety of Supply

Companies prefer to manufacture their products in house.  They want to keep their own assets turning, and they don’t want to waste any time or money building in capacity that they don’t always need.  At the same time, if their customers have identified their product as a critical raw material they may ask, or contractually require, their supplier to have multiple sources available.  Purchasing agents want to know if you can continue to supply if something major happens at your site.  For this reason, many companies will work with tollers to qualify secondary sources of production.  Even when servicing the product demand doesn’t stress the existing systems.

Procurement specialists do not want to allow critical materials to be single sourced.  Failure to have multi-site sourcing options for clients can create an opening for your customers to start the search for potential alternatives.

Approving secondary sources can also provide some safety in the event of unexpected demand surges.  Toll manufacturers are often able to respond quickly and can augment existing supply chains when the system is under stress.  Approving a toller as a secondary source puts you in a position to take advantage of success.

Product Lifecycle

Products have a defined life cycle. From introduction, growth, maturity, and decline. Each stage of a product’s lifecycle will have different sets of demands on a company’s site assets and supply chain organization.

During the initial stages of a products life cycle process requirements may make it difficult to place in the production queue without interrupting how more mature/profitable products are serviced.  Depending on internal asset capacity, among other things, utilizing an external manufacturing partner can allow you to meet product needs without displacing processes that are core.

Once products become mature and volumes have become relatively predictable internal manufacturing will be in full swing and should be able to service product demand.  Many companies will move away from using tollers during this time (if they have their own manufacturing assets), but many will keep external partners qualified as insurance against unexpected demand, or plant disruptions.

When a product reaches the end of its lifecycle it’s usually more than just the volumes that fall.  Products that used to be core can become a distraction.  Companies are often faced with the choice of finding alternative sourcing methods or ending the product as it becomes more and more difficult to justify the resources required to service that piece of business

Localizing Production

Changes to how procurement teams determine which supplier to use in the last few years have significantly increased the value of localized production.  While global supply chains remain a key component in any sourcing strategy, companies tend to like having sourcing options that aren’t an ocean away.  Producing locally can have many advantages.  Materials produced close by your customers can avoid complicated logistical issues, or expensive import duties.  In markets with tight margins, a manufacturer that’s physically located near your customers facilities can reduce freight costs.  Localizing production to a specific region often makes sense from the perspective of achieving a high service level, and from a financial perspective.

Reducing Time and Resource Management

Managing raw material deliveries, production scheduling, etc. is difficult.  Especially when demand is high or dynamic.  Engaging with a toll or contract manufacturer can reduce or eliminate these issues.  In a contract manufacturing arrangement, you’ll just need to place a PO, and they will manage procurement, production, and shipment.  Many tollers, like InChem, will also work directly with raw material suppliers to ease any supply chain burden.  Doing this also avoids any issues with allocating internal production time.  This is especially helpful for materials that have compatibility issues with your main product lines.  Extended cleanouts and expensive waste disposal are inefficient.  Outsourcing that work to a 3^rd party frees your team up to work on other higher priority projects.  

Work With the Best!

For over 30 years, InChem has been a leading supplier of Chemical Toll Manufacturing services. Our operational philosophy is centered around providing Responsive, Transparent, and Flexible Service. We are committed to providing our customers with a toll manufacturing partner that they can trust to handle their IP securely and confidentially. We require that all products produced at InChem are managed in a way that meets or exceeds the best practices in the industry. 100% of our business is chemical toll manufacturing which means we can guarantee that we do not compete with our customers in the marketplace.

In general, our chemical manufacturing assets are compatible with chemistries that meet the following requirements:

• Are compatible with 316ss
• Require temperatures between 25C and 285C
• Require pressures less than 75PSIg
• Have a viscosity of less than 1,000,000 cps
• Do not require RMP
• Are not pyrophoric

Our wiped film distillation assets are capable of processing materials at the following parameters

• Temperatures up to 285C
• Deepest attainable vacuum at the pilot scale is 0.05mbar
• Deepest attainable vacuum at the commercial scale is 0.5mbar

We have batch reaction capability from the pilot scale (5-gallon to 50-gallon reactors), and commercial scale (from 250-gallon to 6,000-gallon reactors).  We also have wiped film distillation capability at the pilot and commercial scale.  We are capable of handling pails, drums, IBC’s, bulk, and isotainers.  We do not have access to rail siding. 

Contact InChem for your toll chemical manufacturing needs.