How edibles companies can scale to mass production
by Bart Schaneman
An ambitious marijuana edibles manufacturer can’t make products by hand forever.
Many companies that make infused drinks, candies and other goodies are finding that it’s necessary to scale up in the rapidly growing, increasingly competitive cannabis industry. Some have even planned to go big from the get-go.
“Our business plan right from the beginning was to establish the brand and then expand the name and the brand as quickly as we could across the country,” said Patrick Devlin, co-owner of Db3, an edibles maker in Washington state.
As in most other industries, edibles manufacturers want to develop their chocolate bars and brownies into consistent and reliable national brands.
But with an uneven regulatory framework across state lines and an industry that faces constant legal and financial hurdles, scaling up for cannabis edibles companies presents more of a challenge than the usual growing pains associated with an expansion.
It begins with careful planning and includes finding the right plant site, keeping overall costs down, careful hiring and mechanization, according to Devlin and Bob Eschino, co-founder of the Colorado-based edibles manufacturer Incredibles.
Room to Grow
Devlin said Db3 invested heavily in the capacity to scale up from the start.
The founders sought out a location with 25,000 available square feet – about 10,000 square feet more than they needed – that previously was used as a food-processing facility. That extra square footage allowed Db3 to meet its growing capacity needs in Washington over time.
“We started with a manufacturing process that allowed for production-style work,” Devlin said. “We made that investment, then we grew from there. Having the footprint was really key for us.”
The building was previously operated under U.S. Food and Drug Administration guidelines, and one of its key features was that it was easy to clean after use. The facility came with floor drains, wash stations, fume hoods and other features necessary for safe food-handling procedures.
“You look for a facility that is capable of producing food in a food-safe way,” Devlin said.
The consistency of the product relies on how well it’s handled from the beginning, he added, which is also key to scaling up.
Db3 – which produces the Zoots brand of edibles, a product line that includes hard candy, drops and brownies – has expanded beyond Washington into Colorado, with plans to enter Massachusetts in 2017.
Eschino of Incredibles also planned on scaling up from Day One.
“It was always something that we wanted to do and were hoping to do,” he said.
However, the difficulty in receiving financing, including bank loans, tempered expectations.
“One of the first things we had to do was go out and find partners and bring in money to build out a room in between two grow rooms that they were using as a drying room, and we paid an astronomical amount of money for it,” he said. “Not only for the rent, but to build that out.”
At the time, the grow operation could supply about 70% of the necessary product and the kitchen was large enough. But within the first 14-16 months, Eschino said, the company scaled up so rapidly that the on-site grow operation could supply only 10% of what the business needed and the kitchen was overextended.
Eschino said the executive team immediately started looking for more buildings.
Today, Incredibles produces 7,000 chocolate bars per day as well as gummies and concentrates. The company started in Colorado in 2010 and, after the first year, has doubled in size every year. It now also manufactures in Nevada, California and Oregon.
Eschino credits co-founder and operations director Rick Scarpello with much of that success.
“He understands how to scale a kitchen,” he said.
The company staffed its operation with trained chefs who came from large operations and had extensive experience growing a production facility.
Keep a Lid on Costs
Edibles manufacturers need to consider how to keep their costs down as they increase production.
Db3’s recipes begin by using ingredients available in bulk. One challenge with that approach: Most recipes start in a small batch, so it’s tempting to use any available ingredient rather than checking first to see whether it can be sourced in large quantities.
When buying in bulk, you have to guarantee a minimum-sized order, Devlin said. And when purchasing larger quantities, you must store those ingredients for a longer period of time. Plus, you need the cash flow to buy them.
To find the necessary ingredients, Db3 goes directly to the manufacturer or to a broker that handles several different flavors or various kinds of food materials.
Eschino emphasized the necessity of developing good relationships, including with suppliers, to help keep overhead low.
“You have to prove yourself, pay your bills on time,” he said. “You have to earn people’s trust and be a good vendor as well as a good customer.”
Shiny New Machines
Once that recipe is perfected and the ingredient supply has been secured, deciding on when to add a new piece of equipment to the process comes down to efficiency.
“Anything that you can mechanize or make more efficient in the production process allows you to produce more product,” Devlin said. “The best thing to do is to hold off as long as possible. If you can do it by hand you have a greater flexibility to respond to the market needs.”
To him, mechanization is a way to control production. But maintaining the quality of a formerly small-batch product can be a delicate balance when increasing output.
Deciding when to buy the machine versus the potential payoff down the road “takes a pretty sharp pencil to figure out,” according to Devlin. At a certain point, your volume will help you make the decision when to add a machine, he added. Make sure the savings you gain will justify the cost of the investment in the equipment.
Mechanization serves as a major challenge for Eschino and Incredibles.
As the company expands to other states, the hope is to continue at the production levels of the Colorado operation. That’s necessary because transporting cannabis across state lines remains illegal and prevents the kind of normal production growth that companies in other industries can enjoy.
“Any other industry, we’d be able to ship over state lines and I’d have one big manufacturing facility here in Colorado with automated equipment pumping out tens of thousands of products a day and shipping them all over the country,” Eschino said. “That’s how typical business works.”
So his company doesn’t automate as much as it might if it had one large production facility. That forces the company to do more things manually.
“You’re handcuffed,” he said.
But Eschino and his team manage to find ways around their logistical problems. A while back, the company needed to upgrade its mixing equipment, and Eschino couldn’t just go out and buy what he needed. He had to cobble together pieces from other industries to build it.
“We’re not buying a piece of equipment,” he said. “We’re Frankensteining a piece of equipment.”
The industry has taught him the importance of improvisation.
“We’re all MacGyvers,” he said, referring to the action-adventure television series. “If we want something, we typically have to invent it ourselves.”
Staff Up at the Right Time
The manual component highlights the importance of making correct staffing decisions.
When Devlin and Db3 recruited new hires, food production workers had the relevant built-in skill set.
“You get people who have that experience and then you pay them well,” he said.
Eschino keeps a tight rein on staffing up to control costs.
“You have to do the absolute most you can with what you have before you take that next step,” Eschino said. “You have to be desperate before you pull the trigger to add someone.”
For Eschino, when it comes to increasing the workforce, staff members who generate revenue are at the top of the list, specifically people who are in production. Kitchen and packaging workers are the highest priorities, as are growers.
Administration positions, for example, can’t be written off on tax returns and thus fall to the bottom of the list.
Produce What You Can Sell
Striking that equilibrium is also crucial when it comes to production. One way to avoid over- or underproduction is to maintain close communication between the sales and manufacturing departments.
Db3 prides itself on knowing its inventory and delivering on every order.
“One of our basic philosophies is once we take on a retailer, we don’t want them to ever be out of our product,” Devlin said. “They make an order, we will deliver that product.”
Close communication is important. The principle members of Db3 are “around each other all the time,” Devlin said. They hold production-sales meetings every three weeks to review the projections for upcoming products.
They also discuss what sales initiatives might be on the horizon in the coming months. The production department can then adjust its output based on the sales department’s forecasts.
“Forecasting is a real key part of this,” Devlin said.
The difficulty comes from balancing production with demand.
“You obviously don’t want to have too much product on hand,” Devlin added.
On the retailer side, Db3 uses customer-managed inventory. That means Db3 works with a retailer to help manage inventory based on the customer’s anticipated sales. One challenge occurs when retailers hesitate to share that information.
In that case, Db3 relies on internal processes to reach out to the retailers. The company also monitors its customers’ order cycles and anticipates their supply needs based on past sales patterns. The sales force also communicates regularly with retailers and relays that information back to the production team.
To continue scaling up at Incredibles’ previous level in a competitive and more developed market such as Colorado, Eschino said, the company will need to rely on a diverse product line to set the company apart.
However, he anticipates that the majority of the company’s future growth will come from expanding into other states as well as international markets.
“That’s where most of our growth will come in the next couple of years,” he said.