Service Model: Turnkey vs Tolling in CPG contract manufacturing

What are Turnkey and Tolling?

When you begin working with a contract manufacturer, one of the questions that will arise is if you are looking for “turnkey” or “tolling”. These two terms define what are called service models, or ways in which a brand engages with a manufacturer.

Turnkey

This term describes the type of manufacturing relationship a brand has with a co-man, in which the co-man makes the entire product. They will be in charge of ordering the ingredients and packaging and making the product, and you will be billed for the finished product.

This type of relationship favors businesses who have a large number of products or a high volume, and don’t want to manage all of the components.

Advantages

• Streamlined Process: the manufacturer handles the entire production, which often results in a more streamlined and efficient process as they have control over all aspects. This may result in lower costs
• Reduced Complexity: By outsourcing the entire production process to a turnkey service provider, brands can reduce the complexity and burden of managing multiple suppliers and logistics, and focus on the brand itself.
• Potential lower COG’s (cost of goods) by tapping into manufacturer’s buying powder
• More direct view of final pricing: you’ll see upfront what your price is, rather than

Disadvantages:

• Cost: Turnkey services may come at a higher cost compared to other service models. Food manufacturers need to consider the added expenses of outsourcing the entire production process to a single provider.
• Limited Control: With a turnkey service model, the food manufacturer relinquishes some control over the production process. They may have limited visibility into specific aspects of production, which can be a disadvantage for those who prefer more hands-on involvement.
• Dependency: Relying on a turnkey service provider means the food manufacturer becomes dependent on their capabilities and performance. Any shortcomings or delays from the service provider can impact the manufacturer's ability to meet deadlines and fulfill customer orders.

Tolling

This term describes the type of manufacturing relationship a brand has with a co-man, in which the brand is in charge of purchasing the ingredients & packaging, and sending it to the co-man. The co-man will manufacture the product, and will charge you for the use of their machines and their labor.

This type of relationship favors businesses who are looking to produce smaller quantities of products, or on an as-needed basis.

Advantages:

• Cost Efficiency: With a tolling service model, the food manufacturer only pays for specific processing or manufacturing services provided by the toller. This can be cost-effective, especially for smaller manufacturers who may not have the resources to invest in their own production facilities or equipment.
• Control: you as the brand have more control over the raw materials being used, and you retain ownership over the intellectual property related to the finished product.
• Flexibility: Tolling allows food manufacturers to have more flexibility in their production capabilities. They can leverage the toller's expertise and equipment for specific processes without committing to long-term investments
• Focus on Core Competencies: By outsourcing certain aspects of production to a tolling service provider, food manufacturers can focus on their core competencies, such as product development, marketing, and sales.

Disadvantages:

• Coordination: as the co-man is only in charge of the actual manufacturing, you as the brand have a lot more to coordinate. Ingredients and packaging need to arrive before production, testing may need to occur after production, and distribution needs to align with production dates.

Maple Mountain Co-packers created a really great image that visually demonstrates the difference between the two models.