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Production as a Service vs Buying Equipment

Production as a Service vs Buying Equipment

Production as a Service (PaaS) provides an opportunity for companies to innovate production without large amounts of capital, allowing the company’s capital to instead be directed where the ROI has the most dramatic impact. In the cannabis industry, that can include an array of investments from product development, additional licenses, and store fronts.

Alan Ellman
September 27, 2021

Production as a Service (or PaaS) business structures have been growing in popularity over the past decade and were accelerated even further by the COVID-19 pandemic. PaaS strategies provide businesses, especially those in cannabis manufacturing who need pre-roll manufacturing and pre-roll filling, to have access to industry 4.0 automation and data exchange technologies that revolutionize productivity without major investment.

There is a variety of “as a service” business models like PaaS, including Machines as a Service (MaaS), Software as a Service (SaaS), and many others that allow small to medium sized businesses to make use of machinery, software, production processes, and more without needing to first make huge investments in these products.

Production as a Service along with its counterparts, therefore, help to encourage a circular economy that eliminates waste and wasteful spending by businesses while providing those same businesses with access to the latest technological advancements through a “pay for use” model.

What is Production as a Service (PaaS)?

Production as a Service (PaaS) is a business relationship whereby equipment is provided without any investment by customers. Customers pay the equipment manufacturers on a per-use basis, essentially leasing equipment rather than purchasing it outright so that they are only paying for when they actually use the equipment rather than investing in equipment that spends a lot of time not in use.

Why is PaaS better than equipment purchasing?

Production as a Service (PaaS) provides an opportunity for companies to innovate production without large amounts of capital, allowing the company’s capital to instead be directed where the ROI has the most dramatic impact. In the cannabis industry, that can include an array of investments from product development, additional licenses, and store fronts.

Businesses that utilize the PaaS model also reap the benefits of having access to the latest technological innovations that increase production capacities, as well as the use of Industrial Internet of Things (IIoT) software that monitors equipment and allows equipment providers to track performance and issues that may interfere with production. This reduces the risk faced by businesses in instances of machine failure, while allowing PaaS vendors like Accelerant to collect data for maximized performance and to avoid costly breakdowns that interfere with production and a customer’s ROI.

Examples of PaaS In Other Industries

A giant of a completely different industry, Rolls Royce, is one of the early pioneers of the PaaS strategy along with the incorporation of IIOT technology into the service. In the 60s, Rolls Royce started their “pay-by-the-hour” system for the Siddeley 125 Business Jet where instead of customers purchasing the valuable, high performance engines outright, they instead entered into a fixed cost per flying hour agreement that included engine and accessory replacement services.

This way, Rolls Royce’s customers were able to have access to these valuable motors along with repair and replacement services instead of using a large investment to purchase the engines outright, allowing them to avoid the risks of malfunctions and loss of innovation while receiving regular product improvements.

Today they have extended this practice across their range of aircraft and marine engines, utilizing IIoT software that monitors their engines and sends data back to Rolls Royce so they can anticipate repairs and upgrades based on the customer’s needs. This is the exact same approach used by Accelerant Manufacturing to ensure that all cannabis and hemp operators have access to the latest cannabis manufacturing equipment without the risks of a large investment.

PaaS shifts CAPEX to Cost of Goods Sold

With Production as a Service partnerships, such as Accelerant’s PRO commercial pre-roll machine, a company can shift what would have been CAPEX (Capital Expenditure) upon purchase of equipment to its COGS (Cost of Goods Sold), boosting operational investment and allowing small to medium sized businesses to grow faster. For reference see link below:

The Big List of Things You May Not Deduct Under the 280E (greengrowthcpas.com)

Regarding the 280E tax rules for Cannabis where operation expenses are not deductible from potentially extremely high taxes means that this approach provides a sound tax strategy for the use of PaaS contracts that produce units. This therefore groups these costs within COGS and allows for greater operation expense deductions.

Modular PaaS Benefits Are Greater Than Traditional Equipment Purchases

Utilizing equipment in a Production as a Service model provides many more benefits to a cannabis company than locking up capital through equipment purchases. Even though it is common for people to talk about the salvage value of equipment after the purchase has been completed, over time the equipment is guaranteed to need to be replaced by more innovative equipment that can increase productivity. This traditional approach involving investing in equipment only leads to devaluation and a loss of investment.

At Accelerant Manufacturing, the pre-roll manufacturing equipment is modular, allowing for regular updates of equipment based on a customer’s growth which we monitor through our IIoT software. This allows cannabis manufacturers to avoid losing capital when updating their pre-roll production equipment.

Financial Analysis: PaaS vs Buy

To understand the benefits of PaaS from a financial perspective, we need to treat the purchase price as an investment. In comparing Accelerant’s PaaS model vs the traditional purchase model, we can look at the NPV (Net Present Value) and the IRR (Internal Rate of Return) of a purchase to clearly illustrate the lack of ROI from purchasing pre roll cone filling equipment.

Key assumptions:    

  • The Accelerant PRO machine along with the modular approach can be expanded within the same footprint to generate the suitable units per hour as acquired by a business without the purchase of brand new machinery at each stage of growth.
  • This process involves a step-down in rate from 15 (for 7 years) to 8 (for 5 years) based on production, finishing at 1 million units.
  • The residual value of a purchased machine is set at 50% of its undepreciated value with a minimum value of just over $50,000.
  • All servicing of PaaS machines, including parts and labor, are covered by a PaaS fee with the exception of issues arising from failure by the customer to properly clean, operate, or maintain the machine. This allows customers to accurately predict their production expenses related to the PaaS fee.
  • Any transportation of PaaS machines must be done with the direction and supervision of Accelerant. Additionally, the cost of such moves will be the responsibility of the customer.

This analysis illustrates that a company is better off not buying equipment, instead paying on a per-unit basis. An additional consideration that is not included in the above empirical analysis is the way in which a business suffers due to loss of innovation caused by using equipment that is nearing the end of its lifecycle. Instead of allowing equipment with a loss of innovation to cost businesses money, this equipment would instead be updated by companies that use PaaS models in order to increase output while reducing customer risk.

Obsolescence Management

Usually, companies need to plan for when their equipment becomes obsolete. For example, replacement parts and support may become difficult to find or non-existent over time, which is then compounded by technological progress and innovation that can make equipment obsolete before the end of its lifecycle.

Many of these concerns go away with PaaS partnerships where equipment manufacturers are paid based on output. All parties benefit from innovation cycles being applied in modules and machine components in order to continuously increase output.

Alan Ellman

Alan Ellman is serial technology entrepreneur with over 20 years of experience helping launch diverse startups and a mix of skills in entrepreneurship, venture capital, business strategy, partnership development, and technology.

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