Part 1: The Cannabis ERP Cost: Optimize inventory and lower carrying costs
Cannabis ERP applications are a subset of the ERP market designed to deliver specific functionality to address the complexities of the cannabis industry. And, just like traditional ERP applications, Cannabis ERP systems purport to help companies reduce costs and boost efficiency. But is the cannabis ERP cost worth it for the cannabis operator? Do you even need Cannabis ERP? In this two-part series, we’ll look at multiple ways Cannabis ERP systems deliver cost-saving benefits that help even smaller cannabis operations grow profitably. Here, we’ll consider how Cannabis ERP can help you optimize inventory and lower carrying costs.
Do I even need Cannabis ERP?
Companies making everything from baby food to beer rely on ERP systems for use on the shop floors of their manufacturing plants. Similarly, cannabis operations manufacture products—with extracted biomass—into consumable products. Many cannabis operations also include a cultivation side of the business (whether indoor or outdoor) that is not dissimilar to that of traditional food manufacturers. In other words, the base operations for a cannabis business is quite comparable to that of other manufacturers. Manufacturing and cultivation operations are complex, and without robust operational controls that ERP systems provide, it’s all too easy for inventory, operations, and administrative costs to get out of control.
Just as many small manufacturers start operations without a robust ERP application, many small cannabis operators do, too, instead opting for entry-level accounting or an incomplete seed-to-sale compliance application. However, both quickly realize that in order to scale their businesses, they need to invest in tools that optimize inventory holdings, streamline workflows, simplify compliance and audits, boost quality levels, and lower the Cannabis ERP cost with regards to operating.
Traditional ERP systems simply do not provide the industry-specific feature set that cannabis companies need to manage all aspects of their operation from cultivation through sales and delivery. Cannabis ERP does.
Inventory Costs Money
Inventory is expensive—to make, to buy, and to hold on to. And it involves a careful balancing act—if there isn’t enough, production stops. If there’s too much, your company incurs the burden of all costs to hold it—and possibly have write offs, if it becomes no longer usable. The expenses surrounding inventory storage are often referred to as inventory carrying costs.
For most industries, carrying costs make up around 20% – 30% of the total cost of inventory. Carrying costs include storage, taxes, damage or obsolescence, insurance, and even opportunity costs. Opportunity cost is usually the largest piece of the pie and is essentially a measurement of what you could do with that money if it were cash and not tied up in inventory.
A typical response to reduce carrying costs is to simply hold less inventory. However, by doing that you risk running low on essential components and face the costly potential of halting production. I’ve met many cannabis operators that don’t factor inventory carrying costs into their business decisions—and it’s a dangerous mistake. The goal is not to hold too much and not to hold too little. This is where ERP systems come into play. Cannabis ERP systems are designed to help businesses optimize their inventory holdings with features like Reorder Points (ROP), Economic Order Quantity (EOQ), and Materials Requirement Planning (MRP).
Reorder Points (ROP)
An inventory item’s reorder point is simply the minimum quantity of that item that you should have on hand and available before you need to reorder. Sounds straightforward, but the challenge is that the ROP has to be set sufficiently high to ensure inventory stock on-hand remains available when needed, and a replenishment order is triggered with sufficient existing inventory to last until the new order arrives. This requires that you have a good understanding of the reliability of the stock’s lead time as well as your organization’s demand for the product.
Cannabis ERP systems handle ROPs well. With tracking of real-time inventory—not just what’s on hand, but factoring in existing orders and work-in-process—they can store a reorder point and recommend you generate a purchase order when the ROP is near. Perhaps even more valuable is the ability for Cannabis ERP to consider the demand using sales history from prior periods to recommend an optimal reorder point, ensuring there will not be a significant shortage or an excess. This makes the Cannabis ERP cost worth it.
Economic Order Quantity (EOQ)
The economic order quantity, or EOQ, is a calculation designed to find the optimal order quantity for your business to order to minimize logistics costs, warehousing space, stockouts, and overstock costs. An EOQ calculation considers setup costs—packaging, delivery, shipping, handling, vendor bulk discounts—along with annual demand and holding costs (warehousing cost, insurance, etc.). It’s especially helpful in environments with random or uneven demand patterns. Because of this, EOQ adds value to many areas of the cannabis industry.
Materials Requirement Planning (MRP)
Volumes have been written about Materials Requirement Planning (MRP). It can be extremely complex, but for our purposes, it doesn’t have to be. MRP is designed to tell you what to make and when. MRP schedules the required materials for production and evaluates whether you will have the required materials to fulfill your orders. MRP—with EOQ—helps companies better manage the demand with ever-changing lead times that are typical in the cannabis space.
Starting off right
The cannabis industry is one of the fastest-growing industries in the country. As newcomers to the market rush to get started, many take a short-term versus a long-term approach to their business management software. To grow your brand, you need broad-reaching functionality that spans the operation—and includes robust inventory management—that only comes with a fully-developed Cannabis ERP system. We encourage cannabis companies to start with a Cannabis ERP solution out of the gate. In this industry, your ability to pivot, adapt and expand rapidly may depend on it.
To learn more about the Cannabis ERP cost and how Silver Leaf CBC can help, contact us today.