Maximizing Returns: Evaluating ROI in Cannabis ERP Systems

May 15, 2023
 Min Read

What is an ERP system and who needs one?

What is an ERP system and why do I need one? This is a question every business owner must consider as their organization continues to grow and scale. In my years as a business analyst and consultant, Enterprise Resource Planning (ERP) was a topic that came up in every meeting – regardless if the business’s revenue was 1M or 50M. 

Enterprise Resource Planning is about planning and managing the resources of an organization to ensure best practices in every function of the business. These resources include people, working capital, inventory, time, etc. From supply chain and customer management to helping identify important trends and patterns, an ERP software elevates the entire business and optimizes scalability.

Can cannabis businesses use ERP software?

There are many examples of large cannabis organizations leveraging an ERP to promote growth and reduce costs. For example, this case study about Charlotte's Web, a rapidly growing CBD manufacturer based in Colorado, shows how they used ERP data to save $2M in operational costs and increase customer acquisition by 25%. Cronos group, a large Canadian publicly traded company, revealed they had reduced costs by $23M "related to the implementation of the company's ERP system."

Large cannabis businesses like these have realized that leveraging technology and data to promote growth and cut costs is the distinguishing factor for successful operators in a volatile market. Colin Hood of Americannmade, a vertically integrated Canix client from California, said “Canix has been a godsend in terms of saving time and money”.

How does an ERP software provide value?

ERP systems provide value by integrating processes that involve multiple departments to remove bottlenecks. The capability to work with a unified view of the organization breaks down data silos, and saves a great deal of time when making informed business decisions. For instance, real-time insight into supply chains, inventory capacity and projected customer demand could help a manufacturer maximize output without exceeding the capabilities of its teams. 

An ERP should also automate and synchronize workflows across the company as much as possible. Canix’s MRP tools and auto PAR level alerts, task management and RFID auditing features are all examples of this functionality.

Why do cannabis businesses need ERP software?     

A cannabis business stands to benefit from an ERP even more than a business in a more traditional industry. This is caused by two factors: the complexity of unique regulatory compliance requirements and the relative adolescence of the cannabis industry as a whole.

Cannabis compliance laws can create bottlenecks and stifle growth. For example, the much maligned 280e bars cannabis businesses from taking any tax deductions that are not part of COGs. This effectively causes businesses to be taxed on gross income instead of net income. This inability to deduct sales and overhead costs can be crushing for some organizations, further highlighting the need for a system that optimizes efficiency and accurately tracks and costs anything that can be deducted. 

Other cumbersome regulations, such as tracking individual plant tags and harvests, as well as confusion around lab samples are also a burden that can be alleviated by an ERP. Large scale multi-state operators (MSO’s) are most impacted by these restrictions, due to the unique nature of each state’s laws and market. Canix’s ability to help decision makers identify trends by reporting vital data allows MSO’s to react quickly to a rapidly changing market while also ensuring compliance.

What are some ways an ERP can help a business scale?

Consider a standard procure-to-pay process, which involves many teams and touch points, from sales to warehousing to fulfillment. By using an ERP, stakeholders throughout this chain can track and manage the entire process from a single system. For instance, Canix’s mobile app allows a salesperson to complete a sale, check the status of the order at any time and keep their customer updated without having to rely on anyone else. 

When the salesperson confirms that the required stock is available, it is automatically deducted from inventory.  This process tracks all relevant costs throughout the supply chain, increasing efficiency and saving money. As a result, customer relationships and trust are strengthened.  

Accurate real-time inventory and order information ensures that  customers always receive the right items and orders arrive on time. By limiting those issues, customers are more likely to be happy and become repeat buyers.

Real time reporting is one of the most indispensable and immediate benefits of using an ERP system like Canix. It is vital to be able to customize reporting across all functions — finance, inventory, orders, procurement, sales, productivity, etc. Canix has the ability to automate the creation and delivery of reports to relevant stakeholders – whether it be the bank, regulatory authorities or management – provide actionable data, and save multitudes of time. It also allows organizational leadership to spend time devising strategies and acting upon insightful data, rather than spending time searching for it. 

Not only can users track the performance of different components of the business, but they can also compare departments to understand what is driving the business forward and what is holding it back.

How do I pick an ERP software?

It is important to pick a system that is specific to your industry, in this case cannabis. While legacy ERP software providers, like SAP or Microsoft, have worked with countless companies in traditional industries, cannabis is a unique  case. The complexities and irregularities of a rapidly evolving market like cannabis requires an ERP that can adapt and improve continuously. State specific laws and requirements are continuously changing, making a strong bi-directional integration with state compliance software a prerequisite for any cannabis ERP. 

Check out the blog post “6 Questions to ask yourself before choosing a cannabis ERP software” for further reading. 

How do I calculate the ROI of an ERP?

There is a distinction between “hard” and “soft” ROI when it comes to ERP software. Hard ROI refers to traditional returns that can be easily assigned a quantifiable financial value, such as incremental revenue gained or costs reduced. For instance, since the implementation of their systems, Canix customers have seen a 40% to 60% improvement in order process efficiency and a 40% to 55% reduction in reporting times, both of which can be quantified in dollar figures and therefore fall in the category of hard ROI. 

On the other hand, soft ROI refers to intangible gains, such as a rise in employee morale or improved brand equity with customers. Both of these benefits can have an immense impact on a business’s bottom line.

What are some ways a business can realize the ROI of an ERP?

A fully integrated cannabis company has 20 unique cultivars and manufactures 30 unique cannabis products. It maintains an average profit margin of 15%. With Canix, it can easily spot the strains with the lowest average yield and the products with the lowest profitability. This allows the company to investigate further and discover that these products have much higher labor and packaging costs. After speaking to the staff, the company determines that most of the work that goes into making those items is manual and time-consuming. Additionally, employees are spending an excessive amount of time designing and creating labels that are then outsourced for printing. 

It immediately decides to purchase a new machine that can automate the production of those goods, and also decides to use Canix to create and print all labels in-house.  The business sees its average profit margin climb to 20% and sees a significant reduction in labeling costs. Just like that, the ERP software has saved the business hundreds of thousands of dollars annually in hard ROI.

There are countless other opportunities for cost savings and intangible value provided by an ERP. The ability to monitor the pulse of your organization in one place means you can quickly identify the source of higher expenses, making it much easier to reduce costs and scale the company. In addition to cost savings, an ERP provides intangible benefits  such as heightened data security, universal access to one central cloud database and increased employee morale and productivity. Canix also enables improvements to planning, which prevents rush orders, overproduction, or over-ordering, all of which can drive up costs. By preventing these kinds of mishaps, brand value increases over time, and customer trust is strengthened.

How will an ERP help my employees?

An ERP system can significantly enhance productivity by automating basic, repetitive tasks, freeing up employees to work on other projects that bring more value to the organization. This also serves to improve employee morale and build a strong company culture. 

Canix's auto-tag allocation and task management features enable  personnel to complete a variety of tasks faster by making processes more straightforward and reducing the time spent searching for the information they need. Since employees have visibility into the entire company, they don’t have to ask around for a specific set of data or details on how certain processes work. There are countless ways an ERP system can lower costs, which is why these solutions often have a fast ROI.

How can I calculate hard and soft ROI?

Selecting the right ERP for your organization is absolutely critical. However, calculating the ROI of such an all-encompassing solution is not always easy. Management must carefully weigh the costs and benefits of each option and determine which one is most suitable for their specific business and market. The formula for calculating hard ROI is simple: (total value of investment - total cost of investment) / total cost of investment x 100%. 

It is difficult to measure intangible benefits such as increased data security, visibility and brand value, but they should unquestionably be included in considerations. As a starting point, it is helpful to consult ledgers and classify expenditures into categories. For example, if you don’t have a cost for safety measures, look back at what any recalls or withdrawals have cost your company, as well as the budget allocated to satisfying compliance audits.

Is it really that important?

An ERP should be the structural foundation or “skeleton” of your organization, helping it grow in the most optimal manner. Therefore, you should at the minimum consider the ROI of an ERP on an annual basis, or even 3 to 5 years into the future. Selecting and implementing the right ERP is a key business decision that can greatly impact the overall direction of your organization. If implemented correctly an ERP system can provide both immediate and long-term benefits, making it well worth the time and effort. 

Canix offers an inclusive ROI analysis to potential users, which helps them discover how much current inefficiencies are costing the company. This is especially significant, as a ROI analysis can be a time and resource consuming process. Nonetheless, performing this analysis and adopting the right ERP is one of the most crucial and consequential business decisions a company can make. By automating and optimizing your business, you gain leverage (time+money), which is the key to creating and scaling a high growth organization. The right ERP can mean the difference between success and failure in the rapidly evolving cannabis industry.

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