OPERATIONAL RISK IN THE CANNABIS SECTOR

By Sean Samuel, VP Sales and Marketing at C15 Solutions

The cannabis sector has various elements of pharma, agriculture and consumer packaged goods, especially food & beverage. However, there’s a common denominator to these sectors - they’re all regulated. With any manufactured goods, there’s operational risk (this can be production risk, marketing risk, regulatory risk, etc.) that must be managed. We will exclude financial, legal and other external risks from this analysis to focus strictly on operational risk. The pace at which the cannabis sector is growing effectively represents the growing operational risk most cannabis operators face today.

The Cost of Quality (CoQ), which is especially high in cannabis, is arguably the biggest economic drag on the sector and is typically an insufficient product for managing risk. CoQ can be defined as the sum of Poor Costs of Quality + Good Costs of Quality. Examples of good costs are things like training, validation, calibration of equipment, internal audits, etc. Think of it as the ‘prep’ to avoid mistakes. Examples of poor costs are things like customer complaints, labelling errors, recalls, product destruction, failing Certificate of Analysis (‘COA’), investigations (into quality events like deviations or non-conformances), supplier-related issues, etc.

The CoQ is often overlooked by producers, primarily because it’s not a pure accounting measurement like Cost of Goods Sold (COGS). Rather, the CoQ is often embedded throughout many operational costs and expenses and can even represent the opportunity cost of lost sales due to quality issues. In fact, the CoQ in cannabis typically amounts to 25-35% of top-line revenues. This is approximately 10-15% higher than other established, regulated sectors like the auto, medical device and even pharma sectors (according to The American Society for Quality). Certainly, the maturity of each sector is a factor, but we’re also going to look at three important operational levers cannabis operators can pull to minimize their operational risk and reduce their CoQ: people, process and technology.

Put simply, the best cannabis companies are the ones that enable a genuine culture of quality. To do that, meaningful investment and rigour must be applied to all three levers: people, process and technology.

People → When it comes to building your Quality Assurance and Regulatory/Compliance teams look for professionals with experience in other regulated manufactured goods sectors. More specifically, look at heavily-regulated sectors, like pharma. Make no mistake, cannabis is one of the most regulated products today from both a production AND marketing perspective. Having professionals on your team that are used to this level of regulatory scrutiny and pressure is a massive, intangible asset. There’s also an inherent conflict of interest between production and quality assurance in that the former’s objective is to release as many batches as quickly as possible whereas the latter must ensure every batch isn’t just safe but upholds the company’s internal quality standards. Lack of coordination and ‘silo’ behaviour between these departments or even worse – prioritizing production at the expense of quality – will lead to increased operational risk and CoQ.

Process → Having specific, clear, and well-written Standard Operating Procedures (SOPs) is crucial in the cannabis sector. Not just because every cannabis operation relies on them or because regulators require them, rather, they’re integral because employee turnover is incredibly high in the cannabis sector!

There are many reasons for turnover in the sector, but rather than speculate as to why that is, we recommend having bullet-proof processes specifically to address this operational problem. With effective SOPs AND training programs, new staff can get up to speed quickly and facilitate production with minimal deviations and interruptions.

Technology → Technology is the great enabler. It’s what enables the people and reinforces the process. In cannabis today, the typical tech stack consists of Customer Relationship Management (CRM + Inventory Tracking System (Seed to Sale or Manufacturing Execution System), Enterprise Resource Planning (ERP or accounting) + Quality Management Solution (QMS).

Seed to Sale and ERP platforms fall under the production system category while QMS would fall under a quality system and represents the other half of an end-to-end compliance IT solution. eQMS platforms are, unsurprisingly, widely adopted in other regulated manufactured goods sectors like pharma, CPG, etc. While production systems directly address the inventory and costs associated, eQMS is very much a ‘process’ driven tool that is used to:

» Store and manage SOPs (edits/reviews/ approvals)

» Build and administer training programs/ curricula

» Execute production-related investigations (e.g. complaints, deviations, supplier issues, corrective actions, out-of-specifications, etc.)

» Calibrate equipment

» Schedule facility maintenance/sanitation

» Analyze COAs

» Release batches

Without technology to teach and reinforce the process, the burden of compliance and record-keeping falls on people; not only does manual record-keeping introduce obvious inefficiencies into the operation, but it also needlessly introduces increased compliance risk into the operation. Placing this burden on your staff will not only make them less effective at their day job, but it will also increase their anxiety levels too, most likely resulting in more turnover – a vicious circle! Stakeholders cannot rely on insurance, as all known and unknown risks aren’t fully insurable, or the exclusions are broad, to cover the costs of unmitigated and unmanaged risks.

In sum, the Cost of Quality is a massive economic drag on the cannabis sector, and the best, most-profitable companies have established a genuine culture of quality. The only way to truly build such a culture is to invest wisely in your people, processes and technology. Over-reliance on either one or two out of three will either leave your operation open to unnecessary risk, leave profit on the table, or both.

Sean Samuel is the VP Sales and Marketing at C15 Solutions

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