In-House vs. Outsourced Manufacturing: Maximizing Efficiency in Vertically Integrated Cannabis Businesses

Every vertically integrated cannabis business, regardless of whether they’re a big MSO or a new microbusiness, will have to make a big decision: which products to manufacture in-house and which to outsource. To make the right call, it’s essential to be as realistic as possible about the available passion, skills, expertise and financial ability—understanding that internal skills and resources might change over time.

Most vertically integrated cannabis businesses will, as the name suggests, include cultivation and retail operations. Depending on the regulatory environment, product manufacturing (vape carts, edibles, concentrates, etc.) is where there is some flexibility on the degree to which production is handled by trusted third-party partners. 

If you’re trying to decide what manufacturing to vertically integrate and what to outsource, however, it depends a great deal on what type of products you are bringing to market and the resources available. Let's delve into each product category and explore the rationales behind in-house production versus outsourcing.

In-House Vs. Outsourced Manufacturing for Cannabis Flower Products

Flower remains the largest cannabis retail category, taking up around 40% of total U.S. market share in 2022, according to industry analyst Headset. It’s a smart move for vertically integrated cannabis businesses to include a variety of flower products in their offerings. But it’s equally true that growing good flower isn’t just a walk in the park. Commercial cannabis cultivation requires a deep understanding of horticulture techniques, inputs and genetics. Producing flower in-house also allows a vertically integrated business complete control over strain selection, quality, and consistency. 

Beyond dried and cured flower destined for retail sale is biomass used to manufacture other products like concentrates, carts, edibles and topicals. Whether 100% of that biomass is cultivated in-house or sourced externally depends on what products you intend to produce, market demand for those products, and the price and quality of biomass available on the wholesale market. Of course, your grow room design plans and available square footage for flower processing and product manufacturing is also a factor.

Increasing cultivation capacity can be a major expense for any business, especially when it comes to efficient cannabis facility design choices and equipment selections. Many businesses turn to the wholesale market to meet short-term needs or form partnerships with third-party growers to supplement their in-house cultivation efforts.

Is It Worth Manufacturing Cannabis Pre-Rolls In-House?

In addition to cultivation efficiency, there’s also the question of how that flower will ultimately be packaged and sold. In 2022, pre-rolls accounted for 12.3% of U.S. market share, although they’ve since seen a dramatic rise in consumer adoption of as much as 22% year over year. 

The cost to set up a pre-roll manufacturing line can be relatively inexpensive—indeed, many vertically integrated businesses consider pre-rolls easy, low-hanging fruit because the category startup costs are relatively low. It only takes an investment of a few thousand dollars in grinding equipment, knock-boxes to pack material into pre-roll cones, and labor to complete the process.  

Pre-rolls are a great way for vertically integrated businesses to add additional SKUs to their retail or wholesale menus by repurposing smaller flower buds, which typically command a lower price in the wholesale and retail markets.

That said, crafting pre-rolls involves meticulous blending, rolling, and packaging techniques. If you have a knack for creating unique blends and infused joints, and an eye for detail, manufacturing pre-rolls in-house allows you to showcase your creativity and cater to consumer preferences—a solid path toward greater brand awareness and customer loyalty.

In-House Vs. Outsourced Manufacturing for Cannabis Extracts

After flower, cannabis extracts claim the industry's second-biggest market share. Vape carts account for 22.4% of the category, while edibles take 11.7% and concentrates 8.6%, for a total of nearly 43% market share. As with flower and pre-rolls, the first question growers should ask is, how much biomass is available for extraction? The second question is, how much product is the available extraction equipment capable of processing and over what period of uptime—a KPI known as throughput. The greater the throughput, the more expensive the cannabis manufacturing equipment will generally be.

Manufacturing Cannabis Vape Carts 

Manufacturing vape cartridges requires expertise in extraction methods, formulation, and filling processes. If you have a background in chemistry or experience with extraction techniques, producing cartridges in-house can provide greater control over product quality and customization. 

Alternatively, outsourcing cartridge production to specialized labs can be more cost-effective, especially for newer businesses that intend to test this sub-sector of the market, or if you lack the budget, space or expertise for in-house production.

Manufacturing Cannabis Concentrates

For a vertically integrated business, there’s a stunning number of concentrate formats to consider: shatter, crumble, sauce, diamonds, badder, sugar, cold-pressed rosin, BHO wax, distillates, live resin, budder, RSO, dry sift, bubble or any of the other niche product categories to have a moment over the last decade. 

Indeed, changing consumer preferences and a thirst for novelty mean the concentrates space can move fast, including advances in extraction equipment and manufacturing processes. Naturally, whatever cannabis concentrate formats a business pursues will depend on what equipment it has in the lab, and what equipment selections feel worth the investment.

If you have experience with extraction techniques and a passion for creating potent and flavorful concentrates, manufacturing concentrates in-house can be a strategic move. However, outsourcing concentrate production to experienced labs may be more practical if you're facing constraints in terms of equipment costs, expertise, or scalability—or if you simply want to focus on the cultivation practice.

Manufacturing Cannabis Edibles

Crafting edibles requires precision in dosing, formulation, and packaging. If you have culinary expertise and the ability to develop recipes for delicious and innovative cannabis-infused products, manufacturing edibles in-house can be a rewarding venture. On the other hand, outsourcing to reputable food & beverage manufacturers can streamline production processes and ensure compliance with food safety regulations—an added layer of oversight in addition to the usual cannabis compliance rules.

Manufacturing Topicals, Tinctures and Accessories

The remaining percentage of cannabis market share goes to miscellaneous categories such as topicals, tinctures and accessories. Assess your team’s skills and passions to determine which products align with your collective expertise. For example, if you have a background in alternative medicine or natural products and wellness, manufacturing tinctures in-house may be a natural fit. For products outside your expertise, outsourcing can be a practical solution to ensure product quality and compliance.

By controlling every step of the production process, vertically integrated single-source cannabis companies can maintain consistency, quality, and transparency in their products, as well as a competitive edge in the market. A certain amount of respect should be given to a company that can be more than just one of these skill sets under the same roof.  

Ultimately, the key to any successful cannabis manufacturing process is to leverage your team’s available passion, skills, and expertise to drive in-house production while strategically outsourcing tasks that may be better handled by specialized vendors. Remember, though, the cannabis world is a small community. The quality of your work and the way you treat your partners will certainly impact your return partnerships and customers.