Supplier Negotiations in a Non-Vertically Integrated and Emerging Cannabis Market

Supplier Negotiations in the Medical Marijuana Supply Chain

With just 44 operational medical cannabis dispensaries (retailers) and 19 cultivation centers (suppliers), the Illinois medical cannabis industry is indeed small. All legal medical cannabis in Illinois must be grown, harvested and sold within the state. In other words, no cannabis can be bought or sold over state lines.

Most cannabis business licensees have a stake in either the retail or supply side, but few are vertically integrated. The gap between dispensaries, who engage in frequent patient interactions, and cultivators, who grow and process medical cannabis, creates a non-vertically integrated supply chain. This market is further complicated by the number of retailers and suppliers, similar product offerings (for example, five cultivators currently stock the strain of flower Blue Dream), and dynamic nature of product availability (largely contingent on harvest and shelf life.) Accordingly, dispensaries must work in close cooperation with cultivators by developing long-term, stable relationships to offer products that best meet patients’ needs.

As the owner of a medical cannabis dispensary in the Chicago suburbs, we view our negotiations with suppliers as a channel to understand each other — what’s important to each party, how do we prioritize our own needs and the needs of our counter-parts, and what are the deal terms to maximize overall value.

Insights Into the Medical Marijuana Supply Chain

The Value of Negotiations

In order to build these strategic cooperative relationships, we recognize that our negotiations with suppliers provide a means for both parties to obtain their own profits. From the viewpoint of income distribution, we seek to obtain a Pareto optimal solution within the whole supply chain. When this is achieved neither one of us can be made “better off” without making the other party “worse off.” A Pareto optimal solution serves to maximize the number of high-quality products, promotes supply chain throughput, and creates a win-win with regard to price volume negotiations. Downstream the result this provides to the patient is assurance of in-stock inventory, greater product variety and affordable product pricing.

Assessing Our Own Needs and Objectives

Our first step in the negotiation process is to evaluate our own needs and objectives. We routinely assess our inventory levels. We make use of reporting tools in our point-of-sale system to determine what products need to be reordered and the reorder quantity. Metrics like inventory turnover, inventory to sales ratio and out-of-stock items are evaluated. We also take into account patient product requests and new products to hit the market. For example, we may choose to reduce our inventory count of cannabis oil topical bars now that topically applied cannabis patches have come to market.

Secondly, when determining the reorder quantity, we consider how much we are willing to pay (cost of goods) compared to the price the product will sell for (revenue per a unit.) We make estimates on the effect that future supply of cannabis will have on prices, i.e. more cultivators and an expanded product line may drive prices down, a trend we’ve seen in Colorado as prices have dropped by more than 40 percent since the beginning of 2016. We consider whether it’s in our best interest to make smaller, more frequent purchases or if we should take advantage of volume discounts and order larger quantities.

Understanding Your Supplier and Their Priorities

Understanding suppliers’ objectives can illuminate proposed and negotiated deal terms. We talk with suppliers on a weekly basis, go out with them socially and visit their cultivation facilities. We ask questions and open dialogue:

  • What other dispensaries carry their products? Do they have a relationship with our closest competitor? Is the dispensary 20 minutes from us carrying their products? And if so, must we carry these same products, as a point of parity, to meet consumer inventory expectations?
  • Are they looking to offload a particularly large amount of inventory? If so, for what reason?
  • Which of their products are in greatest demand? Why are these products so sought after? What are their stock levels on these products?
  • Is their company looking to innovate? Where are their R&D efforts focused? What’s in their product pipeline?
  • How ambitious are their efforts to gain shelf space?
  • Are there opportunities for us to co-brand or co-market? Are they open to white-labeling their products?
  • Will they negotiate on payment terms?

Embracing Transparency and Ongoing Communication

We believe transparency and communication are the bedrock of our supplier relationships. We openly share product sales data. We drill down in to this data and look under the hood by soliciting feedback from patients and dispensary agents. We incentivize participation by patients in product surveys and focus groups or to leave reviews on our Facebook page.  We evaluate a patient’s loyalty to a particular cultivator or category of products, how the product met a patient’s expectations and likelihood of product repurchase.

This feedback loop guides our product roadmap. It ensures our products are exceeding customer expectations. The more information we provide to our suppliers, the more likely it is that they can create even better products and we can deliver a more amazing customer experience.

Collaborating Outside of the Supply Chain

Discussing the single issue of price can be contentious and, even, counterproductive when trying to strike a negotiated agreement. To this end, we present multiple, extraneous opportunities to our suppliers as a means to strengthen our relationship. These opportunities include:

  • Engagement with “condition-affiliated” groups, i.e. joining forces for an educational presentation to epileptic patients on the medicinal benefits of cannabis for those suffering from seizures,
  • Product specials geared towards specific groups of patients, such as deeply discounted products for Veterans on Memorial Day,
  • Outreach to the medical community and
  • Assistance with prospective patient enrollment in the Illinois medical cannabis program

In conclusion, supplier relationship management should not be viewed as a “once and done” exercise. In a non-static environment, particularly one like the Illinois medical cannabis market which is characterized by high product innovation and accelerated demand growth, an iterative assessment of the supply chain must be continuously undertaken.

Medical Marijuana Photo via Shutterstock

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Nicole van Rensburg Nicole is a partner and co-founder of Midwest Compassion Center (MCC), a dispensary in the Chicago suburbs that provides safe access to high-quality, affordable medical cannabis. Prior to MCC, she spent 15 years guiding strategy, marketing, and procurement for several family healthcare businesses in the mobile diagnostic testing industry.

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