Toll Manufacturing Overview
John Maher: Hi, I’m John Maher. Today I’m here with Bob Baker, president of Key Polymer Corporation, a manufacturer of specialty adhesives and chemical compounds. Today we’re talking about toll manufacturing. Welcome, Bob.
Bob Baker: Thank you, John.
John: Bob, tell me. What is toll manufacturing?
Bob: John, toll manufacturing is a very current concept in business and many industries, but often each industry chooses their own terminology. In some cases, people call it outsourcing. In the electronics industry, there’s a lot of contract manufacturing.
In the chemical business, it’s toll manufacturing. That’s where we make our physical plant available to other manufacturers and persons throughout the world that have intellectual property but don’t have a production facility in the right place or with the right equipment to make their product.
John: What are the benefits of toll manufacturing over, I guess you’d call it, in house manufacturing?
Bob: John, number one is, we can be up and running a lot faster than building out physical assets. Often, people who rely on us for toll manufacturing have related expertise but not expertise in this part of the requirements.
For example, for many years we’ve manufactured adhesives for installing membrane roofing. Our customers know how to make membrane roofing, but they’re not specialists in liquid adhesives needed to apply their roofing. They’ve developed specialty adhesives that are very well recognized in the industry that are compatible with their roofing materials, but rather than build out a chemicals operation for liquids, they simply provide us at Key Polymer with the technology, and we provide them with a finished product, out the door, without them having to establish a whole other core competency.
In addition, with toll manufacturing, our customer’s complete manufacturing costs are well known. They get one charge from Key Polymer. They don’t have to sort out where they’ve had to apply overheads and where they’ve really, in a way, lost money on their overheads because in many cases they can’t keep the equipment busy every day.
Key Polymer provides a very fixed and understandable cost basis, a quicker turnaround, and expertise that we have. This is our core competency liquid adhesives.
John: When you start a relationship with a company like that, that needs your services, I assume that you have to have some sort of agreement or contract. What does a toll manufacturing agreement cover?
Bob: The first thing is, there’s a nondisclosure agreement. This is going to be a marriage of parties. It’s not a distant transaction. We’re going to have to show them our plant facilities. We’re going to have to bring them into our facility. We do this very openly. On the other side, our toll manufacturing prospective customer is going to have to share with us their technology and maybe even some of their marketing plans that relate to the technology so that we understand the time frame, for example, that they need performance.
The nondisclosure agreement becomes the first step, and then agreements are developed over time that Key Polymer’s specifically tailored. In some cases, they’re long term agreements that provide for annual cost review. In other cases, they can be a fixed agreement that has a minimum annual cost. In other cases, it’s simply ongoing purchase orders.
Key Polymer prides itself on creating a business structure that’s customized to meet the requirements of a wide range of our clients, some of whom are very large corporations that have a rigid structure, and others are entrepreneurs just beginning to capitalize on their intellectual property.
John: You mentioned roofing materials and adhesives for roofing materials. What are some other different types of things that can be toll manufactured?
Bob: Toll manufacturing is simply the application of our equipment, our expertise, our warehousing, our quality control people, our quality control procedures to a chemical compound.
At Key Polymer, we have a very wide range of capabilities, all the way from filling 50 milliliter tubes to tank wagons. We handle viscosities ranging from water thin to thicker than peanut butter. We handle epoxy materials, urethane materials. We handle water based materials, 100 percent solids materials. We have limited but very effective solvent manufacturing capacity.
The prospective customer first needs to disclose enough about their technical requirements to Key Polymer so that we can assure them that we have the right equipment. In many cases, Key Polymer has much of the right equipment, but not everything, and can agree to a procedure to finish off the required equipment, either with cost sharing or with minimum purchases going forward in effect, custom tailoring our operation to meet the specific requirements of an end product.
Not all of these products that are coming through the plant are adhesives. Some are coatings. Some are processing aids that are used as other raw materials in the chemical industry. Our website very clearly displays the range of equipment that we have that we can provide to our customers for contract manufacturing.
Also, because we have our own intellectual property, we also have chemists on staff and chemical engineers on staff that can help the prospective customer to do his scale up or that transfers technology.
For example, a company that’s manufacturing currently in Europe and needs a US production site may need some technical support to source raw materials here in this country. We’re able to provide that additional capacity and capability because of our base business, which was and is a manufacturer of products that we’ve developed.
John: You mentioned one of the challenges possibly being that maybe you don’t have some of the right equipment for a certain job but that you might be able to do a cost sharing situation with the customer. What are some other challenges that are faced by both parties in a tolling agreement?
Bob: Toll manufacturing implies that there’s something that needs to be manufactured. There’s always a challenge on the part of both parties to know when it’s time to invest and when it’s appropriate to invest. There are opportunities that come to us where people are concerned about very large capability, large capacity, but their immediate needs are very small.
One of the challenges is developing a business basis that takes into account the startup costs and the cost of technology transfer and applying it to very small quantities, yet at the same time assures both parties that there will eventually be large scale production.
The toll manufacturer needs to provide the toll customer with the assurance that there’s capacity and sufficient equipment, but this is all being done at a time when the toll customer hasn’t necessarily locked in their future business. Of course, that’s one of the reasons why they’re looking at toll manufacture. They can’t justify a capital expenditure on their own.
Sorting all of that out is something we do very well, but it is a challenge.
John: Bob Baker, thanks very much. For more information, you can visit Key Polymer’s website at KeyPolymer.com, or call 978 683 9411.