
Building a cannabis processing facility/lab can be beneficial in the long run, but it requires fastidious planning and constant adjustment of costs, designs, manufacturing processes and more.
In Rudy Ellenbogen’s time in the cannabis industry, he’s overseen several processing facility build-outs, including two for Verde Natural’s operations when he became CEO of the company in 2015. Now the founder and CEO of Whole Grow, Ellenbogen, who will be speaking in the “Processing Lab/Facility Buildout” session during Cannabis Conference 2020, works as a consultant to cannabis clients through every step of the build-out process. Ellenbogen spoke with Hemp Grower about the work that goes into building a facility, common mistakes he sees and where to begin.
Hemp Grower: What are some key factors someone should consider when deciding whether to build their own facility/processing lab?
Rudy Ellenbogen: The first question is why. I think a lot of people focus on the how and the what, but strategy and strategic planning are the keys to long-term success. Figuring out the motivation and the real intent with a new manufacturing facility allows us to select the right products to produce and, afterwards, the right methods to make those products in the best ways possible.
You need to consider efficiencies and costs, but more importantly, competition and strategic differentiation. When starting, it’s very easy to fall into the temptation of a system just because and without really thinking what’s that marketplace like that you’re in. You have to think about competition … and what is going to be your value proposition with this new operation. It’s also understanding regulations and what is allowed in that specific market.
[Another key factor is] their strengths and their value, because some companies have some knowledge, experience or talent that they can leverage strategically. For example, some people are already growing in a certain way that lends itself to one method. It’s different to be an extractor for others.
It’s also thinking about the infrastructure and space you have, as well as your timeline. It takes a lot longer to set up an explosion-proof butane extraction operation than a CO2 or solventless operation.
HG:What are some of the most common pitfalls you’ve seen with facility/processing lab build outs and how do you avoid them?
RE: I think starting with selecting equipment as opposed to strategy is one. Do some market research before you start selecting equipment. You have to select a system--not specific equipment, but systems--and you have to select the system based on your products and strategy. Before you purchase equipment, evaluate and compare different cost models of operating under one or the other system. Understand efficiency and the yields of different systems and then your products and the pricing of those products. Have an economic model that allows you to decide based on your financial goals.
Another pitfall I see is execution. If you don’t invest in the design, you’re going to pay for it later during construction. Having certified pieces of equipment is going to help a lot with the fire marshal inspections, so thinking about that and checking that the equipment you’re buying is certified [is helpful].
And then building the right team to operate these facilities [is important]. Many times, people just think about who’s going to be the extraction tech, but there are other processes to think about. Think about inventory management, packaging operations, source material, compliance and sales.
In parallel, it’s very important to ask yourself, are you developing a brand? Doing that requires a whole other set of skills, including marketing, branding, packaging, design, distribution and sales. … People think, “I’ll differentiate with really nice packaging,” but it’s a crowded market.
It’s hard to earn consumer loyalty and market share if you don’t truly have some value in your product.
You never want to be in a commoditized market, because it’s a race to the bottom. You never want to be doing what everybody else is doing. We see right now with hemp, for example, a lot of CO2 [carbon dioxide] hemp extraction that allows people to have isolate, and prices have plummeted. It’s basically a commodity.
HG: What kind of education/training is required to properly launch a facility? What continuing education is recommended?
RE: First is acquiring an educated and experienced group of talented individuals. You can also acquire expertise using consultants. There’s also specific training that you can invest in sending your people to and helping them learn.
There is training related to safety and food handling, because you’re talking about a laboratory, so [lack of safety] can put the entire operation in jeopardy. Then, you have technical training on specific extraction methods and pieces of equipment that are provided from the manufacturers of the equipment.
Training I haven’t seen very much is inventory management and cost analysis and really understanding your margins and efficiencies of each process. But that is also key, because if you don’t really know your cost basis, it’s really hard to project your margins, and then you wonder why you didn’t make money.
HG: How can someone begin to understand those cost margins and plan their resources accordingly to start a relatively efficient operation from the get-go?
RE: I think first it starts by understanding the steps and processes to produce each product and
understanding the time and effort and resources that are required. Once you have that, then you can quantify the costs. If you know it takes three man hours to do a certain task and you know the cost of that man hour based on the expertise required, then you can know how that cost is impacting your product.
Another aspect you have to find is what is it that you’re producing in that process, what are the range of yields, what’s the average targeted yield and what’s the loss of that product so you can distribute the cost across units from the beginning until packaging. Knowing these production rates is key, and you will know that if you’re recording the time and effort needed for each one of the processes.
Many times, it’s just something you do over your first month of operations, but people that have done it before can help you make projections. But you should always check it and see where in the process you are spending X to produce X. Then, you can plan what is viable for you.
Maybe in your facility, going all the way to solventless, or going all the way to crystals or sugar is not cost-effective. Maybe rosin is where you feel comfortable, or maybe cartridges make sense. But you have to collect data and organize it to understand cost structure.
A lot of the small companies are not so aware of this. They’re competing with people who have data scientists evaluating efficiencies and modeling costs and making decisions based on that. They may anticipate a problem long before you do, so they can project where the market’s going and, based on that analysis, could make decisions that could make a difference. Knowing where you are and where you’re going starts with knowing your data.
HG: What do you hope attendees will bring back to their business from your session at Cannabis Conference 2020?
RE: What I would like to provide is a more [holistic] understanding for long-term success, where they can think not just about technical aspects, but also think about the operations, think about the economics, think about the strategy and the team that is required to really run or start a manufacturing operation. [I want them to] be able to have a more complete view of what that process looks like, so they can anticipate future challenges and be successful in the long term.