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September 23, 2021

Understanding Cannabis Business Supply Chains

Tips to help manage your Supply Chain

Managing a supply chain can mean different things to different people. Here we will be speaking in general terms about best practices for business owners in the cannabis industry. First and foremost, you need to understand your cost of goods sold (COGS). Equally important, is the understanding of where you have risks. Specifically in regards to sourcing your inputs. Finally, you need to also have a solid grasp on your outputs meaning where (and how) your products make their way to your customers.

Cost of Goods Sold (COGS)

Diving into COGS, business owners should view their business under the lens of something we in the supply chain industry call TCO – Total Cost of Ownership. TCO means knowing the cost for the flower you source to make edibles, concentrates, or whatever you are manufacturing; while also understanding all the expenses to do said manufacturing such as, labor, utilities, and consumables.

Let me give you one quick example, making gummies. Business owners might get a little sticker shock when they start pricing out gummy depositors. So instead of purchasing a $14K machine to automate the process, they use a labor-intensive method to pour the gummy mixture into molds. The shortsighted view is that they are spared a $14K investment. But in reality, they may end up spending that $14K in labor over the next 6 months; simply because they need a team of 4-6 resources to produce the needed production amount. The above analysis doesn’t just include the cost of the labor. But also accounts for utilities to keep the lights on and AC (or heat) running. You get the point. With automation, they may only need two resources for half the time to make the same number of gummies.

So the thought provoking question here is, “Do you plan to be in business in 6 months?

If so, it makes a lot of sense to consider the capital investment of some automation. That is an oversimplified example, but it illustrates the concept of TCO. We could dive into all the different components, but that would be an article in itself.

Risk Mitigation in the Supply Chain

Now let’s deal with the second equally important concept of risk mitigation; specifically sourcing risk. I am sure you all remember Covid-19. How many suppliers (and businesses for that matter) did we see disappear? I personally observed this first hand. The bottom line here is that you need to know your suppliers and their capabilities. Especially if they provide something critical to your operation. Always have a plan B is the lesson. Know where you are going to get that item from if supplier A should go away.

It’s a good practice to source from multiple suppliers so that you have a decent relationship with each. So that when a pandemic hits (or insert your favorite cause for supplier failure); you already have a secondary source. It’s understood that you may not have the flexibility to spread your spend around. Especially if you’re trying to leverage 100% of your spend to get a reasonable cost for the item. But if you can do it, it’s a good strategy to employ.

Another good strategy is to check references on your critical suppliers; no more needs to be said about that. In my personal experience, when Covid hit, we were put on “allocation” with some of our suppliers. Meaning we could not buy all that we wanted, so we had to use multiple sources to support our business needs. Sourcing contracts are a valid concept here, but again, that’s a whole chapter unto itself.

Just In Time Warnings

One other important consideration in regards to sourcing is JIT – just in time delivery. By now you have heard the horror stories of the shipping ports being clogged. Pre-Covid, many manufacturers got super comfortable with ordering components just before they were needed. Those days are gone. We have product sitting in the port waiting to be unloaded, with no ETA as to when it will happen. Point here is, again, have a plan B. While I am not suggesting that you carry excessive inventory, know that JIT practices can be risky these days. No doubt it was all the rage for years pre-Covid, but now this cost-saving technique can cost you dearly.


Lastly, we will touch on outputs. The idea here is that when you are manufacturing product, know where it is going before it is made. Sounds simple enough, but just ask any CBD Isolate manufacturer how it worked out for them when the price of isolate crashed. It was a brutal market and if you did not have strong relationships with your clients (or contracts), you probably lost some business due to the cutthroat nature of that supply chain. You might say, “I can’t get my clients to agree to purchasing contracts, especially now!” and what I say to that is, it’s all about relationships in this industry. Contracts can be made to allow for pricing adjustments when the market makes dramatic moves.

The trick here is to identify mutually agreeable triggers for changing the price in the contract. If you offer price escalators or de-escalators to give your customer confidence, they will not pay too much. And for you, the manufacturer, your client will not pay too little. But at the end of the day, if the buyer is forced to pay too much for their products, they will eventually go out of business. Specifically for the reason that their COGS will be out of balance and you will not have a customer for very long. Vice versa, if your customer ends up paying below market pricing for their products (due to a firm contract). You, the supplier, will not be able to stay in business either because your profitability will suffer…which isn’t sustainable.