Around the U.S., in more and more states, entrepreneuring farmers, scientists, and retailers are building supply chains to cash in on an untapped and lucrative market. It’s a once-in-a-lifetime opportunity to build an entirely new industry.
There are just a few problems. It’s cash only, there’s no infrastructure, and it’s federally illegal.
We’re talking, of course, of the legal marijuana trade.
Ron Volpe, Chief Supply Chain Evangelist and Global Vice President Apps Business Development at Tradeshift, met with Steve Albarran, co-founder and CEO of Confident Cannabis at the National Cannabis Industry Association trade show in San Jose to talk about the complicated case of the cannabis supply chain.
Here’s what he had to say.
Ron Volpe: What challenges are unique to the cannabis industry?
Steve Albarran: A lot of the rules are being written in real-time. The foundation for how this industry operates is new. Everything from processes and the default ways of doing business is new. And there's very little infrastructure right now.
And it’s born in an era of technology. So we get to use new technology to build it from the ground up, unlike almost every other tangible product industry. It's really exciting for companies to think strategically about the best way to do things.
It's also a highly diverse industry. Since Interstate marijuana commerce in the US is illegal, every state has its own regulations and structure. That represents both an opportunity and a challenge for companies like Confident Cannabis.
Ron Volpe: What about the banking problem? How do you manage a business that can’t open a bank account?
Steve Albarran: This is one of the toughest problems that the industry faces. Literally every stakeholder in the country wants to transition to banks. But because of legacy laws, it isn’t changing any time soon. So the way businesses are dealing without credit and banks is by using credit unions. Maybe 70 percent of operators in legal states use a credit union within that state.
The problem starts when consumers at retail locations aren't able to use credit cards. This is because the credit card payment processors move money across state lines, which isn’t allowed for something federally illegal. Sometimes they're able to use debit cards. But most of the time they're obliged to pay for their products with cash. And that means that cash is accumulating at a retail store.
This creates all sorts of difficulties for the retailer. It makes it more challenging to pay employees and vendors, it means armored cars are doing pickups at least once a week, and it makes it more challenging to get cash out of the store into a secure account.
There’s also a lot of penalties to holding cash. Credit unions and banks don't like huge cash deposits because it creates a huge compliance burden for them. Similarly, the IRS charges a 10 percent penalty if you pay taxes in cash.
So nobody wants cash. But there's really no other way to get paid at the moment.
Ron Volpe: Tell us about the network of labs and how you manage quality control of marijuana?
Steve Albarran: Every batch of cannabis, whether it's flower, concentrated, or edible, is highly variable from one batch to the other and highly variable from one vendor to the other. We need to know the potency in the purity of every batch. Labs have to test for compliance, and that creates a lot of data. So we needed to have a data pipeline from these labs.
All of the vendors in the supply chain have Confident Cannabis accounts to test their inventory before they sell it. hat allows us to show the buyers in the market 100 percent of the inventory in any state in real-time, with all the live data they would need to assess the quality and therefore the price.
Ron Volpe: What will the industry look like in three years?
Steve Albarran: When the current United States administration changes, we’ll see a lot of change. It's unlikely that we'll see federal legalization in the current administration. But once federal legalization happens in the US, it'll be a game-changer. That's when all of the big companies will be able to come into the industry. So the game will instantly level up. It will be harder, stronger, tougher competition for the incumbents. But there will also be more opportunities for the incumbents because they’ll have a much larger market. Everybody in the industry today is moving the chess pieces around so that when it is legalized federally, they’ll be well-positioned.
Ron Volpe: How does supply chain technology differ in the cannabis industry?
Steve Albarran: We really pay attention to flexibility as a feature. This industry changes very quickly. What you think might be something that works for California today might not work six months from now. And what works for California today doesn't work for Oregon. So everything from database architecture, to product roadmap, to user interface must be flexible.
Secondly, our industry is populated by SMEs. The way these companies make purchasing decisions is very different from other businesses. There's no real procurement process. So the user interface has to look and feel a lot more like a consumer app, the advertising has to look and feel a lot more like consumer advertising. A lot of the large stuffy enterprise businesses have had a hard time coming into this industry because the great people in this industry really don't want that kind of stodgy language.
Steve Albarran is the co-founder and CEO of Confident Cannabis. This has been another Supply Change episode. Join us next time when we talk with Barry Katz, author, professor, and the first IDEO fellow.
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