Entity

Characterization
BUSINESS MODEL
Three Main Type of Business
Activities

Manufacturer Distributor Service

Provider
Manufacturing
Toll
Manufacturing
In a toll manufacturing
arrangement, a company
provides its raw materials or
semi-finished goods to a third-
party service provider. The
service provider, who often
has specialized equipment or
infrastructure, provides a
subset of manufacturing
processes on behalf of the
company using those
materials or goods for a fee.
(Copyright 2013 Practical
Law Publishing Limited and
Practical Law Company, Inc.)
Toll Manufacturing
Invoice
Supplier/ Principal/ Customer
Distributor
Vendor Enterpreneur

Manufacturing

Basic Cost + Fee

Services

Invoice
Toll Manuf.
Contract

Manufacturer

Basic Cost :
Conversion Cost
 @Boutique

Design
Sale to Customer
Jahit

Kain & other Toll Manuf.

materials Contract
Design,
Manual
Instruction

Jahit Brother -Tailor

Toll Manufacturer
A toll manufacturer is actually a service provider which activity generally consists of
processing raw materials following the specification and clearly instruction of the
principal. The toll manufacturer does not become the owner of the raw-materials, work-
in-progress or goods manufactured; it has no responsibility for production scheduling,
procurement of raw material, quality control, distribution, logistic or revenues collections
(Adams & Graham, 1999). Thus, such an entity assumes neither inventory risk and
usually owns no valuable intangible (just routine manufacturing/processing skills). The
transfer prices used for remunerating the operations performed by a toll manufacturer
can be determined by using the cost- plus method or the transactional net margin
method (assuming that the comparable uncontrolled price method CUP, cannot be
used).
 Indofarma
Toll Manufacturer
PT Indofarma (Persero) Tbk telah berpengalaman dalam bisnis toll in
manufacturing dan telah dipercaya dari beberapa perusahaan karena :Memiliki
sertifikasi CPOB dan IOT,
Memiliki SDM profesional yang terlatih dan berpengalaman,
Memiliki mesin sesuai dengan perkembangan teknologi dan terkualifikasi,
Memeliki metode produksi yang tervalidasi
Memiliki sarana dan kapasitas yang memadai untuk skala produksi besar dan
Memiliki Sistem Dokumentasi ISO 9000
Kerjasama toll in manufacturing di PT Indofarma (Persero) Tbk dapat terdiri dari :
Toll in dalam bentuk fee atau jasa saja yang diterima oleh PT Indofarma
(Persero) Tbk dalam hal ini material disediakan oleh perusahaan
pemesan/pemberi toll in.
Toll in dalam bentuk pembelian finished good (produk jadi) dalam hal ini
perusahaan pemesan hanya perlu memberikan ROFO (Rolling Forecast)
sedangkan penyediaan material dilakukan oleh perusahaan penerima Toll In.
Dapat menyewakan mesin ekstrasi herbal dengan menggunakan tenaga
operator dari PT Indofarma (Persero) Tbk.
 Contract
Manufacturing
A contract manufacturer ("CM") is a
manufacturer that contracts with a
firm for components or products. It
is a form of outsourcing. In the food
business a contract manufacturer is
called copacker.
In a contract manufacturing
business model, the hiring firm
approaches the contract
manufacturer with a design or
formula. The contract manufacturer
will quote the parts based on
processes, labor, tooling, and
material costs. Typically a hiring firm
will request quotes from multiple
CMs. After the bidding process is
complete, the hiring firm will select a
source, and then, for the agreed-
upon price, the CM acts as the
hiring firm's factory, producing and
shipping units of the design on
behalf of the hiring firm.
(https://en.wikipedia.org/wiki/Contra
ct_manufacturer)
Contract Manufacturing
Principal/ Customer
Distributor
Enterpreneur

Manufacturing

Baisc Cost + Fee

Services

Invoice
Contract
Manfacturing

Invoice
Supplier/
Manufacturer
Vendor Raw Material
Flows
Basic Cost :
Raw of Material
Conversion Cost
Contract Manufacturer
A contract manufacturer generally provide manufacturing functions based on a written
agreement, becomes the owner of the raw materials and the finished products and is
responsible for processing the raw materials (quality control). The contract manufacturer
bears the inventory risk, and generally bears more risks and responsibilities than a toll
manufacturer, however, the procurement decisions, production scheduling and logistics
remain with the principal. Also, the contract manufacturer does not hold valuable
intangibles. As in case of a toll manufacturer, the transfer prices used for remunerate a
contract manufacturer might be determined by applying the cost-plus method or the
transactional net margin method (assuming that the comparable uncontrolled price
method CUP, cannot be used).
FOXCONN
CONTRACT
MANUFACTURER
Hon Hai Precision Industry Co., Ltd., trading as Foxconn
Technology Group, is a Taiwanese multinational electronics
contract manufacturing company headquartered in New Taipei City,
Taiwan. Foxconn is the world's largest contract electronics
manufacturer,[3] and the third-largest information technology
company by revenue.[4]
Foxconn is primarily a contract manufacturer and its clients include
major American, Finnish, Japanese, and Canadian electronics and
information technology companies. Notable products that the
company manufactures include BlackBerry,[5] iPad,[6] iPhone,
iPod,[7] Kindle,[8] PlayStation 4, PlayStation 3, Xbox One, Nokia
and Wii U.[9]
Foxconn has been involved in several controversies relating to how
it manages employees in China. There has been a history of
suicides at its factories blamed on working conditions. In January
2012, about 150 Foxconn employees threatened to commit mass-
suicide in protest of their working conditions.[10] (Wikipedia)
Fully-fledged
Manufacturing

A fully fledged
manufacturer typically
assumes all the relevant
functions related to the
production process
(sourcing and purchasing
raw materials, finding
clients, R&D - use of
intangibles, production
schedule, quality control,
logistics) and also the
associated risks (inventory
risk, market risk, warranty
risk etc).
Fully-Fledged Manufacturer
A fully fledged manufacturer typically assumes all the relevant functions related to the
production process (sourcing and purchasing raw materials, finding clients, R&D - use of
intangibles, production schedule, quality control, logistics) and also the associated risks
(inventory risk, market risk, warranty risk etc.). If the fully fledge manufacturer and the
distributor with which it transacts use valuable intangible, the most appropriate method
to be used for determining the transfer prices is the profit split method.
 Maspion
Fully-fledged
Manufacturer
PT. Maspion and its subsidiaries are the members of Maspion Group,
and one of the largest consumer durable good producer in the world.
The company possesses strong expertise in marketing and
manufacturing wide series of quality houseware products of
kitchenwares, plastic housewares, glasswares, and electrical home
appliances. PVC and PE pipes are also available for residential and
household purposes.
The company has an established and extensive distribution networks
both domestically and internationally through its distributors, agents, or
retailers, as well as representatives in major cities in Indonesia and
major developed countries. The company has also been strong in
establishing strategic alliances with major prominent foreign partners in
manufacturing consumer durable products, that has strengthened the
company business leading position in the domestic market and also
kind presence in the global market.
Title and Goods Flows
Contract Manufacturing Models

Title
3rd Party Contract
Principal Distibutor
Supplier Manuf.
Goods

Title Flows
Customer
Goods Flows

3rd Party Toll

Principal Distibutor
Supplier Manuf.
Goods

Toll Manufacturing Models

 Responsibility and Risk #1
Amongst different levels of Manufacturing Business Model
Fully Fledged Fully Fledged Contract Toll Manufacturer
Manufacturer Manufacturer Manufacturer
Owns Intagible Licensed-
Intagibles
Sourcing of Raw Materials -
Consignment of raw Materials - - -
Manufacturing planing
Routine Intagibles
Specific Valuable - -
Manufacturing Intagibles
Research and Development - - -
License -Intagible - - -
Manufacturing
Title to Goods -
 Responsibility and Risk #2
Amongst different levels of Manufacturing Business Model
Fully Fledged
Fully Fledged
Manufacturer Contract
Manufacturer Toll Manufacturer
Licensed - Manufacturer
Owns Intagibles
Intagibles

Assembling and Packaging

Warehousing and Logistics
Price setting
Invoicing and Collection
Marketing and Advertising
Quality Control
Sales and Distribution
After Sales Support
Warranty and repair
()
() () - -
-
- -
- -
- -
- -
 Responsibility and Risk #3
Amongst different levels of Manufacturing Business Model
Fully Fledged
Fully Fledged
Manufacturer Contract
Manufacturer Toll Manufacturer
Licensed- Manufacturer
Owns Intagibles
Intagibles

General and Administrative

Functions
Research and Development - -
Risk
Market Risk - -

Inventory Risk -

Operational Risk

(Product) Liability Risk () -

Bad Debt risk -

 FAR Manufacturing Remuneration
Remuneration

Functions
Assets
Risks
Toll Contract Fully Fledged
Manufacturer Manufacturer Manufacturer
20
Distributor
Commission Agent
A commission agent is an intermediary that arranges the sales of products to customer
on behalf and on the name of the principal, while the later is the goods owner and
generally signs the sales contracts (no inventory risk for the commission agent). The
remuneration for activity performed by the commission agent is typically based on the
cost-plus method (assuming that the CUP method cannot be used), or a commission
(percentage) on the sales.
Commissionaire
A commissionaire is similar with the commission agent, with the difference that it sells
the goods on behalf of the principal but in its name. The commissionaire does not
become the owner of the goods and does not bear any inventory risk. The transfer prices
used for remunerate a commissionaire might be determined by applying the resale-price
method or the transactional net margin method (assuming that the comparable
uncontrolled price method CUP, cannot be used).
Buy-Sell Distributor
A stripped buy/sell distributor is similar to fully fledged distributor, with the difference that
the former is stripped of certain functions and risks. The stripped buy/sell distributor
become the owner of the goods sold (immediately prior to the sale to the client) and thus
bears certain limited inventory risks. Also, the distributor acts in its account and in its
name. As in case of a commissionaire, the transfer prices used for remunerate a stripped
buy/sell distributor might be determined by applying the resale-price method or the
transactional net margin method (assuming that the comparable uncontrolled price
method CUP, cannot be used).
Fully-Fledged Distributor
A fully fledged distributor is acting more autonomously than a stripped distributor; the
activity performed is decentralized, with little or no central control or consistency.
Distribution
Functions
Function Assets Risk
Remuneration
 Responsibility and Risk #1
Amongst different levels of Distributor Business Model
Commission Commissi- Classic Fully
Agents onaire Buy-Sell Fledged
Distributor Distributor
Title to goods - -
Warehousing and Logistics - - ()
Purchase planning - - -
Marketing and Advertising ()
Quality Control - - -
Price Setting - - -
Sales and Distribution
After-sales support - - -
Warranty and repairs - - -
 Responsibility and Risk #2
Amongst different levels of Distributor Business Model
Commission Commissi- Classic Fully
Agents onaire Buy-Sell Fledged
Distributor Distributor

Invoicing and collection -

General and administrative

Function
Inventory Risk - - -

Market Risk ()

Bad Debt Risk - -

(Product) liability risk - -

Foreign echange risk - - -

Transfer
Pricing Impact
Service Provider
 Responsibility and Risk #1
Amongst different levels of Service Provider Models
Shared Contract Sophisticated
Services Services Services
Centre Provider Provider

Investment in assets used to Tends to be low Tends to be low Tend s to be (very)

render services high
Human Resources Depends on type Lower Higher
of services Compensated/less Compensated/Less
rendered Sophisticated Sophisticated staff

Valuable Intagibles - -

Routine Intagibles

Invoicing and Collection ()

General and Administrative

Functions
Service
Providers
Functions Assets
Risks
Remuneration