Disadvantages of Toll Manufacturing
The disadvantages of Toll manufacturing from the source Company’s point of view are:
Risk of Losing Trade Secrets
This is the biggest disadvantage of toll manufacturing. The source company has to share its proprietary trade secrets with the manufacturing company to enable it to produce. As a result, the manufacturing company may use it to its own advantage in the future. It can stand up as a competitor itself later on after learning the complex processes of production. It can even help a third company to set up a competitive unit and produce for it at a higher fee.
Red-Tapism
The processing company might delay or postpone the source company’s order if its production facilities are occupied beforehand. It may face delays in set-up and production due to red-tape and bureaucratic delays. This may lead to delayed deliveries because of which the source company may suffer losses.
The disadvantages of Toll manufacturing from the manufacturer company’s point of view are:
Complex and Low Margin Processes
The source company might keep with itself the higher margin and easier processes for making a product. It may sub-let the more complex and lower-margin processes to the toll manufacturer. As a result, lesser lucrative and cumbersome processes will be left with it and this may not be advantageous to it.
Conclusion
Toll manufacturing is very common with companies that are situated in high-cost regions. They face the problems of expensive land and labor. Lower cost regions such as China, India, Thailand, Vietnam, Sri Lanka, and Bangladesh have played a major role in attracting Toll manufacturing contracts from across the globe. Cost of capital, set- up and land coupled with the skilled and inexpensive workforce has contributed to this shift in production processes.
