Mastering the mechanics of the cannabis supply chain
Dave DiPersio has had an opportunity few business leaders ever get: he has been involved in the creation of an entirely new supply chain and logistics operation for a brand new industry.
When asked if it was a challenge he ever expected to face, his answer is quite clear.
“Never. Absolutely not. I’m actually an accountant by trade, so this role is actually a departure from finance in general. To go into a brand new industry, was pretty exciting.”
DiPersio’s role is senior vice-president and chief services officer for the Nova Scotia Liquor Corporation (NSLC). As such, it was up to him to oversee the development and the roll-out of the province’s plans to manage and sell recreational marijuana products.
As most Canadians are aware, in June 2018, the federal government passed Bill C-45, the Cannabis Act, which was designed to legalize and regulate the sale and use of marijuana in Canada. The Act came into full effect on October 17, which was the first day that Canadians could legally purchase the product through licensed retailers.
According to a report by CIBC World Markets, “by 2020, the legal market for adult-use cannabis will approach $6.5 billion in retail sales. For context, this is greater than the amount of spirits sold in this country, and approaches wine in scale.”
The comparisons to the liquor industry are useful for perspective; however, marijuana is a very different product.
Like a number of its provincial counterparts, Nova Scotia decided it wanted to be the sole wholesale distributor and retailer of adult-use cannabis, and while the province already had a similar system in place to manage liquor sales, getting its marijuana sales network (and the supporting systems) in place wasn’t as easy as simply adding SKUs of bud to the existing alcohol inventory purchases. At each step of the process, the NSLC had to start from scratch: Who were the suppliers? What products did they have? How would it ship the products to its stores and directly to customers? How would it track inventory and meet its reporting duties to the various branches of the federal government? The list of questions was practically endless, and to make matters even more complicated, changing expectations of what exactly the federal legislation legalizing the use of recreational cannabis would contain and when it would be implemented caused considerable uncertainty for all involved in the newly emerging industry.
“I’d say the most satisfying thing was building something from nothing and building it all so quickly,” says DiPersio.
In the end, NSLC decided to operate 12 stores—11 constructed as a “shop in shop” model and built inside existing liquor stores—and one stand-alone location. It also decided to sell cannabis products online. Additionally, NSLC had to decide on its logistics partners.
DiPersio said Canada Post was the obvious choice to deliver online sales to customers as it has ability to reach every person in the province. The postal service makes daily pickups at the distribution centre (DC) and delivers the orders to most customers the next business day.
GardaWorld, which NSLC was already using to handle its cash management services, was selected to transport the inventory from the warehouse to the stores via armoured car.
The Metro Green Logistics division of Metro Supply Chain Group of Companies was picked to operate the fulfillment centre, a 20,000 square-foot warehouse located somewhere in the province (“We don’t disclose the physical address because that’s one of our security features,” said DiPersio.)
“All of our inbound product is FOB [Freight on Board] to our fulfillment centre, so it’s the producers’ responsibility to get the product to us. And then Metro is managing everything that happens within the actual distribution centre. So they do all of the receiving and the put away,” explained DiPersio.
According to DiPersio, store shipments are typically packed in totes, unlike alcohol which gets moved on pallets. Store receiving also differs from the alcohol side of the business, with locked cages being added to the cannabis stores’ receiving areas—a security measure not taken with the alcohol inventory.
The Clyde Street location in Halifax is one of 12 cannabis outlets operated by the Nova Scotia Liquor Corporation and its only stand-alone location. (NSLC)
Security and theft prevention is definitely one of the chief concerns when it comes to selling, handling and transporting cannabis. Jeff Meyers, COO of Vancouver-based Spire Secure Logistics, which is a security consultancy for governments and businesses, including those in the cannabis sector, said just because a product is legal or legalized, it doesn’t mean it’s exempt from criminal interest.
For example, he pointed out there is still black market tobacco available, and organized crime still benefits from those sales.
Thomas Gerstenecker, CEO and founder of 3|Sixty Secure Corp., a cannabis-specific secure transport and security services company based in Almonte, Ont., said that because a shipment of cannabis product can be worth more than 10 times the same volume shipment of alcohol, for example, it garners the attention of thieves.
To prevent truck hijackings, Gerstenecker said 3|Sixty puts a number of preventative measures in place including videoing all product so there is evidence if tampering occurs. Careful and deliberate route planning is undertaken, but if a truck does go off route, the vehicles are geo-fenced, which means an alert goes off at the operations centre, notifying the company of a route departure.
Hijackers gaining access to information about shipments is a serious risk, according to Andy Richards, CEO of Spire, and it’s one of the reasons the company advises all of its clients to perform deep and thorough background checks on all of their employees. He said that these checks must go beyond simply looking to see if a person has a criminal record. Instead, they have to ferret out relationships between the employee and people involved in gangs or other criminal organizations.
Of course, security measures aren’t the only things to worry about when considering cannabis logistics. Government regulations must also be considered as well as business best practices.
Kevin Ward, business development manager at Atlas Growers Ltd., an Edmonton-based company specializing in medical cannabis, said getting logistics companies to understand the needs of the cannabis industry has been challenging.
Because they are required by law to report any potential product loss to the Federal Ministry of Health and the RCMP within 24 hours, companies like Atlas ask third-party logistics providers for their standard operating procedures in the event something happens during transport, such as trucks breaking down. Shockingly, according to Ward, some of the shipping companies have been reluctant to provide this kind of information because they either haven’t received these kinds of requests or they deem the information proprietary and confidential.
Not only must cannabis companies be aware of where their products are during shipment, they must ensure that those products remain within Canada’s borders at all times. Bojan Krasic, the chief financial officer for Oakville, Ont.-based beleave kannabis corp., which is involved in both the adult-use and medicinal (or “wellness”) marijuana markets, said this requirement limited the number of potential logistics providers.
“We couldn’t use someone like UPS or FedEx because at times those companies will pick up a shipment and take it to a hub somewhere like Dallas, where they’ll aggregate a bunch of packages and they’ll try to ship it back to Canada,” he said. “We couldn’t break any international laws because even though it’s never leaving their facility, it’s practically trafficking cannabis.”
Not accurate, according to Lee Rammage, manager corporate communications and public relations for Federal Express Canada. “[Our] network is designed so that domestic shipments are processed through our Canadian network. Our network is not designed to transport any domestic shipments across international borders.”
When it comes to shipping, marijuana is a pretty forgiving product.
Most licensed producers in Canada started out by purchasing seeds (as opposed to plants or cuttings) According to Atlas Growers’ vice-president of cultivation, Jim Hole, seeds of all types are pretty resilient. He said as long as the Rule of 100 is followed, seeds should remain viable. As long as the temperature (measured in Fahrenheit) and the humidity add up to a number totalling less than 100, everything should be fine. “If you go above 100, the seed deteriorates very quickly, so you want to keep it cooler and drier, so it can last for a very long period of time. There should be no quality issues if the seed was vacuum-packed for shipping,” he said.
Atlas Growers’ CEO Sheldon Croome added that since seeds are relatively inexpensive, it makes them easy to ship.
“Transportation-wise, there’s not much risk in sending seeds. They’re just shipped in a box, probably by Canada Post. Seeds aren’t extraordinarily high in value. Something like a pallet of a cannabis derivative, like cannabis pills, that can have a far higher value, and shipments over $100,000 are picked up via armoured vehicle.”
Like other industries, the cannabis industry has the option of taking out insurance for a whole host of situations, including cargo loss and theft, but according to Toronto-based Sean P. Bell, vice-president of Canadian Insurance Brokers, there are very few mandated protections.
“They need a cannabis bond, just like the liquor company producing liquor would have a liquor bond,” he said. “There are obviously multiple options to place the bond, but there isn’t much of a mandatory insurance requirement. It is mostly a public relations thing. Producers are crazy not to insure as robustly as possible because with one bad day, their brand is gone.”
Even with insurance in place, it still makes sense to take preventative measures to ensure cannabis cargo is safe during the shipping process. At Atlas Growers, Ward said that means physical security measures were created to protect the facility, including the shipping area.
“The facility is fully secured with 360 degrees of perimeter security and lighting. We have a perimeter fence which is eight feet topped with barbed wire and and an electronic gate, all fully monitored. We actually have it monitored in such a way that even if you were to clip a chain link trying to break in, we would we know.” Before a driver can even back their truck up to the one shipping dock doors, their identity is confirmed and reconfirmed, explains Ward.
As for how the industry and especially its logistics networks will develop and evolve, that’s still very much up in the air. It will take time to measure how much demand there truly is for the products. It will also take suppliers time to ramp up their production schedules and to fulfill their initial promises to retailers. For example, DiPersio said NSLC originally expected to carry about 350 SKUs, but opened with between 100 to 150, as products were in short supply.
DiPersio also speculates it will take some time for suppliers and retailers to learn how to work together to meet each other’s schedules, since a number of the producers who are now selling recreational products originally started as medical marijuana producers and only set themselves up to serve a direct-to-consumer delivery model.
“From our perspective, the producers still have a lot of development to do going by when people are showing up versus their scheduled appointment and how much product is showing up versus how much we requested.
“I’m sure they’ll move quickly and I’m sure there will be lot of improvement in the inbound supply chain over the coming months.”