Creating Trust in Cannabis

Forward looking vision into the operation and management of cannabis brands across a global supply chain

CannaProve Inc.
May 31 · 12 min read

Abstract

The cannabis market is posed to grow dramatically and dynamically. It is quite likely that during this time one or more supply chains will encounter a massive problem that will compromise their ability to deliver in the market. Our knowledge of the marketplace shows that a trusted system of provenance/chain of custody data will not only be a good thing to have but table stakes for operators.

Leveraging this same data, supply chains can increase their revenues and profits using the platform based on authentic information by combining blockchain technology with intelligence and predictive analytics. Companies can create economic efficiencies of their cost of goods sold through automated compliance processes but reaching brand loyalty through consistency, visibility and trust creates tremendous financial upside for cannabis businesses.

Introduction

The cannabis market is a complex, deeply textured market with issues for:

Licensed Producers/Cultivators around scaling production, DNA/Genome tracking and regulatory compliance, compounded by limited branding and a lack of higher price variation for the range of quality products;

Extractors around tracking LP’s DNA/Genome in a cost effective and efficient manner

Pharma/Food/Beverage/Cosmetics meeting the myriad of regulator hurdles for a plant based product with little empirical data about effectivity and consumer outcomes;

Retailers with little data about product quality, product differentiation and confirmation of the product’s provenance and;

Regulators without clear visibility into product’s provenance without lengthy paper reports and only for one facility at a time.

Underlying the entire regulated industry are the black and grey markets with long histories of cultivation and sales that are not hampered with the regulator requirements. With a volume of unregulated supply (and demand), regulators and law enforcement struggle to approach 100% legitimacy in the market, while LPs battle cheaper illegitimate products that are often superior quality due to their ability to ignore health concerns and to spray plants with pesticides.

In this complex arena, what is needed is a multi-stage trusted network that has the capabilities to track all the steps in the supply chain in an immutable manner while also identifying gaps and possible omissions in the data — data used by all parties in the supply chain including regulators. Furthermore, to validate the data as true or authentic, it would be preferable to take data from IoT/sensor sources rather than manually entered data for data accuracy, depth and volume reasons.

By gaining this chain of custody data for each cultivator, it would be possible to leverage this for both Cultivator and Pharma company benefits through better brand management. It would take the end-point, customer sales data plus additional data gleaned from point-of-sale (PoS) systems, as well as social media to build a holistic view of the user and the brand metrics.

Full-visibility into the cannabis supply chain

By layering in ML for predictive analytics, other interesting opportunities arise:

● More accurate forecasting;

● Product pricing intelligence;

● Marketing metrics vs historic norms;

● Revenue optimization — based on customer sales predictions and DNA/Genome/Seed baskets.

Cannabis Industry Insights

Up until recently, the cannabis market was a black market. Significantly in the last three years, a number of governments have chosen to legalize some aspects of the market such as Canada’s decision to legalize recreational and medical marijuana with edibles, cosmetics and beverages on the near term horizon. Others, like Jamaica, have reduced the penalties on possession to minimal levels with the expectation it could be legalized at some future point.

Globally, cannabis is only legal for consumption in Canada, Uruguay and some states in the USA. However, with the legalization in Canada, it is expected that many other countries will follow Canada’s example to increase their tax base while attempting to reduce the impact of cannabis as a “gateway drug.” It is expected that long term, the legal cannabis market will approach $250B by 2025 which includes recreational drug use, medicinal use, cosmetics, beverages and foods.

Cannabis is facing a shift to multinational production and consumption, increasing supply chain complexity.

There are already a number of countries with vibrant cannabis cultivation market such as Jamaica, Colombia, St. Vincent, St. Lucia, St. Kitts, Israel, Greece, Malta and others looking to expand their agricultural base to include this high value cash crop. At this point, there are however very few countries that are willing to import cannabis and then so only for medical purposes. Many in the industry do see this practice changing under pressure from trade organizations and the medical industry’s focus on this new class of drugs.

There are over 100 chemical attributes, cannabinoids, in cannabis. The most widely known are THC and CBD. THC, delta-9-tetrahydrocannabinol, contains a psychoactive substances (PAS) that when activated cause the brain to become high and intoxicated. CBD, cannabidiol, has a plethora of impacts including pain and stress relief. There is a significant portion of the medical research community that is excited about the opportunities that CBD (and other cannabinoids) have for potential new drugs. Unfortunately the drug testing that has taken place to date has been minimal or simply anecdotal and not usable by the medical community.

A key element of cannabis are Terpenes. Although Terpenes give cannabis its distinctive smell, there are a wide range of Terpenes and consequently flavours and smells. Terpenes unfortunately cause problems when it comes to making cannabis-laced products difficult to produce as they have to mask the strong flavours produced by Terpenes. As a result there is a thriving new market for flavour companies with masking products.

While the legal changes to cannabis in Canada and parts of the US has created a vibrant legal market, there is still a substantial black market which can provide very good product at 33–50% cheaper. Much of this is attributed to the black market ignoring the ban of the use of pesticides during cultivation. As their product is not inspected nor under the same rules for accurate packaging, the cultivators use this advantage at the expense of consumers health. It is for this reason that there is a trust issue with cannabis — both for recreational and medical purposes.

Food recalls are a common thing amongst Walmart and other large grocery stores.

A critical turning point in this market will take place when a regulator finds a serious flaw in a supply chain. As we have seen with foods like lettuce and alfalfa sprouts, a single recall or non-compliance issue has huge impacts on the entire market as the perception of users is the entire supply chain system for all users is compromised.

An insurance policy for participants in the market is severely needed.

How do we solve the trust problem?

The first building block is having shared data between the stakeholders in a supply chain. Blockchain is the logical technology as it enables a single source of truth between all the stakeholders. We don’t believe that it is necessary or really possible to replace all the existing systems already in place in the supply chain. Rather, we suggest integrating existing systems through standardized APIs including cultivation software, ERPs, transportation & logistics systems, lab testing applications, pharmaceutical systems (expected to be ERP), retail, mobile apps and social media platforms.

Integration into existing systems lowers the adoption risk with less operational disruption

Data quality needs to be ensured and one cannot just take data from any regular source as trustworthy. For example data from ERP systems may each be okay, but they might not match between two stakeholders. This is especially true with demand/forecasts. But what if the source data entered is bad? One can overcome this data reliance in a couple ways.

  1. The first is to get data from trusted machines — IoT sensor data — instead of relying on humans entering data. This of course assumes that one can authenticate the devices — a feature of smart contracts on blockchains. An alternative approach is to closely link people to transactions. In this scenario, stakeholders in the supply chain will be required to sign-in with a Digital ID — this could be augmented with facial recognition or other biometric data (not in San Francisco cough cough..) — and this data can be stored with each transaction. In this way, if there is any fraud, there is a person responsible for oversight.
  2. Another method is to validate the data versus prior data sets. For example, did this shipment take +/- 10% of the time of the prior average shipments? And, did it make any unscheduled stops? Although this helps, unless there is data about the fraud or data that points to the fraud, the systems cannot detect fraud. So what has to happen is that when a fraudulent activity is uncovered, the supply chain oversight group needs to uncover data that can identify this type of action. This new data, if historically available, should be used to identify past fraudulent activities.

Cannabis Business Opportunities

1 → Decreasing Compliance Risks and Costs

Using the provenance data, solutions around compliance can be automated. Compliance solutions can be delivered in four steps of incremental value:

a. Data completeness — is all the data around a batch/lot collected. This will allow for companies to manually produce compliance data from their products along the entire supply chain;

b. Providing regulatory oversight directly to the chain of custody;

c. Adding an electronic codification of the compliance rules (a rules oracle) will allow us to compare the data available to the compliance rules. This will allow stakeholders to receive alerts when compliance rules are out of bounds;

d. Automating compliance reporting across entire supply chains. Gathering compliance data is difficult and a tedious manual process today. Although many cultivation packages offer this capability within a facility, they fail to provide this across nodes in the supply chain especially when that software package is not the consistent application for the locations. Since we believe the industry will trend towards less vertical integration, more specialized parties will be involved in the value chain. In a highly fragmented market, it is highly unlikely one software package will dominate at this early stage.

Screenshots from CannaProve’s Provenance and Compliance features.

By gathering the chain of custody validation in one source, it helps compliance officers and regulators alike prove that product batches/lots were managed appropriately with full traceability. For regulators, dashboard views into the supply chain of legitimate producers and processors not only reduces their manual audit time and costs, but helps to root out black market players by exception. Furthermore, they can track revenues in real-time. Compliance regulations today are frequently changing, fuzzy in their meaning to non-lawyers while being vastly different in different jurisdictions.

By working with leading legal and compliance firms, knowledge and operating guidelines can be streamlined and automated through code in smart contracts. Some examples include:

● New facilities have automated checklists of requirements and timeframes to open certified facilities;

● Operators have schedules of compliance requirements for their facilities that are localized;

● Operators have the ability to measure their processing against compliance requirements and automatically understand where they might be falling short as well as ensure compliance regulations are being met;

● Legal firms are able to generate a new source of revenue for their knowledge in a very scalable manner.

Once in place and validated by regulators, automated reporting for each participant in the supply chain can be created for regulators. This will include both batch/lot specific reporting as well as regular facility reporting.

2 → Leveraging Accurate, Shared Data for Revenue Increase

Views from CannaProves Brand Management and Profit Optimization features.

With a supply chain of trusted data in place, solutions for stakeholders to increase their revenues become possible. The dream of all downstream suppliers in a chain is to get very accurate demand data. What is ideal is to get the actual demand orders rather than a forecast as long as there is time to produce the products and services necessary. In a blockchain enabled environment that is possible with the demand signal shared with all participants in real time. Furthermore, with ML-based forecasting we believe that end user forecasts can be greatly improved.

With better and more timely demand signals, we also believe that product mixes can be better optimized for greater profits. This is especially true in the early years of the cannabis market as user tastes become better understood and mature. Complicating the matter is the introduction of new products, branding and sales strategies and the like. Responsiveness will be key to the long-term profitability of all participants in the supply chain.

Photo from inside a Canadian cannabis store.

One key feature for retailers is to know the provenance of the products that they are selling. Currently it is only available on the packaging which is relatively sparse. We believe providing multiple views of the provenance (i.e. a score for quick reference for 90% of the market, some detail for 9% of the market and great depth for the outlier 1%) will be a key element to drive up brand value through detailed information about the chain of custody. This is especially true for pharmaceutical companies and medical users, as well as recreational consumers looking to get organic or at least non-hazardous products. We believe this is a key driver for business growth in the medical market.

Today, there are few cultivators that are very focused on their brand management. Much of this is due to the required focus on meeting demands but over time as cultivation processes become more consistent and effective, brand management will be the next key battle ground.

There are opportunities to be at the forefront of brand management in cannabis providing exceptional brand managers with one-stop tools for them to understand and manage their supply chains. For example, with the full chain of custody information about their products, they can utilize this same data augmented with social media data to provide metrics around:

a. Routine product metrics such as product velocity and customer services levels;

b. Price comparisons to key competitors;

c. Correlations between price, promotions, product knowledge and other attributes to focus on the key drivers of sales activation in store;

d. Customer sentiment.

The value of brand management cannot be underestimated. In a market where the range of prices from Good to Best is approximately 2x (i.e. if Good is 10, Best is 20), when compared to other consumables like wine, food and cosmetics, we should see a 10x range. Some of that is mitigated in Canada with the present restrictions on branding, but even so, there should be a much great range of prices, with the upside being a potential increase of 70–80% in margins.

3 → Fine Tuning Supply Chains for Profit Optimization

We are at the infancy of the global legal cannabis market with barely 1–2% adoption. We believe that, even as a highly restricted/controlled product, the market will mature into a global market whereby supply is no longer locally produced, as is the case with food and pharmaceuticals. On the face of it this is cost driven.

(Cost of indoor growing) > (outdoor growing + transportation)

It should be noted that outdoor cultivators typically don’t have the same issues with scale that indoor cultivators seem to have had. An exception to this general globalization rule in consumer goods is the beverage market, but that is typically due to the high cost of moving liquids, however the cannabis products that will be used in the beverage products can be produced anywhere as they are relatively light weight.

As a result of this coming globalization, there will be a great need to provide detailed, verifiable and immutable chain of custody information to regulators. However, once proven, we believe that the market will move towards a global supply chain. What this means is that supply chains will have more and longer planning cycles and complexity. It also means that they will have more options to optimize their profits if they can utilize data. We believe that organizations will be able to shift production from one facility to others to optimize profits affecting time to market, price and cultivation risks.


About CannaProve, Inc. — CannaProve is the recognized leader in solutions that empowers trust and knowledge across the global cannabis industry. CannaProve was founded on principles of improving life quality through the adoption of cannabis and all its derived health and wellness benefits. CannaProve proprietary software platforms offer a user-rich, simple to implement experience that enables cannabis supply chain participants to be agile and responsive to turbulent markets, while capturing maximum value. To learn more, visit www.cannaprove.com.

The Startup

Medium's largest active publication, followed by +477K people. Follow to join our community.

CannaProve Inc.

Written by

Recognized leader in solutions that empowers trust and knowledge across the global cannabis industry.

The Startup

Medium's largest active publication, followed by +477K people. Follow to join our community.