Article
Integrated business planning for cannabis operators: A path to profitability and stability
How strategic planning can boost both short-term performance and longer-term competitive advantage
August 14, 2024
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Article
How strategic planning can boost both short-term performance and longer-term competitive advantage
August 14, 2024
The U.S. legal cannabis industry is at a critical juncture, driven by an array of dynamics: increasing competition, normalization, evolving consumer preferences, and rising costs. While growth projections are positive, sources of cash and capital remain tight, and profitability lags. Only 24.4% of businesses in the U.S. cannabis sector reported that they are profitable—down from 42% the prior year. Profitability and financial health—as well as overall business viability—increasingly depend on the ability to align supply of finished goods with market demand.
Cannabis operators are moving beyond the “Green Rush”—the period of rapid growth that began in 2012 when the first states legalized cannabis—to mature and stabilize their businesses. To do so, they must be able to coordinate operations from cultivation planning through finished goods delivery—creating a seamless supply chain that can meet constantly changing customer preferences and demand at both the market (state) and enterprise levels.
While IBP is an integral part of operational management in other industries, it hasn’t gained as much traction in the cannabis sector due to organizational challenges such as limited data availability or lack of decision-making infrastructure. But cannabis operators that invest in developing the right IBP capabilities can boost both short-term performance and longer-term competitive advantage.
Integrated business planning is a structured process for coordinating business decisions to accurately forecast the number of finished goods required to meet demand. It coordinates the right people and functions—from sales and finance to supply chain and procurement—at crucial moments. This collaboration ensures that business functions move in unison to achieve short-term goals—as well as longer-term ambitions such as facility expansions and capital investments that improve yield or establish new capabilities.
Think of it this way: If the sales organization wants to sell vape cartridges to capitalize on market demand, it needs to make sure that operations is planting for it, supply chain is distributing it, marketing is promoting it appropriately, and finance is modeling profitability with a competitive cost per gram. This can’t occur without cross-functional coordination.
Companies capture more sales, optimize costs, and maximize profits by focusing on certain areas—well-coordinated planning, optimal resource allocation, and the ability to respond swiftly and accurately to change. Integrated business planning provides a decision-making framework that can help cannabis operators sharpen these critical capabilities.
Effective demand planning and operational coordination: Demand planning determines the quantity of goods needed per category and location, informing actions to be taken across the seed-to-sale value chain:
Without effective coordination of these processes, cannabis operators risk one of two adverse outcomes: an oversupply of product leading to excessive capital tied up in unproductive, aging inventory and unwarranted cultivation costs; or an undersupply resulting in missed growth opportunities and poor customer experience. Either outcome creates a negative feedback loop, further eroding profit margins, market position, and consumer confidence.
Optimal biomass allocation: Connecting the dots from biomass cultivation to processing to finished goods is a formidable task, often spanning a quarter of a year or more across multiple organizational functions. Any misalignment in this process can lead to either missed sales opportunities or increased cost per gram, critically impacting financial health.
Integrated business planning helps determine which finished goods provide the greatest benefit—thereby informing decisions about how to use on-hand biomass, which strains to produce, and how many total grams are required. Enabled by data, IBP coordinates cultivation, production, marketing, and procurement functions through regular meetings that align each stakeholder’s responsibilities over time. As a result, cannabis operators can accurately determine cultivation needs, develop a resource for finished goods production and continuously monitor input signals (such as profitability, availability, and consumer preferences) to ensure that all decision-making remains focused on predefined business objectives.
Evolving consumer preferences: As consumers become more educated and cannabis becomes ever-more destigmatized, the consumer cannabis landscape will continue to evolve. We expect it to look drastically different in 2027 than it does today—irrespective of further regulatory changes. The maturation of consumer preferences has already manifested in the proliferation of cannabis 2.0 products that possess lower THC percentages, more varied cannabinoid profiles, and an emphasis on terpenes in mature markets. We expect this trend to expand via a “post-cannabis” period in which cannabis normalizes beyond the need for stylized stores and into a period of casual banality.
Due to these everchanging conditions, cannabis operators must actively monitor each market’s maturity proactively across the dimensions of geographics, regulated market participation, and product purchasing trends. To accomplish this, operators need to access and analyze market- and transactional-level data around consumer purchasing habits by demographic—and feed this into planning in a timely manner.
Promotion responsiveness: As the industry continues to mature, margin maximization will become increasingly important. For vertically integrated operators and retailers, it will be a key factor for assessing promotional effectiveness. This requires the operational flexibility and responsiveness to accommodate real-time changes in promotional strategy to meet market demands and compete with competitors’ offers.
Without the right data, processes and tools, operators cannot take a long-term view toward balancing promotions while optimizing for allocation of biomass and profitability. This leads them into chasing revenue day by day—creating self-competition, disrupting processes, and ultimately eroding profitability.
In our work, we see four key challenges that could limit cannabis operators’ ability to employ integrated business planning.
Data availability and reliability: Many operators lack sufficient historical data and data attributes to make data-driven decisions that other, more mature industries can. They also lack the ability to integrate what data they do have with relevant third-party sources such as BDSA Analytics or New Frontier Data. This can often leave them flying blind.
Cannabis operators likely will need to purposefully and proactively re-deploy capital into data management, including a data platform that can support individual markets and connect the enterprise. While critical and foundational, this is often viewed as the necessary evil and continuously deprioritized.
While data may be an issue, resolving these issues should not stand in the way of introducing IBP processes and leveraging whatever data is available—any data insight is better than none.
Siloed supply chains: The cannabis industry’s supply chains are unique in their lack of interstate commerce, limiting biomass to the state in which it was created. In some states, the challenges precipitated by lack of interstate commerce are exacerbated by vertical integration requirements, preventing a business-to-business marketplace.
Unlike companies in other industries that can employ a single enterprise IBP process, cannabis operators will need IBP processes tailored to state-specific stakeholders that account for the interstate limitation. This will require multiple “playbooks” and the ability to run multiple “plays” to effectively orchestrate planning. That may feel burdensome compared to current approaches—even though it brings more rigor to the planning process.
IBP experience: The cannabis industry is highly entrepreneurial. That has been instrumental in driving growth through a high degree of regulatory and market change. As a business matures, however, it requires the right expertise for facilitating cross-functional collaboration and planning. If leaders haven’t experienced this in the past, it will be hard to understand what good looks like, how to implement it, or even where to begin.
Planning horizon and combinations: Planning for finished goods is a daunting task, as the biomass produced to support finished goods that were planned months prior might not meet the cannabinoid profile, potency, or quantity requirements needed. This challenge is further exacerbated by the many combinations of finished goods that can be made with biomass, which require optimal allocation of finished goods to balance consumer demand with profitability. While operators may realize their current process is suboptimal, taking the time to re-design a process in a fast-moving environment feels like an insurmountable task.
The good news is that it’s possible to begin introducing IBP elements quickly—and see impact within a few months. Careful consideration of the following areas can point your organization in the right direction:
Start with the business problem you need to solve: Acknowledging an issue or problem is the first step toward positive change. It sounds simple, but if you see something, say something. Common warning signs of insufficient or immature IBP processes include insufficient inventory to meet demand, missed sales targets, or consistently inaccurate forecasts.
These warning signs tend to be symptoms, not root causes. To solve an issue so it doesn’t happen again, you’ll need to address the root cause or causes. For example, the cause of a missed sales target may be lack of communication—the sales organization didn’t provide operations with a clear understanding of what it needed to meet expected demand. A diagnostic or root cause analysis doesn’t just pinpoint underlying issues. It provides direction for solving those issues.
Determine who should be at the table—and who will lead: Integrated business planning requires collaboration across business functions—each with specific inputs and responsibilities. It’s important to have fit-for-purpose multidisciplinary teams that work together to solve the challenge at hand and define the necessary process improvements.
At minimum, this should include representation from the supply chain and operations, finance, marketing, and sales functions—with the former typically providing leadership for the effort. Given the need for data and real-time insight, IT should also be involved, at least in a supporting capacity.
Define the right IBP approach for your organization and strategy: Implementing integrated business planning involves a combination of people, process, and technology changes. While there are proven IBP principles that companies can leverage, it’s important to recognize that there is no one-size-fits-all solution. The right approach will vary by cannabis operator, according to its unique business scope and scale. The answer may be very different for a $5 billion company than it will for a $100 million company, and it ultimately should depend on an organization’s unique goals.
Determine the level of planning maturity you want to achieve within a specific period—six months, a year, or two years. It’s possible to begin making meaningful progress almost immediately. Leading a multidisciplinary team through a RACI (responsible, accountable, consulted, informed) exercise can quickly establish new accountabilities for decision making and new communication processes that ensure key stakeholders are in the loop at the right times.
Changes to tools and data may take more time. A smaller organization may be able to leverage Excel and other existing tools to improve insight, while a larger company may need more advanced and/or custom tools. In our experience, successful companies—regardless of size—can leverage what technology platforms they have to achieve meaningful progress.
Achieving the operational flexibility to make swift adjustments to cultivation, production, or marketing plans requires a coordinated decision-making infrastructure. Integrated business planning provides this infrastructure—with clear spans of control and decision-making authority alongside direct channels of communication and real-time data, creating the information network that aligns functions throughout the organization.
With this capability, cannabis operators can account for shifts in demand even after plants are in the ground by making real-time adjustments to production plans, product mixes, and allocations of biomass or finished goods—thus improving their response to real-time market conditions.
What does best-in-class IBP look like for a company of your size? If you don’t know or don’t know how to determine that, find the right expertise to make sure you’re approaching this properly and efficiently. While it’s an established practice in other industries, IBP is a largely untapped by the cannabis industry. Getting IBP in place can make a big difference—not just in performance but in long-term viability. Getting the right IBP process in place can drive success and competitive advantage.
This is where integrated business planning (IBP) comes in.