Making a legitimate business out of marijuana requires high labor costs and extreme costly maintenance. Hundreds of Medicinal Marijuana Entrepreneurs have gone under because of competition or cost. The CEO of Pink House Blooms, Elliot Klug (pictured above) explains, “In order to survive in any business, you’ve got to be cost effective, so that was one of our drivers.”
Pink house and other commercial growers are required to document the life of each plant from the time it’s a cutting to the time its flowers are sold and the state of Colorado requires cameras in every room that has plants to prevent marijuana from entering the black market. These extra requirement are not comparable to any other industry or cheap either.
The Marijuana flower is trimmed by hand because the machine would damage their Trichomes, the part of the plant that is rich in the high-inducing THC. This results in high labor costs. Payroll can make up more than a third of production costs. Retaining employees who learned their trade by growing clandestinely, is also a challenge because “they aren’t used to being part of a regular society”, says Jason Katz, chief operating officer of Local Product of Colorado.
Growing space can cost $100 or more per square foot and Pink House Blooms has a 6000 square foot warehouse. To have operation costs as inexpensive as possible they use every inch of their warehouse. To save on air conditioning costs, Pink house developed a system that uses water to cool the powerful lights that make marijuana grow. Those lights, causing a $14,000-a-month electric bill, are on 24/7 making their electricity bill a huge portion of their expenses and preventing the company from paying back the borrowed money.
The employees may have gauges and there are Pink Floyd posters covering the walls but it is not as mellow as one would think, It is a tough business. They have supplier issues because many companies do not want to be associated with a pot-growing business.
Is this still a touchy subject or is there something operations managers do to convince suppliers to work with them?
Operations Management for this industry is not typical at all. They have to create new equipment specialized for their product because it cannot be found on the shelf. This business could have high costs because it is relatively new.
Is it possible that over time, operation managers will find better ways to lower their costs? Any specific ideas?
Colorado and Washington has approved the use of Marijuana for Medicinal use and recreational use effect by next year. Will a higher demand leading to higher profits make it possible for these companies to increase production efficiency?
What methods might this industry use to forecast. Why might the naive approach lead to too much forecasting error?