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Engineering the Emerald Triangle’s Regional Cannabis Supply Chain Network

August 22, 2018 by Emerald Media Group Leave a Comment

Author: Joseph Curtis PhD, Chief Scientist at BioQuant Labs

Engineering the Emerald Triangle’s Regional Cannabis Supply Chain Network

The Emerald Triangle’s Cannabis (ETC) ecosystem is facing a series of challenges as farmers, manufacturers, distributors and retail sales channels reorganize themselves into supply chain network (SCNs). These SCNs must be capable of delivering quality products to consumers in key markets within the state and across the globe. In order to thrive in the hypercompetitive legalized cannabis marketplace and create real economic value, executive teams must embrace the principles of supply chain engineering.

Investopedia provides the following definition: A supply chain is the connected network of individuals, organizations, resources, activities and technologies involved in the manufacture and sale of a product or service. A supply chain starts with the delivery of raw material from a supplier to a manufacturer, and ends with the delivery of the finished product or service to the end consumer.

Firms operating SCNs within the Emerald Triangle must recognize that they are under the influence of a variety of factors driven by two sets of factors. First, global trends affect consumer preferences. Firms innovating in local and international markets must be aware of how these factors impact the perception of value. Second, pressures from stakeholders not only influence the market conditions, but also contribute to the regulatory environment in which they operate.  Taken together, both of these groups of factors necessitate the formation of regional supply chain networks. This strategic approach is especially useful for those firms interested in sourcing innovation from suppliers across the U.S. and abroad. The application of lean principles can enable them to align their operations with other regional supply chains delivering their products into the evolving global cannabis marketplace.

Figure 1. The Cannabis Supply Chains Delivers Value to LOHAS Customers & Responds to Human Needs and Global Trends

Cannabis business executives across the Emerald Triangle understand that their customers are also stakeholders in civil society and expect sustainable innovation. These “Cultural Creatives” act both as innovators and trend setters. The recent rise of “Cultural Creatives” as market drivers is unparalleled in U.S. history. The author Paul H. Ray, who first coined the term Cultural Creatives in his book by the same name, explains that “What you’re seeing is a demand for products of equal quality that are also virtuous.” This market segment is identified by the label “Lifestyles of Health and Sustainability” (LOHAS). LOHAS is a demographic defining a particular market segment related to sustainable living, “green” ecological initiatives, and generally composed of a relatively upscale and well-educated population segment. The challenge to executive teams and investors is to build a regional SCN that delivers powerful brands that resonate with the values of the cultural creatives and trend setters within the LOHAS market segment.

 

Designing the Cannabis Supply Chain Network

Cannabis firms across California’s global, dynamic economy, will benefit most from designing a supply chain that is both Lean and agile. Using Lean and agile in combination is known as having a hybrid supply chain strategy.   According to Paul A. Myerson is Professor of Practice in Supply Chain Management at Lehigh University. A hybrid supply chain strategy may be appropriate for companies attempting to personalize their product offerings. By producing smaller batch sizes specific to the unique needs of various customer populations, firms can become the supplier of choice.  

A Lean supply chain focuses on adding value for customers, while identifying and eliminating waste. Being agile and responsive, implies that your supply chain can handle unpredictability, and a constant stream of new, innovative products with speed and flexibility.  Equipped with these insights, executive teams across the ETC ecosystem can collaboratively design supply chain networks that optimize their operations for performance and create value for customers.

Although agile supports the natural design of supply chains configured to manage variability. However, the extent of variability in the demand, lead-time, and operations must determine the amount of agility designed into the supply chain. This is where the new class of cannabis executives will need to act locally and think globally. The architects of these evolving supply chain networks must use quality design principles to align their operations across the cannabis value chain. Supply chain architects can select from six generic models: agile, continuous-flow, custom-configured, efficient, fast, and flexible.

The key to success for any supply chain network is the sharing of information and a reliance on the use of metrics. The use of supply chain, information and analytics is the life blood of executive teams. Not only is this data is used to anticipate trends, and respond to dynamic market changes driven by consumer preferences. It is also used to select and evaluate potential suppliers for their ability to add value in terms of product quality, process velocity, and lower3 TDC. Understanding these metrics is vital for the evolution of a regional supply chain network across the emerald triangle.

 

Supplier Development and Re-Engineering the Cannabis Ecosystem Workforce

Supplier development is about generating a new capability or competency in suppliers. Essential to the success of the emerald triangle as a regional power is the application of design principles to developing an agile workforce. With the transition to a legalized market, leadership teams recognize that their workforce development strategies must add value to the communities that they serve. Suppliers that self-identify as “cultural creatives” embrace the opportunity to act in a socially responsible manner.

Next, consider the concept of “Business Design” as key to strategic workforce development and supply chain optimization. Business Design is a human-centered approach to innovation. It applies the principles and practices of design to help organizations create new value and new forms of competitive advantage. At its core, Business Design is the integration of customer empathy, experience design and business strategy. When combined with good social, labor and governance practices, the Emerald Triangle’s regional SCN can gain and keep a greater share of the LOHAS market segment.

 

The spillover effects from aligning the agile workforce will have economic impacts across the cannabis value chain and enable the Emerald Triangle’s regional SCN to deliver products to consumers at the lowest total delivered cost (TDC).  TDC is a metric that encompasses every aspect of physical value added to a product from raw materials to final delivery to the customer. Globally, businesses are transforming their supply chains from linear and sequential processes into flexible and dynamic interactions in an agile supply network with seamless collaboration between internal and external business partners.  And with the transition to a legal market, county governments across the Emerald Triangle are partners in supporting the evolution of a regional SCN.

 

Using Humboldt County as a case study on fostering entrepreneurship and innovation, a review of the Local Strategic Workforce Development Plan 2013‐2017 reveals that the Humboldt County Workforce Investment Board (HC‐WIB) “envisions the Humboldt County and Redwood Coast region as a dynamic and entrepreneurial rural region that is innovative with its natural and human resources. The HC‐WIB focuses and synchronizes resources that support the industries that offer the greatest opportunity for our residents: Targets of Opportunity.”  In addition, the county’s policy approach to economic and workforce development requires them to “Listen to the needs and opportunities of base industries, as articulated by business owners and executives in those industries, and shape projects and programs to address their priorities.”

 

With the ongoing efforts to re-engineer the cannabis ecosystem, firms operating in the Craft and Heritage Farming Communities (CHFCs) across the state’s unincorporated communities could also benefit from the same scope of investments identified by the HC-WIB for workforce and supplier development targeted at other industries. Without an investment plan with targeted investments thresholds, the infrastructure deficiencies contributing to the regions “island-like economy” may disadvantage the emergence of the Emerald Triangle’s regional SCN and disproportionately impact the economic futures of the Emerald Triangle’s CHFCs.

 

Connecting the Emerald Triangle Cannabis Ecosystem with California’s Evolving Manufacturing Infrastructure

Cannabis innovators faced with the challenge of aligning their cannabis supply chains and delivering their products to customers in the LOHAS market segment would benefit from an understanding of the regional manufacturing capabilities available to them. Supply chain architects utilize a variety of metrics to ensure that their operation is delivering the highest quality products with a total delivered cost that enables them to be competitive in a national and global marketplace. Let’s examine a case study developed using California’s pool of temporary manufacturing licensees as an example of how cannabis innovators and county regulators across the Emerald Triangle could benefit from a regional SCN.

After reviewing the data in figure 2, one immediately recognizes that the ETC (green color) has 64 manufacturing licensees (adult and recreational) in Humboldt County. CHFCs in southern Humboldt’s unincorporated communities have the opportunity to partner with local manufacturers to deliver craft and heritage products configured to meet the requirements for quality, sustainable development, and good social and labor practices deemed essential to satisfying the needs of the LOHAS market segment.  The manufacturing infrastructure map also reveals the considerable investment in manufacturing infrastructure across the state. Retail operations in Southern California and the Bay Area have the advantage of proximity to the states’ highest concentration of LOHAS consumers. Using this map, supply chain executives can partner with firms (distributors, dispensaries, and transportation logistics) to create supply chains with the capability of achieving a TDC that enables them to compete with other supply chains offering similar products.

Figure 3 displays the various tax rates cannabis supply chains across the ETC ecosystem are facing. In terms of a regional SCN, lowering and harmonizing these tax rates for the short-term could potentially accelerate commerce and rapidly facilitate the emergence of the Emerald Triangle regional SCN. For example, when you compare these tax rates to those proposed for counties in southern California, executives can quickly see the trade-offs between the logistics and transportation costs incurred to deliver their products to LOHAS customers in the Bay area and LA versus the tax rates imposed at the County level. These tax rates impact a firm’s supply chain TDC and may make their location less attractive as a potential business partner.

Tax Authorities CDTFA Sales & Use Tax Rates by County & Municipality
County tax rate Humboldt              

7.75%

Mendocino

7.875%

Sonoma                   8.125% Trinity                         7.25% Harmonized

5%

LA

9.5%

City tax rate Arcata

8.50%

Point Arena

8.375%

Santa Rosa

8.625%

— Municipal

5%

Compton

10.25

Combined Tax 16.25 16.25 16.75 7.25 ≤10 19.75

Figure 3 Tax Variation across the ETC Ecosystem

 

Cannabis innovators operating in CHFCs must develop efficient supply chains in order to prosper in a regulated cannabis marketplace. They must also recognize the enormous potential of collaboration and business partnerships via California’s evolving cannabis supply chain. The choice before them is to lead by anticipating and responding to the quality and consumer safety requirements of the global LOHAS market segment (Figure 1). Next, they must leverage the power of data-driven decision making to designing and evolving a regional cannabis supply chain. The governance approach used by individual counties could be amended to support the emergence and sustainment of a regional SCN capable of delivering cannabis excellence to millions of patients and recreational consumers across the world.

Filed Under: Lifestyle, Wellness Tagged With: California, cannabis, education, emerald triangle

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