Quality as a Profit Center in Your Cannabusiness

Okay. Hello and welcome to the latest installment of the Cannabis Business Key. I am your host, Jason Klein. I am a partner attorney with Ramone Law, uh, specializing in cannabis business, uh, corporate transactional, all of your cannabis business needs. Uh, and today we have a fantastic guest, Leslie Engelking, uh, with Focused Standards. Uh, we're going to be talking about the not so sexy but very, very important concept of cost as a profit center. I'm sorry, quality as a profit center of your cannabis business. Uh, so, um, as usual, uh, now that we're getting into the hang of this RingCentral, I want to orient all of our guests here, uh, to how the RingCentral platform works, where we're doing this webinar and how the sort of the run of the show works. Uh, so, uh, this is of course an educational webinar. Uh, we're here to talk about, um, cannabis, cannabis businesses, cannabis industry, uh, to give you some tips and tricks and hopefully find some value in running your cannabis business. Uh, we are not giving you legal advice. And we're certainly not advising you on how to violate federal law. Everybody here knows that cannabis, marijuana, the THC-containing stuff is illegal under federal law under the Controlled Substances Act. And so just a quick disclaimer here for everybody to see before we jump in. And a quick commercial on my firm. It's a large international firm. We have all sorts of resources across a broad spectrum of legal service industries as well as a wide variety of geographies. We are very efficient and modern in our use of technology, decentralized distributed business format that we have. And we have a very high quality of legal services that we offer here. Me and my colleagues, especially my my colleagues, I can't stop singing their praises, have a, have a ton of experience and are able to offer legal services to you and your cannabis business or many other types of your businesses at a very reasonable cost. So if you're looking for legal services, shopping for a good place to develop a legal relationship, I'd encourage you to reach out to me. And I'd love to show you how it works over here at Ramon. Here's a couple of locations, and we're growing on a very regular basis. So, you know, when you come back for the next webinar, we might have a couple of dots, a couple more dots on this map. Okay, so let me orient you to the RingCentral platform here and how we do this presentation. If you're new to it, this is an interactive presentation. We have a screen share for you to follow along with the PowerPoint presentation, but this is not a lecture. We would like for you to type in your questions using the Q&A feature on your RingCentral dashboard there. Just go ahead and type in your questions. I'll be monitoring those questions as we go, and I'll be sharing them with Leslie as we go. We want this to be interactive and conversational. We're going to be flipping through the slides and we're going to share the slides with everybody at the end after, after the presentation. But in the meantime, if you have specific questions, this is supposed to be interactive and that's what we have found to be the best way to get your— to find value for you in this presentation. So feel free to just go ahead and type away and we'll do our best to get all of your questions answered. We also have Leslie's contact information there and mine as well. And so, you know, if you want to follow up, we really encourage you to do that. If you have specific questions about your business, about how FOCUS might be able to help you, you know, Leslie is going to be a great resource for you. So go ahead and mark down her email, send her an email, introduce yourself, and, you know, get acquainted. Before I jump into Leslie's introduction, the other note that I would like to make is that we do have a great speaker for April. We are doing this series, the Cannabis Business Keys series, monthly on Fridays, noon Eastern time. The date of the month jumps around a little bit, but right now we're on a schedule to do either second to last or last Friday of the month. That's going to put our April presentation at, let's see, April 23rd. So noon Eastern time, April 23rd. That's going to be the next one. We're going to be hosting Eric Ott. He's with K&O Acquisitions. It's a private M&A firm. We're going to be talking M&A and with the number of deals that are out there, there is no end to, to the conversation we're going to have about that. So you'll be getting an announcement since you signed up for this one. You'll be getting an announcement via email on probably in the next couple of days about Eric's webinar, and you'll be able to join us in April. So keep an eye out for further announcements after that. All right. So, uh, now without any further ado, uh, Leslie Engelking, uh, founder and CEO of FOCUS, uh, Standards, which is the Foundation for Cannabis Unified Standards. She's based out of Scottsdale, Arizona. Uh, she has a, uh, she earned her degree from Arizona State University, uh, in communications and statistics. Uh, she has been working in this industry for about 7 or 8 years now since she started FOCUS. And before that she was in healthcare and nonprofit sectors and pharmaceutical industry with Eli Lilly and, and all sorts of big movers and shakers there. So Leslie's here to talk to us about quality as a profit center in your cannabis business. And thank you very much, Leslie. Thanks for joining.

Thanks for having me and thanks everybody for joining us today. I appreciate it. I'm going to tweak one little thing on the in the introduction, just so people have an idea of where my experience in cannabis actually is derived from. So prior to founding FOCUS in 2014, I opened the first chain of vertically integrated cannabis licenses here in Phoenix, Arizona. And I was executive director for 3 years and we grew like crazy and we sort of grew in spite of ourselves without a lot of tools that are necessary and used in other businesses. And it was very difficult. And I realized through that experience how hard cannabis was as a business and how much help the industry needed. And so I left to start FOCUS to develop standards and provide training and certification and guidance to the cannabis industry based on that firsthand experience.

Thanks for— yeah, sorry, I just, it helps kind of give it a Yeah, well, listen, and you're obviously here to speak not just sort of on your, on your experience sort of academically, but, but in real, real life. And so that is a good jumping off point to talk about what is it that we are talking about, you know, quality as a profit center. When I hear the word quality, I think high quality or premium quality or expensive quality, like quality is, you know, a Mercedes-Benz compared to a Toyota. Is that the same way that you think of the word quality? Is that what we're talking about here?

No, I mean, it is, it is and it isn't. So it's not wrong that that's, that is certainly an aspect of quality is high quality. But I think it's really important to understand that when we're talking about quality from a business sense or a manufacturing sense. What we're talking about is really everything that goes into making a product or a service that satisfies the end user's needs. So it's not just quality in I'm spending money on this or I'm spending money on this. It's also how the operations work and all the other costs that are associated with that. I think it's really important to understand too that most of the time quality is driven by the consumer. It's different for every business. And a lot of, a lot of quality isn't visible, right? And so, here's a good kind of explanation of it. The cost of quality is the cost incurred to ensure that products and services meet standards. That's typically what people think about, right? I mean, especially in this industry. So, okay, well, how do we, how are we compliant with the regulations, right? Do we do our tests are we ready for our inspections? And what they don't see is the cost of poor quality or all the costs that happen because something in their system, in their infrastructure isn't working right, whether that's a service or a product that's defective. It doesn't really matter. But until you understand both the cost of poor quality and the cost of good quality, you really don't understand how it's impacting you from a business sense. So I think to the consumer, quality might be high quality, but that— what constitutes high quality changes, right? I mean, if you're making a product and your product is consistent and it's something that works well for that patient or the consumer and they, they like it and they come back for it and you can't make it consistently, that's not a real quality product, right? Even if they loved it before, but they can't get it again. So there's a lot more to kind of think about there for sure.

Right. So when we talk about quality, we're not talking about premium or expensive or something that is of higher cost, end-user cost, right, to the consumer. We're talking more about something that sounds to me like repeatable, reliable, Trustworthy. Safe. Right. Yeah. So, so I think throughout this, and you can see it here on this slide, you're talking about good quality, which doesn't mean middle of the road quality. It means good quality as in it's of good reliability and it is of good safety versus poor quality, which means unreliable. Or it's not necessarily safe.

And even beyond that, you know, unreliable and unnecessarily safe, quality, you know, of a product also involves how that product gets into the customer's hands, right? And so if they get the product and it's a hassle and the lines at the dispensary are terrible and they can only get it there, that is a cost of poor quality too, right? If they can't get the same product from time to time because the supply chain isn't in place the way it needs to be, that's a cost of poor quality. And then that customer can leave, right? And they never come back or, you know, they start talking about it and telling their friends. So there's a lot of other costs that, that really aren't identified. And I think like in cannabis, it's missed more so than other industries, partially just because of the state regulations. And compliance is seen as sort of the goal of, you know, you got to be compliant with the rules. But really quality thinks well beyond just compliance with the rules. That's an aspect of it, but it is much more about conforming to the end user's needs than it is to the state.

I think on this slide there's an interesting double use of the word cost. There's a cost of good quality, but then there's a cost of poor quality. And it strikes me that the cost of good quality is a cost that you as a business, as an executive, determined to take on, you are choosing to accept a— to spend some of the money of the business to develop good quality, whereas the cost of poor quality is sort of something that's foisted on you. Maybe reduced sales would be the number one cost of poor quality I can think of immediately, or just market share or whatever. But you're not actually necessarily— or a way that you spend in a poor quality environment may be to rehab your brand or your product or to fix something that you— that was done poorly in the first place. But it strikes me that the sort of cost that you're talking about in good quality is something that you choose to do, whereas something— the cost of poor quality is something that you are required or forced to do.

It's a result of, yeah, not properly implementing the preventative and appraisal steps of the cost of good quality. Right. And so the industry doesn't really view these costs of poor quality in cannabis. There's, I mean, if you think about the, the ecosystem, it is the norm for people to remediate products, right? It is the norm for if something comes back, you know, from a test or third-party testing and they, it meets it exceeds the pesticide guidelines. Well, what do we do? We're going to mix it in with some more product and get those levels below where they need to be and sell it. But there's no consideration for the extra labor, the extra machinery cost, all the delays to market, all those other things that come in. Those are the downstream costs. And I want to just point out on this slide where it says prevention/investment or external failures downstream consequences. The formal names in, in the quality world for these costs are, are the first before the, the slash sign. I included the investment cost or monitoring cost just to give some illustration of what I'm talking about and, and how that works. And so investment costs would be— yeah, and I guess we'll get into that if you want to go to the next slide. We'll kind of go through these one at a time. But I think that, you know, it's important to understand that the cost of poor quality can cripple your business. And it's not— quality as a goal is designed to increase your return on investment and make you more efficient, meaning that you can be more competitive in a really saturated market, which is super important in this space for sure.

Well, let's get into what you mean specifically, you know, about each of these sort of 4 areas and how this framework works. Maybe we got a little ahead of ourselves, but—

A little.

We've discussed— we've sort of discussed this part, this slide. So let's move past this slide here.

I just want to say one thing on it, though, because I think this is important, and you see this in the media all the time, right? That, you know, all these public companies are merging or they're, you know, laying off employees or they're selling off pieces of their stock and stuff. All this is done to improve the bottom line, right? And it's because of financials. But what's missing is that conversation between the financial sector and the operational part of the business because they have to be together. And you, by cutting these things, it becomes really important. If you go to the next slide, if you don't mind, I think it kind of illustrates this well. So a healthy business is like a healthy body. It's a system. It works in, in conjunction with one another. So when finance is, you know, is driving decision-making and not involving quality, all these different parts of the business get downgraded, and there's downstream further quality costs poor quality cost because of that. And so if you can keep it in mind that you really have to think of your business as a system, like a body, and that when you're taking things away from it, it's impacting the other parts. And conversely, when you're adding in good things and new things to it, it affects all the other parts. This is where quality management system comes in. It's really designed to make sure that all the different aspects of your business are in a comprehensive system together.

I think that's a great sort of metaphor to think about as we're imagining this, because businesses are systems. They're big systems that depend on a lot of different factors. And to your point about sort of cost cutting in and of itself may give some immediate short-term benefits. But you really do have to think about what that means in the long term. So the framework that you had just laid out for us is sort of, sort of a cost of quality that's forked into two areas, the cost of good quality and then the cost of poor quality. And within the cost of good quality here, we're talking about prevention, an appraisal. And so maybe you can just give us a sense of on this side here, what, what is the cost of prevention?

These are the costs that most people in the cannabis industry think of upfront, right? So how do we design our facility? What type of equipment do we select? How effective are our— well, let's leave that one. The research and development that goes into building their products and doing that. What they don't really think about in this, though, is the cost of training. You know, like, we see a lot of oversight about training, but— or a supplier qualification program, right? We saw that huge vape crisis 2 years ago, and that was literally due to supply chain issues with some of the carrier oils and people moving to vitamin E because another— what they were using wasn't available or got more expensive. And so These are things that you do in advance to prevent problems later in your organization, and some of them are much more attended to than others.

Right. Well, yeah, some of them are seen as more imminent or, you know, immediate as far as value than others, but that's probably a mistaken premise, as we'll get into.

So let's— because this is like the— these are prevention costs. So this is actually the output of cash towards quality, right? This is not— whereas the other ones aren't. Like cost of poor quality is not them giving out cash. And so that is one of the reasons it makes it really hard to sort of shift your mind to think this way, right? To get kind of in that mindset of quality, because these are literally dollars coming out of people's pocket. And I hear it all the time when we talk about third-party certification or implementation of focus standards with clients, a lot of people will say, yeah, well, we're not going to do that until the government tells us we have to, whether it's the state or the feds or whoever. And that sort of misses the important and really key component of why you would implement standards or go through a certification, which is to improve your bottom line, right? To create efficiencies in your business and really make sure that you can run your business the best way you possibly can.

Yeah. Uh, and, and that I think is another sort of really critical overarching idea. Uh, and we talk about compliance a lot in this webinar series, um, because as an attorney I deal with those kinds of questions all the time. And oftentimes I do encounter in the cannabis industry, uh, businesses that see compliance as the end point. And minimum compliance, particularly as the endpoint. Whatever their state local authority tells them they have to do, they're going to do that and they're only going to do that. And going beyond that is— they fail to see the value. So that's really what we're talking about. Compliance is a component of this prevention, but it's certainly not the endpoint. In and of itself.

It's a great point. And if you think about it too, I mean, there, when you cut corners on this area of these preventative costs, right? So I can't tell you how many facilities that we've gone into across the country that are in, you know, what people deem as a very unique or special place to put a cannabis business. But, you know, maybe it used to be a garage or a farm or a barn, you know, like, and they, or they build it inside of a strip mall and the real— without thinking through all the impacts that that will have later. And the thing is, I mean, we just had a client yesterday call us that they have problems in their floor. They've got salmonella inside their floor because they hadn't taken care of the mold in their grow. The whole floor has to be replaced now. But if they had actually just had some mitigation and preventative measures in there, it would have never gotten into the floor in the first place. And that's kind of the same with all of this stuff. It's It's to prevent later costs.

Well, I have a friend here, Tim Gunther, who's always contributing to the webinar. We really appreciate it. He's written me in the question and answer tab there that his favorite statement to clients is, if you think compliance is expensive, try noncompliance. So we can, we can get into that side of things, sort of the downstream costs in a minute. But let's, let's also talk here about the next section, which may be a little bit more, a little bit more difficult or sort of a little bit more foreign to, to business operators and sort of the idea of appraisal and monitoring.

So I think, yeah, so appraisal and monitoring again is just anything that you need to do to make sure that what you're doing is the right thing and that your products are coming out the way you want them to, that your processes and operations are flowing effectively. And where this gets a little weird in cannabis is because this appraisal cost is third-party testing. And because in the cannabis industry our regulations have been designed at the state level, they, they are very, very focused, no pun intended, around testing and literally like throughout the supply chain in every space. And so that's a huge cost in cannabis. And so people think, oh, I'm spending all this money on testing. That's spending money on good quality. The reality is though, that testing is, is after the fact. So what about the small grower that only gets 3 batches a year that sends it to testing? Third-party testing and the results come back that it's got pesticides or it's got mold, right? That's damaging to a business and could even be, you know, completely detrimental to a small company. But even if it's not going to kill your business, the cost of dealing with that is so high that could have just been easily mitigated up front if they had just put some internal monitoring systems in place.

Right, right. And there is an element of the compliance that goes into this appraisal are obviously, you know, oftentimes states have third-party testing requirements. Almost, almost every state does. And internal testing and calibration and things like that. But again, in this component, compliance, the sort of minimum compliance with your regulatory requirements is almost is never sufficient. I can say that the regulators, the lawmakers are not— when they're developing those regulations and the laws that govern your business, they're not thinking about quality. They're thinking about one component, maybe protecting the safety of the patients or the customers that you're going to get. But you know, and the community, but that's just one, one component. So, you know, mistaking compliance for quality would, would leave a lot out.

And it's for sure, it's such an important point because it happens all the time. And I think the other part of that is, is this— the process controls aspect of this monitoring or appraisal costs are really important. So a lot of things go wrong in cannabis businesses all the time. And I'm sure we could do a poll and say, you know, how many of you have experienced the same issue more than once in your cannabis business? And I, if people are being honest, I would think it would be everybody. I mean, it certainly was in ours over and over and over. Um, and some of that comes because we don't do any investigation of, of our processes, right? If something, How do we know that we're doing these things and this equates to a good product? We don't go through that validation. Or if we have a bad product, right, we send something to testing and it comes back with a failure rate and we don't normally get that. Why is that happening? And there's not a lot of like investigative costs or investigative actions taken around that. And I think a lot of it's due to cost. It's also just because people probably don't understand. But that's an important part to understand too, is that That internal monitoring of your own processes is key to quality.

Right. All right, great. Let's move on and talk a little bit about this other side, about, you know, sort of what Tim was raising and the other side of, you know, the downstream side of poor quality.

Exactly.

How do we imagine that? I can imagine there may be a few operators who are looking at this list here—delay, scrap, rework, shortages, remediation—maybe breaking out in sweats because perhaps they've had—undoubtedly they've had experience in at least one of these areas.

Yep, for sure. And it's— I mean, these are the things that we see all the time and some of it, it's interesting in cannabis because it's almost built into the ecosystem, right? I mean, the reworking of things, the, you know, like we talked about with the example before of something coming back testing with heavy pesticides, and so they have to mix it in with a larger batch, or they have to extract it, or whatever to fix that. Nobody really thinks about that, like that that is a cost. And then the retesting of those products, right, is a big issue too. But there's also all the waste, and then all the other costs that kind of like come from not being efficient with your materials or your time, right? Labor costs are in there. Downtime is a big one in cannabis. I mean, how many times is a business waiting on a shipment of something, whether it's bags from China to come in or, you know, vape cartridges or whatever, and they're just literally in limbo waiting until they can get it out there because they really don't have good control of their supply chain from the beginning. There's no supplier qualification in place, and so then they end up in this situation and they don't actually consider the cost of that.

I want to just step back a minute and just talk about ISO standards. We have a question from, from our audience from Steve about ISO standards. Where would you put sort of third-party certification in this framework? Is it, is it in this?

It's both in the, in both of the types of good quality, right? So it's the appraisal and monitoring as well as the prevention and investment, right?

So, so when it comes to sort of third party, and I think focus would would fit into this, and ISO would fit into that. Absolutely, for sure. Have you found that there's other sort of— well, I guess the question is, are there states or regulatory frameworks that require third-party certification, or is this something that is, you know, really left up to the business for them to elect you know, we want to do an ISO certification or a FOCUS certification?

So primarily it's been, and historically it's been, just completely up to the business owner. I think we'll see that changing very, very soon. The reason for that, if you look at, if you consider like an ISO 17025 accreditation for a laboratory, an ISO 17025, that's mandated in almost every state. Nothing is mandated for the manufacturer or the grower or the retailer because they don't have any accredited certifications to do that. As for FOCUS, we've been working hard at that for the last couple years and we're just about done with our ISO accreditation next month. And so we've had states reach out to us, multiple states, talking about the implications to them and how that they could implement a program within their own cannabis programs to really utilize third-party certification and training. And so in Michigan, they've actually rewritten their entire, both medical laws and adult use laws to say that if a company has a, you know, a GMP certification, cannabis-specific GMP certification from an ANSI or ISO accredited organization, that they will reduce the amount of testing that is required, third-party analytical testing, and they will also reduce their license fees for the length of the time that the business remains certified. And they're doing that because they're sort of transferring that responsibility, right? The preventative stuff is there. They don't feel like they need to do as much testing.

Well, hey, I think that's there's a value right there for you, right? Less testing means faster process to customers ultimately, and less cost, you know, on each transaction to the business, which helps the bottom line. But, well, you had mentioned it, so let's talk about GMP for a minute. Good manufacturing practices. Obviously the FDA has GMP has sort of adopted GMP when it comes to food, dietary supplements, and medical devices and things like that. When we're talking about GMP, is that, is that something that's just contained on the sort of cultivation and processing side, or is there a retail side of GMP?

Yeah, I mean, GMP stands for good manufacturing practices, but it's kind of a misnomer because it involves much more than just manufacturing, right? It's, it's literally about everything that goes into a business. So how you train your employees, how you document things, you know, how you deal with waste, are your systems integrated, that kind of stuff. So it's— it absolutely can be implemented across the supply chain. To grower or retailer. And that's exactly what— I mean, FOCUS standards and certification is designed to do that. We didn't recreate the wheel. We took ISO standards, we took Code of Federal Regulations for, you know, 110, 111, 117, 210, 211. So it's, you know, supplements, pharma, food, and OSHA. And we just put it together as GMP for cannabis. We didn't we didn't want to recreate the wheel. We wanted to use the existing standards and regulations that have already proven themselves and build a system that would allow cannabis businesses to work within the existing regulatory structures and still be able to assure, you know, product quality and safety and consistency.

Right, right. Well, this is a, this is a topic onto itself, right? GMP. Oh yeah, for sure. Is a whole sort of area of operations and establishing processes that we could spend hours and hours talking about. I just want to go back to the idea that Michigan had incorporated the ISO-certified or ISO certification to reduce the testing and licensing fees. Can you speak on whether you think that's a trend that other states will adopt? Because that also strikes me as an efficiency in government, sort of regulatory oversight that maybe the regulators would like to see. I mean, it means they have to do less. Yes.

So I think— so to answer your specific question on Michigan, if we'll see more of that, I I don't know. I mean, obviously from, from a focus perspective, we hope so. But the reason I don't know is just because Michigan is pretty unique in their regulatory attitude towards cannabis. They very much want to help build a successful industry. Whereas many states are regulating this because they have to, not because they want to. And so they don't go above and beyond doing their job to try and figure out ways to improve where Michigan really, really has done a great job of that. I do think we'll see some iteration of that. I don't know if it will be exactly the same in other states, but certainly, you know, the accreditation will allow us to be the third-party auditor on behalf of states and for them to rely on sort of that kind of stuff. So it'll be interesting to see. We've never— FOCUS doesn't do— you know, we're not an advocacy organization, so we don't We don't push any of this. Our position is just, we're here to protect health and safety in cannabis. And so, um, we haven't spent any money or time doing any lobbying or to even let states know this. We just happened to be in discussions with Michigan about something else a couple of years back and they asked and we explained it and they sort of went ahead and did this. We really weren't involved.

Well, for states that are, you know, looking for reliable, trustworthy, you know, and sort of tried and true methods of regulating the industry instead of reinventing the wheel, this would seem to be a, you know, a good, a good place to start. Obviously, you know, something like ISO, this is not even cannabis specific. It has been used across the cannabis industry, uh, you know, with increasing frequency for the last couple of years and same with GMP. But, but obviously these are things that, um, relate to all sorts of industries and have many, many, many years of experience in analogous spaces to the cannabis industry. So it would seem to me that if, you know, the hard work of trying to figure out from the ground up how to regulate your state's program, that seems like a much more difficult approach than deferring to tried and true methods. Well, let's talk here for a minute, Leslie. Let's move on to— we got all the way— we're bouncing around, but we got all the way back to the first idea here of good quality. But let's move to the fourth prong, the downstream costs, the last component of what we call poor quality. And this is basically failures, external failures, or downstream consequences. How do you, without, without giving people too much angst, how do we think about these concepts?

These are the interesting ones to me. So an external failure just means anything that is discovered after it leaves your facility, right? Whether that's discovered by, you know, a vendor that you sell to or a customer or whoever. And these are oftentimes the costs that are not very visible. People don't think about how much time an employee is spending on complaint handling. And this is where we always challenge people to, like, have them make a list of every complaint that they get for a week in a document and just go through it, because it's amazing how much time is spent on this stuff and you don't even know. And it goes along with the returns and the recovery of product. Recalls in and of themselves are— we haven't seen a real one impact cannabis yet like we're going to. Um, but we, there's one going on right now in Nevada. I know there was like 8, 4 strains maybe that were sent to 8 dispensaries. They all found mold in the secondary testing. And so they're trying to do that now. But I mean, a recall in any industry can literally cripple a company if they're not prepared for it. And, and don't handle it well. So there's a lot of costs there. Customer churn, I think, is one that is really important in cannabis because there are so many options and it's such a competitive marketplace that if you're not delighting your customers, they're going to go somewhere else and buy something else. And so, but how many, you know, how, what percentage of customers are you losing and what is your customer acquisition cost? And that's not something that, I have seen a lot of companies in this space actually think through, but it's always going to cost more to get a new client than it is to keep an existing client. And so there's a lot of money being lost there by, by just losing business because of poor service, poor qualities, inconsistencies. I think the other part that is really a big deal in this industry is the high turnover rates of employees. And all these poor quality costs really impact the employees. Like, it's It's frustrating to work in an environment where you're banging your head against the wall doing the same thing, you know, having problems every day. And I think that just really impacts employees' morale and then they leave. And we've just got such high turnover rates in this, which really makes it hard on the business owner. I mean, the employees are the key to the success of a company, right? And so you really got to think through all that and how those costs are. And I don't think that that's something that anybody can considers really.

Well, I know we've seen a lot of businesses that have experienced that, particularly the employee morale and turnover and the inability to build sort of an institution in your business or institutional knowledge in your business, which, which, you know, I think until you experience it yourself, it's hard to, hard to put a number on that.

I think the example was In my— in the company that I ran, the cannabis company, we had a guy that was sort of in charge of all the nutrients and everything that went into the plants in the grow. And he would order them and we had a certain ratio that we mixed things to get them the way we wanted. And that was all things that he designed as part of our company. But then he just decided to leave and he took all of it and all that knowledge went with him. We had all the material, but we didn't have any idea what to do with it. It cost us a fortune. Trying to figure it out, plus the delays, everything else. So, that's a really, like, clear, easy example of how the cost of poor quality could really affect us, because if we had had the system in place to build that information and keep it in, you know, an SOP and an ingredient list and da-da-da, then that would have all been documented, and losing that employee wouldn't have been nearly as damaging to our company.

Absolutely. Well, we've got about, let's see, 10, 15 minutes left. So let's keep on moving through the presentation. You can skip that one.

I think we've kind of covered that. Yeah. Yeah. So this is important because you really— this breaks down the whole thing, right? Efficiency is the driver. Of cost savings and quality, right? So you can make this— everybody's going to make the same, grow the same strain of cannabis. Who can grow it the most consistently that meets the customer's needs at the least cost is going to win because they've really— I mean, that's what efficiency is. You've eliminated all the waste and extra downtime and rework and scrap that from your operation. And now it's a tightly oiled machine that can get that product out. At a fraction of the cost that it used to take, right? And so that's kind of how quality will always— you know, the more you spend on quality, the less you waste on quality.

It's a great way to put it. And that sort of goes to the idea of doing it right the first time. It's all connected. Right. Absolutely. But it ties— it's a good way to tie it together because sort of like what we said at the beginning, You can, or maybe we said this in our warm-up conversation, but you can ignore quality at the beginning at your own peril. It will come back to get you one way or another. So go ahead and ignore it at the beginning, you'll pay for it later.

For sure. And that's where, you know, you kind of like somebody, clients come to us, we prefer to always work with somebody from the get-go, right? We want to talk to their architect, and their builders and make sure that they're building to the standards. And we want to look at the process flow and, and design of their facility and the equipment and materials that they're using to make sure up front that it all meets the standards and will do what it's supposed to do. When we have clients that come to us from an existing place, they struggle a lot more because they're already now working backwards from not investing in quality in the first place. Place. And so you've got to build a business built around systems that are not effective. And so changing things is always harder than doing it right the first time. And it really does create a big difference in cost. Well, yeah.

So let's talk about that. And maybe we may be deviating a bit from your slide, but essentially this goes to the idea of building in a cost of quality program into your business from the beginning. And maybe you could talk about sort of you know, what you can expect in that process. I know you were just starting to, to frame that up, but for a business that's sort of at the beginning stages, you know, how do you, how do you, what are some of the components of building that into, into your entire business model?

So I mean, the first, the first step is always just having an understanding of where you are today. Right? So if it's not a new business and you're existing, we always recommend starting with the gap analysis, which is just a one-day sort of— it's like an audit, except the intent is to compare your operations today with where they are with where you want to be. And so for our clients, that's FOCUS standards. And what they end up with is a comprehensive punch list of everything that they need to do in order to meet the requirements within the standard. That list is different for every client, but it's really a nice tool because you can just take that, and whether or not you want to become certified really doesn't matter. You now have a list of all the improvements that are recommended to make in your business, and you can go about making those. And every time you make one of those, it's really going to help your bottom line. Will you see it today? Maybe not, but it's moving towards that process. So typically, that's the the first step. And then from the next step is almost always documentation. If we don't have, you know, if you didn't document it, it didn't happen is a very typical saying, right? And so if we don't have insight into what you're doing through documentation, it's really hard for us to identify problems.

So absolutely. So do you recommend that there's a dedicated employee, the sort of quality, you know, job description in your company for this? Or is this something that's tackled by, you know, some, you know, a chief executive or something like that? Or is this, or, you know, maybe alternatively just something that you sort of outsource to a company like yours?

It can and is a mix of all those things. Absolutely, you need a quality person in your business, and you probably need more than one depending on the size of your operations and the scope and the number of SKUs and all that. But either way, everybody needs a quality team, and that should involve executive leadership like the CEO or the CFO, because unless it comes from the top and, and the executives care about quality, it's almost impossible to implement it below, right? So they really have to be understanding of this because they are going to spend money to save money. And, you know, they're in charge of the purse strings. So it does— you really do need everybody involved. It's also really, really important for everyone at the employee level to really understand these things because they're the ones doing this day-to-day work. The efficiencies are at their level. And so they can really contribute to helping improve things and identifying problems.

So do you distinguish between, say, let's just call this person the quality manager. Do you distinguish between, or who would you, where in the corporate sort of chart would you put the quality manager? Meaning, would they report to be in the operations side or would they be in the C-suite side?

Both. I mean, more operations. They report to C-suite, but they work hand in hand with C-suite. You know, you have to consider the direction the company's going and where they want to be in the next year to 2 years and 3 and 5 and, and sort of work on it with them. So I think it's both, but the quality director would work with all of— or manager, whatever your title is— would work with all of the managers, you know, like the cultivation manager or the extraction manager, right? Because quality, the retail manager, affects all of that. And that's where it gets a lot, like— and we see quality people in companies that— the companies that do hire someone for quality, it's one person that's completely overwhelmed with their, you know, the workload of 8 people. So if you're really going to do it right. But I think having one person in charge of quality Always, even if it's an employee, you know, internal, that's super important. And then external help. I mean, we obviously— I run a business helping people, but what we always try and do is, is teach them, not do it for them, right? Because in our mind, like, you don't— you can pay me forever to come in and fix things for you, but wouldn't you just like to understand why they're happening and prevent them from happening in the first place so you don't have to pay me? Right.

Yeah, let's nip it in the bud on the first two there rather than letting it grow. Downstream and try to figure it out later, always. So there's this concept in healthcare of QAPI, sort of quality assurance and performance improvement, sort of two sides of the same coin, right? I guess, is that the same thing? Are we talking about the same thing here when you're sort of talking about it, a quality manager. It's also obviously performance improvement. It's not just about documenting or measuring or monitoring, but it's about turning those, you know, the insights that you learn from those activities into better performance.

Yep. Sorry. I guess it wasn't a question.

I got a little distracted.

I'm not sure how to answer you.

Right, right. Okay. Well, I mean, I think that's the lesson here is that again, quality assurance or quality in general as a component of your business is not something that we're making up just for the cannabis industry. This is obviously a lesson that we're taking from other very mature industries. Like, okay.

These concepts came around the 1940s, 1950s. So yeah, and they're, I mean, there's quality gurus that, you know, did this. This was their whole life's work. And it's really turned into a big movement. But Toyota is probably the most famous company that has sort of gotten through this with Edwards Deming going through and improving their quality and efficiency.

And that's why, I mean, I'm glad you brought them up. That's why I mentioned them at the beginning, right? So a Mercedes-Benz versus a Toyota. Some people, when they hear the word quality, think, well, Mercedes-Benz, higher quality. And it's certainly not.

Well, and I think about it like in restaurant terms too. I mean, McDonald's is the same everywhere because they've just mastered this, right? Their efficiency is, everything has an SOP. It can happen everywhere. Their quality is just as important as the quality at Fleming's, right? It's just a different level of food, a different type of food, but the quality is still just as important.

Yeah, and maybe their performance on quality may even be better than the sort of white linen dining that's out there. Just because the product that they sell is not premium doesn't mean that it's not of high high quality. In fact, like you said, their entire business model is based on this concept of quality to ensure that their customers know whenever they see those golden arches, they're going to get the same product and it's going to be reliably good and it's going to taste the same whether they're in, you know, Spokane, Washington or in an airport in Georgia.

Yep, exactly. Exactly. Exactly. And it's a real hard thing in cannabis to do that because, The states, you know, you can't move across state lines. I'm obviously on the hemp side, you can now, but so there's not a lot of, you know, when an operator is an MSO, if they're not following standards and they're just building each business to the regulations in the state, they're going to recreate the wheel every time they start a new operation versus, you know, in restaurants or anything else, you just take your team and go to the new state and redo what you did before. And so then the repeatability of it becomes much simpler.

Right. And well, and that goes to the challenge that this industry in particular faces in developing this quality, because I think what you were speaking about before, a lot of businesses sort of don't appreciate the cost, the bottom line cost of the quality failures. It may be because Historically, prices have been very high and margins have been good and you get to hide behind good margins. But as price pressures bring the, you know, the cost down for customers, that's going to obviously start to affect the bottom line of businesses who aren't in the business of quality and it's going to put a lot of strains on them. I think that's a coming consolidation. In this industry over the next couple of years. Um, the other point I think that's a really salient point to make here, um, is that cannabis businesses as they expand from one state to another face a whole different range of compliance or regulations, frameworks for operating their business. But that does not mean, just like we were talking about at the beginning, just because compliance in Washington state is different from compliance in Maryland, that doesn't mean that you can't run a very similar kind of business because of course, like we were saying, compliance is not the goal.

Quality is the goal. Yeah. And that's where the standards and the certifications come in, right? Because they're not written to a specific state regulation. They're written to be quality management system standards for cannabis and in a management system style. So they cover top to bottom of how to run your business better. All the things that you need to sort of think about. You know, and whether the state requires that or not, you still need to think about those things.

Yeah, and you know, gosh, I feel like we're just getting a lot of momentum behind us, but we have to wrap this up.

I know, it's a big topic. I was worried about that in the beginning.

I want to emphasize a comment that we just got from Ed on the question and answer. Thanks for all your comments, Ed, I appreciate it. But he says quality should include sustainability. And I really, I agree with that. 100%.

It's absolutely ours. Ours has a huge component of sustainability. And it's important to say sustainability in both sense of business sustainability, right? Which is basically what the standards and certification are designed to improve and help. But there's also the sort of sustainability on the energy efficiencies and that kind of thing. Cost to the environment.

Well, we have more questions that we weren't able to get to, and thank you everybody for contributing so much to this conversation. A couple of things, everybody who's here and who's listening to my voice right now will be getting a copy of this presentation. It contains my contact information, Leslie's contact information, You know, even if your questions are just sort of academic or just, you know, interested in hearing what Leslie has to say about the topic that we didn't get to today, just go ahead and send her an email and, you know, follow up with her and keep that conversation going. We're going to be recording— or we did record this whole presentation, so we'll be putting this presentation up on YouTube and sending a link around for people to watch it later. If you think there's somebody in your business or in another business or in your life that could benefit from this conversation, I encourage you to share that thread. Come back to us in April for that conversation about M&A. Oddly, now I'm thinking about how quality plays into M&A, plays into valuation. It's something we've talked about in the past, compliance as valuation, but really it's about quality as valuation. You want to really develop a really strong valuation for your business. And if you're looking for an exit, I can't imagine a better way to do it than to start focusing on quality. So, Leslie, this has been an outstanding conversation. I really appreciate you sharing with us today. Yeah.

And please do, everybody, reach out if you need anything. We're here to help in any way we can. So we're happy to send you information and get you pointed in the right direction at the very least.

Fantastic. Well, uh, thank you all very much. Let me just get to the— oh, here we go— Leslie's contact information, uh, screen on your screen now. And again, uh, thank you all for joining. Uh, keep an eye out at the Cannabis Business Executive for upcoming webinars. Uh, sign up for the next ones and, uh, reach out with your questions. Thank you all very much. Have a wonderful day and have a wonderful weekend.

Thanks so much, guys. Thanks, Jason. Thank you. Bye-bye.