Due Diligence for Suppliers & Cannabis Supply Chain Partners

By Mark Slaugh
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Between the patchwork quilt of rules and regulations that is the modern cannabis industry, products pass through many hands before being sold to a customer. From sourcing, cultivating, manufacturing, distributing and vending, the relationships between a licensee and their vendors/partners up and down the supply chain is complex and touches many stakeholders along the way.

While the focus on quality packaging, dope labeling, delicious ingredients and consistently potent cannabis is a priority for most companies, what often isn’t thought about is the liability in bringing these components together in terms of compliance.

Compliance responsibility falls on licensees as a direct term and condition of licensure within their state. To operate, licensees must maintain and be able to demonstrate compliance with a plethora of rules and regulations. Compliance is the name of the game in cannabis.

While most operators understand this, what most do not think about is how the compliance or noncompliance of their vendors affects their own liability.

Sharing Noncompliance & Liability

Supply chain partners are automatically segregated by whether or not they are plant touching licensees or not.

Licensees are the only entities in the supply chain that can be fined, administratively held, suspended, revoked or even arrested due to noncompliance. This fundamental nature means that supply chain partners are automatically segregated by whether or not they are plant touching licensees or not.

In the case of mutual licensees such as a manufacturer and dispensary, the liability for compliance falls on both entities. A single manufacturer that makes an error on labeling language or a cultivator using the incorrect containers both pass on their liability to any downstream partners.

iComply has seen regulators quarantine hundreds of products among multiple dispensaries who never checked the compliance of the supplying manufacturer. Surprisingly, most dispensaries don’t think of the liability passed to them amid hundreds of SKUs and multiple manufacturers and cultivators. Confounding the issue further is that everyone in the industry can interpret the same rules in completely different ways.

Assuming your supply chain partners are 100% compliant is a dangerous pitfall.

By not checking noncompliance from supply chain partners, operators accumulate evidence dating back years. Like METRC being off, these issues tend to snowball until they seem overwhelmingly difficult to handle. And it doesn’t just stop at labeling issues. Noncompliance can fall on all supply chain partners and be left in the hands of a licensee in a variety of ways.

Business partners like security contractors can often run afoul of regulations and put their licensed partners at risk.

Even worse, are supply chain partners who don’t have a motive to be compliant as they do not own licenses and often have a poor understanding of cannabis compliance. A packaging provider, marketing company, CBD provider, security company, vending machine providers, waste disposal companies and other commonplace suppliers and partners can often run afoul of regulations and put their licensed partners at risk.

Since regulators can only enforce the licensed entity, many states have made it clear that licensees are ultimately and fully responsible for any actions of noncompliance taken by third parties contracted by the company – regardless if they touch cannabis or not.

Areas of Common Noncompliance in Cannabis

Like a game of “Hot Potato” (worth millions of dollars), we’ve seen common noncompliance liability get passed down the supply chain in the following areas of cannabis operations:

  • Product liability
  • Packaging and labeling
  • Test result manipulation
  • Expired licenses
  • Input or ingredient defects
  • Inventory tracking errors
  • Recordkeeping and manifest errors

Some of these areas of noncompliance rely with non-licensed supply chain partners such as packaging, ingredients or third party printed labels. Often, these folks simply don’t know what they don’t know and make mistakes – not knowing the thousands of dollars they could be costing their licensed partner down the line.

Other areas in which compliance should be expected from licensed partners lies in product liability, test result issues, inventory tracking, manifests and recordkeeping. No one usually wants to be out of compliance and usually these issues arise from licensed partners who are simply confused, mistaken or ignorant to the requirements of ongoing and changing rules.

It’s hard to keep all of one’s suppliers and supply chain partners on the same page over the long run and amid a multitude of changing rules. But what you resist, persists…

Managing Compliance in the Cannabis Supply Chain

Nothing worth it is ever easy; but it is possible to identify common areas of noncompliance in one’s cannabis operation and supply chain partners and to do something about.

To identify problem areas, iComply recommends conducting regular auditing at a macro level; but to also dive deeper into micro level audits of all of one’s books and records (covering vendor files) and packaging and labeling for at least 12 months.

You don’t know what you don’t know, so one must begin by investigating and understanding where liabilities are occurring between themselves and their supply chain partners. Once valid feedback and noncompliance is discovered, it can be remediated.

Like triage, you have to stop the bleeding before you can prevent further injury.

Consistency in quality standards requires meticulous SOPs

It is always more expensive and time consuming to continue reacting to noncompliance and trying to fix issues after the fact. This is how snowball effects happen until the problems seem so overwhelming, operators tend to simply ignore the liability. While it is human nature, it is also extremely dangerous and detrimental when multimillion dollar licenses are on the line.

An ounce of prevention is worth a pound of cure –Benjamin Franklin

By implementing proactive compliance measures, cannabis businesses can avoid costly noncompliance consequences and position themselves as proactive checkpoints of supply chain compliance. We recommend integrating the following procedures, documents, training and tools into one’s operational compliance infrastructure:

  • New vendor checklist
  • Packaging and labeling checklists by product type
  • Virtual review of labels/non-cannabis packaging
  • Calendar expiration dates for licenses and products
  • Compliance auditing of key vendors and strong contracts regarding liability
  • Input product checklists and tracking as per GMP compliance

This snapshot is just the tip of the iceberg when it comes to the depths of liability a cannabis business is exposed to by its supply chain partners. To truly manage compliance, one must be aware of shared risk and implement proactive measures to prevent suppliers and supply chain partners from inadvertently affecting the operational compliance of your cannabis business.

Selecting Supply Chain Partners

There are plenty of fish in the sea and plenty of suppliers vying to do business with you. iComply has seen the good, the bad and the ugly. We’ve been on the front lines of developing markets like California where we warned our clients to steer clear of companies like Kushy Punch long before they finally lost their license for noncompliance.

control the room environment
Preventing contamination can save a business from extremely costly recalls.

We advise our clients on the importance of being selective and conducting due diligence in vetting supply chain partners and vendors. Most fundamentally, how aligned are the values of potential partners? Are they in the business for the same reasons you are? What brought them to the cannabis space? How do they value relationships and what do they know about compliance?

Too often when focused on price or speed, people miss the more important fundamentals of relationships. We serve as vetters for our clients whether they are shopping for a POS provider, a bank or a waste disposal company. Beyond the cultural alignment, the more objective questions begin to take shape in vetting a potential partner. This can differentiate between license holding and non-holding supply chain partners.

For plant-touching licensed partners, we recommend answering the following before entering into business partnerships that affect your supply chain:

  • Copies of licenses, contracts, and a catalogue of products
  • For products being selected, prior to ordering a sample, obtain a copy of the label by email first. Or an EMPTY sample of product packaging and labeling to vet against a packaging and labeling checklist.
  • Search news articles on the company and ask if they have had compliance issues before. Obtain documentation if there have been compliance issues previously.
  • Ask how they manage their compliance and prevent noncompliance down their supply chain. Do they train their staff? Do they conduct regular audits internally? How often do they update SOPs and reconcile inventory?

For non-plant touching partners, we recommend answering the following:

  • Obtain any certifications for quality assurance or in credentials for services.
  • Ask for references from other customers who have cannabis licenses.
  • Discover how familiar they are with the cannabis industry AND the rules and regulations in your market.
  • Ensure they have an understanding of how they impact your compliance. Discover how they plan on preventing areas of concern together.
  • Make sure they know you are ultimately responsible for noncompliance and understand what they are willing to do to protect you.

Ensuring accountability across the supply chain means selectively choosing partners who share the same values of integrity and professionalism. On more complicated deals, such as licensing IP or your brand to operators in new states or markets, we recommend that you mandate a compliance program that offers third-party validation to ensure the internal integrity of your partners. Too often, brand risk isn’t considered in the fast-paced expansion of the industry and operators must not only be vetted, but held accountable, when representing one’s brand and products.

For all intents and purposes, the wild web of the supply chain in cannabis is the industry. We are a collective of collaborators who all serve the goal of delivering high quality and safe products to cannabis consumers globally. For those committed to minimizing their risk to protect their profits, cannabis compliance is the key to success.

Ensuring accountability across the supply chain means selectively choosing partners who share the same values of integrity and professionalism. In doing so, the industry elevates its legitimacy and more effectively expands in a sustainable manner that protects all stakeholders involved.

Noncompliance affects licensees the most and they must be the most vigilant, but it takes a village to raise an industry. Compliance affects most everyone in the supply chain and the loss of any operator hurts the entire industry.

extraction equipment

The Hidden Costs of Non-Compliance for Consumers

By Mark Slaugh
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extraction equipment

Anyone owning and operating a cannabis business should know the value of proactive compliance management to operate successfully. For consumers, the view into the world “behind the budtending counter” is limited to the cool looking packaging, test results and the overall “vibe” of products they may want to try.

In our experience, as the oldest cannabis compliance firm, we’ve audited and visited hundreds of facilities and have seen the proverbial “Wizard behind the curtain”. We know “how the sausage is made.” And, as one can expect, it’s not always as glamorous in the back of the house as it appears on the shelf.

As markets expand and people buy into existing or new cannabis businesses, amid a world of thousands of competing companies and products, consumers need to ask themselves: “What do I know about the companies and products I consume?”

More and more, the question of consistent quality keeps coming up in the cannabis industry. Recalls are still ongoing in the news as products continually fail testing for potency and contamination.

Colorado, for example, is considered the shining jewel of the US industry in terms of experience, quality and integrity. However, consumers may be shocked to learn that a majority of dispensaries in the state do not operate by stringent SOPs, nor do they verify packaging and labeling for compliance, or review test results of products coming in and going out of their shops.

Starting January 1, 2021, these retailers finally have to develop and implement recall procedures in the event of contaminated products or cannabis that is causing adverse side effects. Later this year, vape pens will finally have their vapor tested instead of just the concentrate therein.

These liabilities or lack of compliance infrastructure may very well be a ticking time bomb no consumer in their right mind would want to deal with.

Bad Product/Brand Experience

Non-compliance and inconsistency on the part of operators translates directly into negative experiences for consumers. Whether its consuming a product that tastes like chlorophyll or enjoying a product the first time only to find a completely different experience the next time around, consumers experience the cost of non-compliance the most.

Beyond products, most consumers recognize their brand experience when shopping for products. Since the invention of Weedmaps, customers have always expressed their like or dislike for particular dispensaries and delivery services. Operators know these reviews from a customer’s experience can make or break their business and brand.

We always tell cannabis operators that a brand is a double-edged sword. As easily as it can strike through competitors, it can just as easily damage one’s own business.

Examples include SweetLeaf and Kushy Punch whose brands, once well-known and popular, are now synonymous with the worst of the worst given their histories of non-compliance and shut downs.

For consumers, finding consistent, quality products at a fair price is often the most important consideration to avoid the cost of a bad experience with cannabis. For visitors or first-time consumers, this could mean the difference between trying cannabis again or deciding it’s simply not for them.

Contamination & Illness

control the room environment
Preventing contamination can save a business from extremely costly recalls.

The worst-case scenario for consumers, especially patients, is the cost of consuming contaminated products or otherwise having adverse effects from the use of cannabis. While cannabis itself is one of the least harmful substances known to man, contaminated cannabis can be dangerous or deadly.

In the early days of the industry and in many emerging markets with poor to no oversight, these lessons are learned most severely. From the use of non-commercial washing machines being used for water-based extracts that tested positive for E. coli to recalled products ladened with Eagle 20 (which contains the harmful pesticide known as Myclobutanil), the industry has been reactive to safety measures and complying with best practices.

Still, some states persist with limited to no testing and simply label products with a warning to consumers that they are using cannabis at their own risk without testing for safety or efficacy.

Most consumers may be shocked to know that most cannabis companies do not adhere to good agricultural practices or good manufacturing practices (GAP/GMP) to ensure consistent quality and safety standards in similar industries such as nutraceuticals and food manufacturing.

Patients already weakened by disease states – including auto-immune disorders – are most at risk and understand all too well the costs of hospitalization, medical bills and loss of quality of life. For the average adult user, these risks are the same and there is often little to no recourse with the dispensary or product manufacturers if the product slips through contamination testing because of the non-compliance of product validation on flower or infused products.

For companies, outdated and inaccurate SOPs as well as production batches are the only line of defense to protect the company from product liability lawsuits filed by consumers in the event of contamination and illness. Most cannabis companies do not manage this aspect of their business effectively and simply assume they are sufficiently compliant without proactively measuring such compliance and adjusting operations as necessary.

Long-Term Consequences

Consumers would do well to remember that the modern industry is infantile in its development compared to other heavily regulated industries. Cannabis companies are babies learning to crawl while major food and beverage, pharmaceutical and nutraceutical, and alcohol and tobacco industries are far ahead of the game. The US industry, is arguably, already behind the compliance curve comparative to other nations already placing stricter regulations and standards on licensees.

For customers, this can be a confusing experience given that no two batches of flowers will taste the same let alone give a consumer exactly the same effect.

Already, customers are learning Sativa and Indica are imaginary cultural terms to describe generalized characteristics of major and minor cannabinoids and terpenes in each strain which produces a variety of effects – despite state limitations on labeling these active ingredients.

Vape pens are under increasing scrutiny as regulators discover long-term effects of vape use from the tobacco industry causing EVALI in consumers and being deemed as dangerous. As with anything new, the data and science simply aren’t there to truly tell customers what the effects may be over the long run. It has taken decades for tobacco, as an example, to go from doctor-recommended to carcinogenic.

Consistency in quality standards requires meticulous SOPs

Similarly, Big Cannabis of the future may be facing similar concerns that aren’t being warned about currently on their products and consumers could face unknown long-term consequences. In no way is this a condemnation of cannabis and early research shows cannabis is much safer than either alcohol or tobacco.

The point is to emphasize that over the long run, compliance is key to tracking the consistency and safety of products to avoid long-term liability and costs on consumers. Consumers would be wise to gravitate towards compliant brands and companies that focus on consistent quality and safety to minimize potential long-term negative impacts and costs.

Accountability & Transparency

Customers must first understand where the buck stops and who is responsible for what as it applies to cannabis and the cannabis products they consume. This can vary between states from vertically integrated models to horizontal models which allow for independent businesses to buy and sell cannabis between each other.

In the case of cannabis, the restrictions on METRC and other state “seed to sale” tracking systems make it nearly impossible for customers to return products and unclear on how to file complaints.

METRC and other seed to sale systems dictate that dispensaries must be able to track originating sources of cannabis back to another licensed facility. As such, once the consumer buys a faulty vape pen, for example, it’s gone from the dispensary inventory. Bringing it back in physically creates non-compliance issues for the dispensary as they cannot virtually account for the physical addition back into inventory.

No one ever said making sausage was a pretty or easy process. That’s why most consumers don’t want to think about how it’s done.

This example is a simple one to showcase the importance of compliance in the cannabis business and the complexities businesses must go through to operate. What is more applicable and important for consumers to understand is how non-compliance and inconsistency can affect them negatively – beyond messy fingers from leaky vape carts.

extraction equipment
Consumers should ask cannabis companies about their product quality standards

These types of unexpected issues represent significant costs for cannabis operators in recalls, fines, lawsuits and fees which is what most people think the “costs of non-compliance” mean.

However, and in addition to the literal cost mandated by regulation, there are the costs owners don’t think about: in the time and fees charged by the professionals to solve these issues, the time and stress spent on production, the increase or decrease in supply, mitigating product liability, and brand recognition and damage due to poor quality or recalls.

All of these factors simply drive up the costs of products for consumers and decrease the reliability of finding consistent, quality products and brands that customers can count on.

As we always say at iComply:

“It is always more cost-effective to be proactive, rather than reactive, when it comes to operational cannabis compliance management.”

Consumers would be wise to recognize which companies are proactive in managing their compliance. And companies would be wise to get ahead of these customer costs by being the proactively compliant companies that consumers want and need.