How the case of California can inform cannabis businesses in new markets
Investing in cannabis product quality now can avoid major headaches later. The ramifications of poor quality include loss of revenue, loss of market share, product recalls or, worse, legal troubles. Manufacturers of other legal consumer goods — specifically food and drugs — do not have a choice when it comes to quality; the manufacturing of their products is regulated by the Food and Drug Administration. But even without the requirements of government entities, quality should be a top priority on every company’s list.
In California, for example, 20% of products fail laboratory analysis tests and therefore cannot be released for commercial sale, according to multiple news reports. New markets, such as Massachusetts, have the opportunity to instill quality at the outset. To avoid problems with product testing, companies can build it better from the start, using three dimensions of quality that are commonplace in other vertical industries: Current Good Manufacturing Practices (CGMP), Cost of Quality (CoQ) and Quality Management Systems (QMS).
Testing in California
When the term “regulatory compliance” is used in the cannabis industry, it usually refers to mandates about cannabis products after they have been produced. Laboratory testing and analysis are cornerstones of recreational and medical cannabis legislation, but this model is flawed due to a lack of accredited, international standards, which leads to variation from lab to lab. This represents a major threat for California brands that are hoping to survive in an increasingly competitive cannabis industry.
Let’s imagine California, or any other adult-use legal state, is able to perfectly standardize all testing labs. On the surface, this seems like a solution, but it is still incomplete, because testing is usually conducted on batches, not every individual unit, and testing only identifies bad products — it cannot create good ones.
Lessons from the FDA
When people need pharmaceutical drugs, they expect that what they buy is what is stated on the label and every pill in the bottle performs in the same manner every time they take it. There are reasons these expectations are met, namely FDA regulations in the form of Current Good Manufacturing Processes (CGMP). All pharmaceutical companies are required to follow CGMP, which “assures the identity, strength, quality, and purity of drug products by requiring that manufacturers of medications adequately control manufacturing operations,” according to the FDA. CGMPs include testing, but testing alone is not adequate to ensure quality, the agency says.
Adhering to CGMPs, while not yet mandated by any adult-use legal state, requires cannabis companies to invest capital in order to achieve these standards. This could be a hard sell to a startup company fighting to survive in a sea of growing cannabis giants. The good news is that an investment in quality standards now is more profitable over time.
Cost of Poor Quality
Examples of product recalls for non-compliance in the cannabis industry are ever-present. The Denver Post reported that in 2017, 15 companies recalled cannabis products in Colorado. Since the state legalized adult-use cannabis, dozens of companies have recalled hundreds of thousands of products because of contamination, usually from pesticides. There are also examples of lawsuits over contaminated cannabis products in Colorado.
The cannabis industry will face increased risk of product recalls and product liability lawsuits as long as testing is the sole means by which product quality is determined. However, companies can ensure their products face the lowest risk with an investment in good quality to avoid the much higher cost of poor quality.
The most common method for ascertaining the Cost of Quality (CoQ) is through the Prevention, Appraisal and Failure (PAF) framework. PAF is straightforward: put systems in place that increase the odds of high-quality products and then measure how well those systems are working. These two dimensions of good quality are more commonly referred to as quality assurance and quality control.
The key is to take as many measures as possible to avoid external failures in the customers’ hands. These are exponentially costlier for companies to remedy than internal failures. CGMP reduces internal and external failures by building quality into the product from the top down.
Benefits of Quality Management
While using CGMP standards in the manufacture of cannabis products results in higher product quality, these standards do not guarantee a positive customer experience or increased revenue. A high-quality product needs to be supplemented by strong service and support to increase customer satisfaction. There needs to be a Quality Management System (QMS) in place that can connect product quality and customer satisfaction to ensure an amazing total experience while driving sustained revenue growth.
The timing of a company implementing a QMS is extremely important. In a study using panel data of 800 firms in Europe, authors Pilar Corredor and Salomé Goñi noted in 2011 that firms defined as “late implementers” of a QMS experienced no performance gains, and their average performance level was no higher than that of their control sample, compared to firms that implemented a QMS from the beginning and experienced major gains. Overhauling organizational idiosyncrasies to retrofit a QMS is more difficult as time passes.
The Way Forward
Cannabis manufacturers concerned about failing laboratory tests for non-compliance need to build quality into their products from the beginning, specifically using the mutually reinforcing guidelines from the CGMP, CoQ and QMS frameworks.
The combination of the three frameworks can be tailored to the needs of any cannabis manufacturer. CGMP requirements were established to be flexible so each manufacturer can decide individually how to best implement the necessary controls, allowing companies to use modern technologies and innovative approaches to achieve higher quality through continual improvement. Continual improvement aligns with the objectives of a QMS. Further, companies who have a QMS but do not use a CoQ concept are less successful in reducing quality costs and improving quality for their customers, compared to those with both a QMS and CoQ in place, according to research by Andrea Schiffauerova and Vince Thomson.
If the argument of increased earnings and risk mitigation via these three quality frameworks is not convincing enough, consider this: what do tobacco, pharma, alcohol and wellness all have in common? They do not rely on testing alone to ensure product quality. If the goal in cannabis is to get acquired by one of these large-cap companies, building manufacturing infrastructure with proven standards from vertical markets would be a strategic pathway to realize this objective. And if the goal is not to get acquired but to thrive over time and eventually even compete with these companies, one needs to look no further than the FDA’s approval of the CBD-based drug Epidiolex; CGMP requirements have already entered the cannabis space.
A pound-wise investment in quality now will bring major brand value through product differentiation in an industry where products are becoming commodities. Quality always sets a brand apart, and this opportunity is ripe for the picking.
Tymofey Wowk is the vice president of strategic business development at Clean Technique, LLC in Massachusetts. Previously, he worked as a social science research consultant and a humanities professor. As a Ph.D. candidate, his research focuses on factors facilitating the persistence of racial/ethnic minority and low-income college students.