Building a cannabis processing facility / laboratory can be beneficial in the long run, but it requires careful planning and constant adjustment of costs, designs, manufacturing processes, and more.
During Rudy Ellenbogen’s time in the cannabis industry, he was responsible for growing several processing operations, including two for running Verde Natural when he became the company’s CEO in 2015. Now Ellenbogen, Founder and CEO of Whole Grow, will speak. The Processing Lab / Facility Buildout session during the 2020 Cannabis Conference will act as an advisor to cannabis customers at every step of the build-out process. Elbow spoke to Hemp Grower about the work involved in building a facility, common mistakes he sees and where to start.
Hemp growers: What are some key factors someone should consider when deciding whether to build their own facility / processing laboratory?
Rudy Ellenbogen: The first question is why. I think a lot of people focus on the how and what, but strategy and strategic planning are the keys to long-term success. When we find out the motivation and true intent of a new manufacturing facility, we can select the right products to produce and then the right methods to make those products the best we can.
You need to consider efficiency and costs, but most importantly, competition and strategic differentiation. When you’re starting out, it’s very easy to be tempted by a system just because and without really thinking about what market you are in. You need to think about the competition … and what will be your value proposition with this new operation. It’s also about understanding regulations and what is allowed in that particular market.
[Another key factor is] their strengths and value, as some companies have knowledge, experience or talent that they can use strategically. For example, some people already grow in a certain way that lends itself to a method. It’s different to be an extractor for others.
It’s also about the infrastructure and space you have, as well as your timeline. Setting up an explosion-proof butane extraction operation takes much longer than a CO2 or solvent-free operation.
HG: What are some of the most common pitfalls you’ve seen in facility / processing lab extensions and how do you avoid them?
RE: I think it’s one thing to start with gear selection versus strategy. Before you start device selection, do market research. You have to choose a system – not specific devices, but systems – and you have to choose the system based on your products and strategy. Before purchasing equipment, evaluate and compare different cost models for operating under one system or another. Understand the efficiency and returns of various systems and then understand your products and the pricing of those products. Have an economic model that you can use to make decisions based on your financial goals.
Another danger I see is execution. If you don’t invest in the design, you will pay for it later during construction. Certified equipment will be very helpful during firefighter inspections. So think about it and check that the equipment you buy is certified [is helpful].
And then build the right team to run these facilities [is important]. Often times people are just thinking about who the extraction technology is going to be, but there are other processes to think about. Think inventory management, packaging operations, raw materials, compliance, and sales.
In parallel with this, it is very important to ask yourself if you are developing a brand. This requires a whole range of other skills including marketing, branding, packaging, design, sales, and sales. … People think, “I’m going to differentiate myself with really nice packaging,” but it’s a crowded market.
It’s difficult to gain customer loyalty and market share when your product has no real value.
You never want to be in a commodity market because it’s a race to bottom. You never want to do what everyone else is doing. We see a lot of CO2 in hemp, for example [carbon dioxide] Hemp extraction allowing people to isolate and prices have come down. It’s basically a commodity.
HG: What kind of training is required to properly open an institution? Which training is recommended?
RE: First, an educated and experienced group of talented people is recruited. You can also acquire expertise with advisors. There are also special training courses that you can invest in to send your staff and help them learn.
There is training on safety and food handling as it is a laboratory [lack of safety] can endanger the entire operation. You will then have technical training on specific extraction methods and equipment provided by the manufacturers of the equipment.
The training that I haven’t seen very often is inventory management and cost analysis, as well as understanding your margins and efficiency of each process. But that’s also important because if you don’t really know your cost base it is really difficult to project your margins and then you wonder why you didn’t make any money.
HG: How can someone begin to understand these cost margins and plan their resources accordingly in order to start a relatively efficient operation from the start?
RE: I think first it starts with understanding the steps and processes to make each product and
Understanding the time, effort, and resources that will be required. Once you have that, you can quantify the cost. Knowing that a particular task takes three man-hours to complete, and knowing the cost of that man-hour based on the level of expertise required, can help you understand how those costs affect your product.
Another aspect that you need to find out is what you are producing in this process, what is the margin of return, what is the average target yield and what is the loss of that product so that you spread the cost across the units from the start can packing. Knowing these production rates is key, and you will know when you record the time and effort it takes to go into each of the processes.
Often times it’s just something you do during your first month of operation, but people who have done it before can help you make projections. However, you should always check where you are spending X to make X. Then you can plan what will be profitable for you.
It may not be cost effective in your facility to go all the way down to solvent free or down to crystals or sugar. Perhaps you are comfortable in rosin, or perhaps cartridges make sense. However, you need to collect and organize data to understand the cost structure.
Many small businesses are not so aware of this. You compete with people where data scientists evaluate efficiency, model costs, and make decisions based on that. You can anticipate a problem well in advance of you to project where the market is going and based on that analysis make decisions that could make a difference. Knowing where you are and where you are going starts with knowing your data.
HG: What do you hope the attendees from your session at the 2020 Cannabis Conference will bring back to their business?
RE: What I want to offer is one more [holistic] Understanding of long-term success, in which you can not only think about technical aspects, but also about the processes, profitability, strategy and the team that is required to actually manage or start a production company. [I want them to] You can get a more comprehensive overview of this process in order to anticipate future challenges and be successful in the long term.