How to Design the Perfect Distillery... Sort of.
Distillery Design using first principles thinking.
The title of this article might be a bit misleading. It WAS the title of the article I set out to write. As you will see I went a bit off topic.. I must have written this article, or a version of it, 10 times by now. What started out as a ‘simple’ look at the importance of distillery plant design, has evolved into a deep dive into the very foundations of what a distillery is and how it ought to function.
To explain a little about how my mind works and why this particular topic is such a challenge to address, I have to first explain a little about first principles thinking. Many of you will have heard or read about first principles thinking, it has become quite the buzz words within certain business circles.
Ultimately it means to break a problem down to the core foundational truths, these are the truths which your outcome/goal relies upon at the most basic level. This practice is designed to eliminate all the noise and whittle it down to the most basic terms. Then having assessed and identified the basic structure of the problem you can rebuild the solution in a way that addresses the primary problem without creating other unintended problems or inefficiencies.
You can now begin to understand why dealing with the problem of distillery plant design using this method might lead you down a winding path. After all, where do you start.
So I thought the best way to approach this topic is to start with a problem or rather start with the main set of problems which most distilleries face and then map out the problem solving method using first principles. As is often the case with trying to break down complex topics, you quickly realise that it's like traversing a labyrinth, sometimes you have to get off topic a few times in order to get closer to the goal.
The Problem(s)
So let's start with the problem. Or problems a distillery faces. The main issue most distilleries face is the issue of cost efficiency. How much can I produce relative to the cost of production? Using first principles thinking lets strip this problem right back by answering another question:
What is a distillery?... Believe it or not it is the answer to this question which trips up a lot of business owners and brands. A distillery is a production plant designed to produce a distilled product, in our case whiskey. Or more accurately new make spirit that will go on to become whiskey. This is an important distinction. This may seem obvious but it is often forgotten that a distillery is a manufacturing facility. Its true that distilleries hold a lot more romance than say a factory making car parts but the principles of manufacturing still apply.
Many problems facing some producers is that distilleries were designed and built more as tourist attractions than production facilities. Many of the issues facing these types of plants such as scale, functionality, energy efficiency, MAINTENANCE all stem from the failure to properly define what a distillery is. When we get right in our heads that distilleries are first and foremost manufacturing facilities, then it's only natural that the next logical question you might want to ask is:
What are we manufacturing? Well that's an easy one… whiskey! Well, not exactly. We plan on making whiskey in 3,4,5,6 years. Right now we are making a new make spirit. This is a vital distinction. One which has sunk many businesses. Unfortunately we do not churn out great tasting aged whiskey straight from the stills. We instead produce a spirit which will go on to hopefully make great whiskey, there is a lot of hope in that statement.
The reason producers should distinguish between making whiskey and making new make is that a manufacturing plant can only optimise its production when it has a clear idea of what it is making. We can only know what we're making when we know what we want to sell. Or more accurately what we need to sell. Make no mistake, the question, What are we manufacturing? Is interchangeable with What do we want to sell? You would not expect a car manufacturer to simply begin making random car parts and then sending them to be assembled into the rough makings of a car. No, instead the plant is optimised to produce parts that match very carefully thought out design. This design has been informed by careful market consideration. It is only then that the manufacturing process can be streamlined, processes refined and waste eliminated. But far too often we make whiskey with no such plan. We produce far too little or far too much, we split production in inefficient ways, we fill casks without a proper thought out plan as to what to do with them in the future. The result is we have to scramble to invent products based on what is in the warehouse rather than designing the products first, and streamlining production around these products.
So let's take a little closer look at products. Long before a distillery should be planned, designed and built, a product line should be developed. Many producers choose to source liquid and launch products first as a way to build market awareness and bankroll the building of a distillery. Not a bad idea. This gives you the opportunity to assess the market, test the ground and maneuver quickly into gaps in the market. The problem is that many launch sourced products at the same time as they begin building distilleries, a costly and risky strategy. Focus should be placed on establishing the brand, narrowing in on the target market and growing the base before the distillery is planned. Building a brand takes time, it's expensive and requires a long term strategic plan. A brand must be established before a distillery can be planned around it in a way that is efficient and practical. More on this later. When assessing what products to sell the next question is of vital importance:
What is our MVP? Any business, selling or making anything needs to know what their Minimal Viable Product is. For a distillery this can be complex but right out the gate the first one will be new make. A distillery that sells new make spirit as soon as it's made will be very successful indeed. If we look at the business model of contract distillers such as GND (Great Northern Distillery), this is the aim.
If they can get liquid out the door as young as possible then that is what they aim to do. I don't know this for a fact but I would guess that GND has an upper limit of say 5 years for excess stock. Meaning that production output is controlled to not produce much more than what can be comfortable sold before the age of 5. Some aged stock may be of a benefit but this should be carefully managed. If the MVP for a contract distiller is new make spirit and 60% (example) of sales is going towards that, with the rest of sales split between 1,2,3,4 and 5 year old liquid, then anything maturing over that ceiling is ultimately losing value not gaining it.
There is a fallacy in whiskey circles, aging stock = money in the bank. I call this the Time-lock fallacy. The time-lock fallacy is the misguided belief that filling lots of casks now “locks in” future profit simply because time passes. It treats maturation as a value guarantee rather than a risky, capital-intensive bet that only pays if demand, margin and cash flow actually materialise. Many producers do not treat aging whiskey as a liability because they do not see the invisible opportunity costs associated with maturing excess stock beyond the MVP.
So now that we have assessed the question of what we want to sell we can now begin to actually design the distillery. Right? Well not exactly. As is often the case with first principles thinking, the more you simplify the problem the more questions it throws up that also need answering. For instance what started as a question about how to design a distillery has now forced us to answer some very hard questions which may nor may not lead us to asking the most vital question of all:
Should I even build a distillery at all? This is in essence the very end of the first principles thought chain. If I have a problem that needs solving, it can often be the case using this method that once you've broken the problem down to its bare bones, you actually might decide that the easiest and best way to solve the problem is to actually remove the problem altogether. Often we find in complex systems that the system is maintained not out of necessity but rather out of a need to justify various attempts to fix a problem that shouldn't have existed in the first place. The question of whether to build a distillery at all is really an interesting one.
While there is no right or wrong answer, the current climate would definitely suggest that many fledgling businesses probably did fail to understand some fundamental truths on what it takes to be a success in this space. Treating distilleries as part of the brand rather than as manufacturing facilities may have been the first issue. Focusing less on the fundamental truths of economy of scale, MVP, brand and market placement and more on vanity projects designed to impress from the outside but with little substance to support itself over time.
For many brands currently sourcing liquid, the idea of building a distillery or perhaps expanding an existing facility I feel will make less and less sense. With good quality whiskey for sale on the open market by contract producers it makes little financial sense to build a distillery unless that distillery can match the €/LA of the contract distillers. In most cases smaller distilleries will always produce at a loss compared to larger ones. With premiumisation linked to provenance on the wane, consumers are returning to price and quality as the main driver, making producing yourself less attractive.
So to conclude. As you can see from the above, this question has ballooned out into a number of other questions. Any one of these questions could be the subject of articles all on their own. However in the interests of keeping the subject matter of Oak & Alchemy a little lighter in future I will leave this subject matter for another time.
While a lot of negative commentary exists in the spirits industry as of late, It is important to note that it is through trials and tribulations that we can build a stronger and more robust industry. My attempts to tackle some of these questions is first and foremost a mental exercise in risk and future planning. I feel that we will learn or relearn a lot of lessons about how this industry works in the coming months and years and that is no bad thing. Unfortunately for some, these lessons may come at the ultimate cost. With the application of a bit of first principles thinking we can perhaps avoid going down paths destined for disaster.