Five Questions to Ask About Managed Operations for the Vertically Integrated Cannabis Company
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Five Questions to Ask About
Managed Operations
for the Vertically Integrated
Cannabis Company
Five Questions: Managed Cannabis Operations Xabis, Inc.
Contents:
Executive Summary
Question 1: Which cannabis-production operations are
suitable for outside management?
Question 2: Can cannabis-production operations be
scaled effectively?
Question 3: Are Quality Management Systems (QMS)
relevant in the cannabis industry?
Question 4: Which manufacturing technologies are best
for a given operation?
Question 5: How can operational efficiency in cannabis
product manufacturing be improved?
Conclusions
2
Five Questions: Managed Cannabis Operations Xabis, Inc.
Executive Summary:
As a vertically integrated (cultivate, extract,
manufacture, sell) producer of cannabis products, you
are already aware of the industry’s potential for growth
in the coming years. Legal marijuana sales in 2017 are
expected to total $9.7B and 2021 sales are predicted to
reach $24.5B. [1] However, if you are reading this white
paper, you may have questions about the future of
Big growth.
cannabis-manufacturing operations as the industry
Big opportunity. grows and matures. While a tremendous amount of
capital is flooding into the cannabis market, it is not
Big questions. clear that all operational investments are equally sound.
This white paper intends to present key questions that
need be asked by stakeholders about the potential of
managed operations – also known as Business Process
Outsourcing, or BPO – for cannabis companies in the
coming years.
BPO consists of the contracting of operations to a third-
party service provider. [2] In recent years, BPO has been
dominated in the news and in the consumer’s mind by
outsourcing of business processes, e.g., IT and customer
service. However, outsourcing of manufacturing
operations is common [3] and will be the focus of the
present discussion related to cannabis cultivation,
extraction, production, and retail operations. Although
managed operations are common in other industries,
the place of BPO in the marijuana industry – due to its
rapid growth and immaturity – is still being defined.
The central purpose of this white paper is to help define
the essential questions that must be asked by vertically
integrated cannabis companies about the suitability of
managed operations for one or more of their core
business functions.
3
Five Questions: Managed Cannabis Operations Xabis, Inc.
Question 1: Which cannabis-production operations are
suitable for outside management?
Background:
The cannabis industry in the US is rapidly emerging from the
Managed shadows of its hidden, cottage-industry origins. Question 1
acknowledges this fact and is composed of 2 practical parts:
operations
1) Which practices derived from a previously unregulated,
providers: concealed industry are applicable to the legalized,
regulated industry that is now developing?
What’s 2) Can a third-party service provider run things more
behind the effectively than companies can achieve in-house? Put
another way: What’s behind the curtain of a
curtain? management company?
We’ll briefly examine the implications of the preceding
questions with respect to each of the 4 operational areas
outlined previously.
• Cultivation: A practice with which humans have
been involved for millennia. Because sales of flower
(“buds”) are a huge component of overall cannabis-
product sales, artisanal/craft cultivators have a
place alongside large-scale operations. (Think of the
Size matters. The following factors have different
implications depending on scale of operations:
o Genetics and breeding
o Sanitation and safety
o Growth media, fertilizers, pesticides
o Energy efficiency, water use
o Regulatory compliance
o Automation and labor
4
Five Questions: Managed Cannabis Operations Xabis, Inc.
• Extraction: People have been extracting
cannabinoids into butter and baking pot brownies
for decades – and there is certainly a place for that.
But if a company is intent on commercial-scale
operations, the old methods may fall short.
Following are several factors related to extraction
that a cannabis company should consider in
formulating its approach to those operations:
o Solvent extraction: CO2 vs BHO vs Freon
vs ethanol (and many more)
o Mechanical extraction
o Extraction equipment
o Purification and isolation equipment
o Analytical instrumentation/QC
o Safety, sanitation, and security
o Automation and remote monitoring
o IT, data management, inventory control
o Regulatory compliance
o Facility design (directly impacted by the
preceding choices)
o Technically skilled staff
• Manufacturing: This is the part where the infused
butter is baked into the brownies. And many of the
considerations related to extraction apply here,
too. That said, there are additional considerations
because state regulations usually tightly control
cannabinoid content, packaging, and distribution of
finished products.
o Manufacturing equipment
o Analytical instrumentation/QC
o Safety, sanitation, security equipment
o Automation and remote monitoring
o Data management and inventory control
o Regulatory compliance
o Facility design (directly impacted by the
preceding choices)
o Skilled and unskilled labor
5
Five Questions: Managed Cannabis Operations Xabis, Inc.
• Wholesale and retail sales: Once your
manufacturing pipeline is ready, the rest of the
world needs to know about your products and then
buy them. This is the operational area that is the
most like existing businesses, with a few additional
considerations:
o Security and regulatory compliance
o Data management and inventory control
o Facility design (directly impacted by the
preceding choices)
For the sake of practicality, the four operational areas listed
above are considered somewhat separately. However, as the
industry matures and additional efficiencies (and
corresponding competitive advantages) are sought,
additional factors that link all operations become relevant.
These factors encompass activities that affect the entire
company and include:
• Quality Management Systems
• ISO certification
• GMP/GLP compliance
• ERP/MRP
The lists above are not exhaustive but do cover the major
Can you meet operational requirements. As suggested previously, some of
the historical cottage-industry techniques can be effectively
the new utilized within the new regulatory regimes while others are
challenges on simply irrelevant. As an example, breeding a strain for
desirable aroma can be achieved without any special
your own? technology. On the other hand, developing a strain having a
very specific CBD:THC ratio requires analytical
instrumentation, technical staff, and a rigorous QA program.
Given the immaturity of the industry – particularly with
respect to large-scale processes and regulations – the
interested reader is encouraged to consider how effectively
their company can meet these new (and evolving)
challenges.
6
Five Questions: Managed Cannabis Operations Xabis, Inc.
Question #2: Can cannabis-production operations be
scaled up effectively?
Background:
A thousand As we suggested earlier, the challenges involved in baking a
toy trains are sheet of brownies is different from those encountered while
baking 1000 sheets of brownies. The basic problem with
no substitute multiplying existing equipment, labor, and processes is that
for a all the small-scale inefficiencies and waste are also
multiplied. You gain no operational efficiency. Additionally,
locomotive. new problems arise. For example, how do you
simultaneously withdraw and cool 1000 sheets of brownies
so that none of them burns?
While “getting big” is the goal of many businesses, including
cannabis companies, additional resources cannot be easily
brought online to accommodate many physical processes.
With hosted data storage, for example, a provider such as
Microsoft, Amazon, or RackSpace will gladly let you double
your storage with the click of button.
With chemical and manufacturing processes, however, no
such option exists. Moreover, increasing production by
simply multiplying existing equipment and processes is very
risky.
The considerations for different operations are not
consistent, either. State regulations (and biology) can limit
the productive size of a cannabis plant, which means that
scaling-up processes basically consist of multiplying the
number of plants under cultivation. The amount of light,
nutrients, and water also scale proportionally. There are, of
course, opportunities to increase automation, improve the
building configuration, and so on. But cannabis plants will
never reach the size of the potato pictured on the train car.
Wholesale and retail sales models, although subject to
additional regulatory scrutiny and constraints on location,
7
Five Questions: Managed Cannabis Operations Xabis, Inc.
are well established; scaling considerations will therefore not
be discussed here.
The operations that are constrained by the ability to
effectively scale up are extraction and manufacturing.
Running multiple smaller extractors can be useful up to a
point, for example. After that, it may be useful to consider
larger extraction systems. But even that is not a given,
because pressure vessel costs increased non-linearly with
capacity and the consistent availability of uniform, high-
quality cannabis feedstocks can be a serious concern when
trying to fill an industrial-scale extractor. (If you don’t fill it,
you may be seriously undermining the efficiency gained by
purchasing a larger extractor.)
The bottom line about increasing production of extraction
and manufacturing operations is this: Scaling up physical
processes is first and foremost an engineering issue. Of
course, costs are a critical factor in making decisions about
scaling up, but business units are poorly suited to providing
the technical requirements and engineering constraints
necessary to make the business decision. The issue requires
input from scientists and engineers.
https://www.chemicalprocessing.com/cartoon-caption/cartoon-caption-1/
“We’re still working out the bugs in our scale-up process.”
8Five Questions: Managed Cannabis Operations Xabis, Inc.
Question #3: Are Quality Management Systems (QMS)
relevant in the cannabis industry?
Background:
Throughout the cannabis industry, superlatives like “top
Best-in- quality,” premium product,” and “artisanal hand-crafted” are
thrown about like cheap confetti. But the basic reality is this:
class, huh? Many of the “experts” in the industry has never been
subjected to tough scrutiny about the purported quality of
their products. It’s easy to make claims about quality but
Show us much more difficult to prove them.
your data. Referring again to the cottage-industry origins of cannabis
operations, it is easy to see how we got here. Prior to
legalization, knowledge was distributed largely by word-of-
mouth, and claims of quality, potency, and value were
essentially impossible to dispute. There was no regulation,
and scientific verification was basically irrelevant. Fast-
forward to today: Despite testing requirements imposed by
states, there is still tremendous wiggle room regarding
claims of quality. For example, many states will tolerate a
measured potency that is within ± 15% of the potency stated
on the package. And only a limited set of residual solvents
and pesticides are included in required testing protocols.
The take-home message: Minimum regulatory requirements
are not even close to the best that a company can achieve.
And aside from what is permissible, competition among
cannabis companies is heating up. As consumers become
more sophisticated, they will become more demanding
about the quality of the products they buy.
A company can ensure the quality of its manufactured
products using different approaches. However, it is safe to
say that systematic implementation of a rigorous Quality
Management System (QMS) is a requirement, not an
option, for cannabis companies seeking to be as competitive
as possible now and ready for FDA approval in the future.
9Five Questions: Managed Cannabis Operations Xabis, Inc.
Question #4: Which manufacturing technologies are
Will you fully best for a given operation?
depreciate
Background:
your capital
This question is closely related to Question 2, above, in that
equipment the intended scale of an operation will dictate the nature of
before the equipment and processes necessary to efficiently achieve
the desired production capacity. (It is not that hard to
cannabis inefficiently produce cannabis products at large scale if
regulations profitability is not a concern!)
change? To reiterate a previous point: Design (and scale-up) of
manufacturing processes should be left to engineers. Experts
in related areas such as commercial food production can
provide valuable manufacturing insights, but constraints
imposed by use of a drug – also known as an Active
Pharmaceutical Ingredient (API) – mean that process and
product tolerances must be very tight.
And as was implied previously in this paper, everyone has an
eye on federal regulatory approval of cannabis. What this
looks like precisely is anyone’s guess, but a move toward
tighter regulatory scrutiny and pharmaceutical-type
manufacturing requirements such as GxP-certified
operations is likely. As such, keeping an eye on cost-
effectiveness now with a keen awareness of a system’s
potential for GMP compliance – as applied to both food and
drug manufacture – is probably a smart move if the
differential costs are not too great.
Consider cannabis-extraction technologies as an example.
The two biggest contenders for solvent extraction, butane
and CO2, may have different potential futures. Each
technology has pros and cons. Butane extractors are less
expensive and require less technical know-how than CO2
extractors. They also tend to yield a more terpene-rich
product from a single run. On the other hand, CO2 extractors
don’t require an explosion-proof room (Class 1 Division 1),
are tunable for selective extraction of terpenes and
10Five Questions: Managed Cannabis Operations Xabis, Inc.
cannabinoids, and use a solvent that is economically
available in ultra-high-purity grades. (High-purity butane isn’t
cheap and is still highly flammable.)
The preceding characteristics of extraction systems should
also be considered with respect to the implications of each
for future operations in a different regulatory regime and/or
competitive landscape. Additional manufacturing equipment
relevant to cannabis extraction and product creation is listed
below. As with extraction, careful thought should be given
both to current performance of a given piece of equipment
as well as to its expected suitability under tighter
regulations.
• Bulk food mixers/homogenizers
• Bulk liquid dispensers
• Bulk powder/granule dispensers
• Tablet presses
• Packaging equipment
• Labeling equipment
• Coolers and refrigerators
• Rotary evaporators
• Distillation equipment
• Automatic dishwashers
• Laboratory hoods
• Many other pieces of equipment
11Five Questions: Managed Cannabis Operations Xabis, Inc.
Question #5: How can operational efficiency in
cannabis product manufacturing be improved?
Background:
People. Processes. Products. Profit. These four “Ps” are key
Aesthetics or elements (but not the only ones) in the operation of a
successful cannabis business. Previously in this paper, we
maximum
discussed the critical considerations related to scaling up
value? What extraction and manufacturing components of a vertically
integrated cannabis company. As we pointed out,
is your engineering-based modifications to physical, as opposed to
priority for business, processes are essential to improving operational
efficiency.
your product
What wasn’t discussed, however, were the efficiency
set? improvements related not just to the equipment itself, but
also to the ways in which the equipment is operated and the
types of products being manufactured.
As the reader is already aware, people (employees) can
represent a huge variable in the context of a manufacturing
process. Additionally, the product and packaging designs and
specifications can lead to an easy-to-manufacture widget or
an intricate, labor-intensive piece of confectionary art.
(Compare a jar of unrefined oil to a piece of infused
confectionary art.)
There are two components embedded in the efficiency
question. (Neither is necessarily more important than the
other.)
12Five Questions: Managed Cannabis Operations Xabis, Inc.
One question: What product set does the company intend to
Automation offer consumers? This is analogous to the Apple-vs.-Android
or WalMart-vs.-Whole Foods question: Are your customers
and remote
looking for a gourmet chocolate truffle infused with 5 mg of
monitoring for THC distillate or a 20-mg sour gummy worm?
the cannabis The other question: Are your procedures fully documented
manufacturing so they can be reviewed and evaluated to help identify
inefficiencies and subsequently improve your processes?
company: Is it Accurate, version-controlled, and complete Standard
even an Operating Procedures (SOPs) need to be in place for every
option? activity that materially affects the quality of a process or
product.
SOPs, as key components of a comprehensive Quality
System, are critical pieces from both a quality perspective as
well as from an operational efficiency point of view. This is
where the efficiency of People and Processes can be
evaluated and improved once a given product set is chosen.
While throwing more low-cost labor at production can get
more widgets out the door, the risks increase rapidly with
the complexity of production. In other words, folding boxes
does not require the same skillset as adjusting extraction
conditions to get a more favorable cannabinoid profile to
include in a tablet intended to promote sleep.
While automation can be a big part of the answer, computer
control and monitoring of processes and equipment can be a
challenge for the small-to-medium manufacturer in any
industry. And for cannabis, economical automation and
monitoring may be even harder to achieve than it is for the
small-scale baker or parts manufacturer – the industry is
simply not mature and neither is all the equipment.
In any case, having evaluated efficiency from the
perspectives of People, Processes, and Products, a company
can then assess corresponding improvements in Profitability.
Because profit a big part of what everyone is after, isn’t it?
13Five Questions: Managed Cannabis Operations Xabis, Inc.
How to find the answers you need
This paper poses a set of tough questions, all of which are
asking whether the reader’s company has the critical pieces
in place to take operations (and profits) to the next level.
Following are suggestions for finding answers.
Suggestion #1: Assess your company’s ability to
undertake complex processing operations
It is not difficult to find cannabis product companies that
bought an extractor, put together a few recipes, and then
struggled to achieve their business objectives when the
manufacturing component of the operation didn’t fire on all
cylinders. (There are many other pitfalls; manufacturing is
but one of them.)
As we suggested early in this white paper, there are several
potential impediments that can make it difficult to increase
the production of an operation while simultaneously
benefitting from economy of scale. (Recall that simply
multiplying the number of physical processes often
multiplies the inefficiencies and may actually increase them.)
Ask yourself the following questions as you consider
implementing larger and/or more complex manufacturing
steps:
• Do you understand, from a technical perspective, how
to fit the different operations together (cultivation,
extraction, manufacturing, sales)?
• Do you have the resources (capital, people,
documentation) to properly scale up your processes?
• Where can you turn for answers to questions that are
specific to cannabis extraction and manufacturing?
If you cannot readily answer these questions, it may be
difficult for your company to take advantage of the
14Five Questions: Managed Cannabis Operations Xabis, Inc.
opportunities that this emerging industry can offer. Or you
may spend more and take longer to reach your goals than
necessary. The bottom line is that if you have a grand vision
for your vertically integrated cannabis business but don’t
have the technical expertise to get there, you might consider
Managed Operations as an option.
Suggestion #2: Conduct additional in-house
research. (Hint: It doesn’t have to be in the lab.)
As a vertically integrated cannabis company, you may have
in-house R&D resources or you might work with outside
vendors or contractors. If you have the means to investigate
the potential of new products or scaled-up processes, have
relevant staff put together a brief research proposal. If the
work can be completed economically and on a reasonable
time, it can provide valuable insights into the viability of the
project for commercial adoption.
But always remember: Scaling up from a test tube (or a
formerly illegal operation) to a high-volume production line
without proper engineering is a recipe for losing money. If a
new product or process looks promising on the lab bench,
make sure you know how to benefit from economies of
scale.
The shortcut to discovery is to piggyback on the work of
others. But there is a problem when it comes to this
industry: Whereas academic researchers and commercial
vendors publish papers and technical documents,
information about cannabis extraction and manufacturing
can be harder to obtain. Competitors are not keen to reveal
trade secrets and equipment vendors – often with little
experience or competition – have a vested interest in
steering you toward their offerings.
One of the most important things to keep in mind when
reviewing available literature, which can include material
15Five Questions: Managed Cannabis Operations Xabis, Inc.
available on various websites, is that reliable information
The industry is will be clear, quantitative, and backed by actual data. (This
can include both financial and/or physical/chemical
in the midst of measurement data.) Additionally, all the important variables,
an arms race. including performance baselines, operating conditions, and
assumptions, should be explicitly declared.
(Even if you
When it comes to cannabis equipment vendors, wading
didn’t know it.) through the marketing and jargon requires a degree of
skepticism and often requires direct engagement with sales
and technical staff. The key takeaway for vendor-specific
documents is this: If the vendor can’t answer your technical
questions, keep looking.
The same thing is true for Managed Operations service
providers: If the claims are vague and the provider cannot
provide real-world performance data (financial and
operational), then you should steer clear.
Conclusions
Recognizing that competition in the cannabis business is
presently something of an arms race due to the number of
players rushing into the space, it is essential that cannabis
companies ask questions that will help set them apart
competitively. More so than in almost any other industry,
wild claims abound and are hard to evaluate due to the lack
of historical reference information. It is incumbent on the
business owner to ask hard questions and do what it takes to
answer them.
In this white paper, we have tried to identify critical
questions and challenges facing the vertically integrated
cannabis venture as the industry matures and competitive
pressures increase.
The underlying premise – that managed operations might be
an option – is dependent on the technical abilities and
industry-specific knowledge of your company’s employees,
the desired timeframe for implementation, and the
16Five Questions: Managed Cannabis Operations Xabis, Inc.
availability of capital to fund an in-house scale-up project. If
these pieces are in place, your company is likely well-
positioned to be an industry leader. If not, there are options
for utilizing others’ expertise – and potentially their
equipment – on a contractual basis. After working through
the questions posed above, you will hopefully have a much
clearer idea of what makes sense for your company.
About Xabis
We published this white paper to help vertically integrated
cannabis companies evaluate the suitability of managed
operations for their businesses.
Specifically, we are promoting the view that a company’s in-
house technical capabilities vis-à-vis advanced cannabis
extraction and manufacturing operations should be a
primary determinant of whether they consider Business
Process Outsourcing as part of their overall business plan.
To find out more about posing the right questions for your
cannabis company – and carefully formulating answers that
acknowledge the risks and benefits of incorporating
managed operations – please contact us at 303.217.2097 or
garret.nicodemus@xabisinc.com.
Xabis Inc
12015 E 46th Ave
Suite 550
Denver, CO 80239
www.xabisinc.com
References:
[1] http://www.businessinsider.com/legal-weed-market-to-hit-10-billion-in-
sales-report-says-2017-12
[2] https://en.wikipedia.org/wiki/Business_process_outsourcing
[3] https://www.forbes.com/sites/greatspeculations/2015/06/22/getting-a-
piece-of-business-process-outsourcing/#12f28af82a64
17You can also read
