Operational Characteristics and Contractual Terms: A Quick Guide to Contract Manufacturing and Strategic Cannabis Supply Chain Partnerships
The focus of this article isn’t on theoretical ideas. It aims to identify and develop the best supply chain partnerships for your business.
This includes understanding the key operational characteristics and essential contractual terms for both manufacturing and active ingredient supplier relationships.
If you’re a CPG-based business, these decisions are critical to your success.
With that in mind, the article’s primary goal is to provide context for integral manufacturing attributes and relevant section topics of existing agreements.
It's intended to function as a baseline for initial partnership engagement discussions to help ensure you're optimizing manufacturing relationships and protecting your business.
By utilizing contract manufacturers and suppliers with outstanding compliance processes, unique capabilities, and a compelling value proposition, you can more effectively secure your products from being surpassed in terms of quality and consistency.
What else should we be looking for in manufacturers when identifying qualities that provide the optimal conditions for uninterrupted, error-free, high-quality products?
Take ARCATAX , for example—an extraction-based manufacturing company from Northern California.
They’re located in a small, nondescript compound looking out on the Pacific Ocean a few miles from Cal State Humboldt.
The facility is surrounded by other similar commercial buildings and remnants of the logging industry, spread out before a canopy of redwoods and pines immediately to the East.
ArcataX and businesses like them represent a core part of the consumer-hidden cannabis supply chain that powers the products you know and love from the Bay Area down to Los Angeles and San Diego.
Their close relationships with farmers and collaborations with renowned California brands have contributed to their ongoing success.
ArcataX has several advantages that may resonate with your needs which you can look for in similar prospective manufacturers in your regulated market.
In other words, they—
Know the plant.
Execute efficiently.
Sympathize instead of empathize.
Perform honest work and critical services at fair prices.
Contribute to their community, both cannabis and geographical.
Identify and stratify degrees of quality and value across product categories and plant stages.
Facilitate stability within a brand’s supply chain.
Understand internal market dynamics, acutely mindful of evolving pricing and conditions.
Appreciate and incorporate the cultural history influencing their products.
Recognize and provide what customers need and consumers value.
Organize and prepare themselves for the realities of extreme competition.
Meticulously invest in their operations, lacking unlimited resources to accommodate mistakes.
Obsess with process improvement and efficiency to compete with economies of scale.
Value their team members and respect the commitments individually being made.
Demonstrate grit from Adult Use Regulation transitioning.
Strengthen their operations through multiple years of ongoing society-wide challenges.
Oversee the business as experienced founders and technically proficient managers.
Care about Cannabis as a medicine and are motivated by their passion.
Concern themselves with your success, because they want to contribute to it.
—Are these some of the same qualities you value in contract manufacturers and active ingredient supplier partnerships?
Exceptional operators like ArcataX showcase agility, dedication, and a commitment to continuous process improvement, distinguishing themselves from bloated, unfocused companies that struggle with operational efficiency.
Lately, several major international operators are closing facilities before they're even fully operational.
The primary reason? Instead of focusing on strategic, incremental, earned growth, they became consumed by speculative manufacturing that ultimately proved to be unsustainable.
Using words like 'biggest,' 'most,' 'capacity,' 'first,' 'largest,' 'everything,' 'throughput,' and 'square footage' as main selling points doesn't give you much of a business advantage in the majority of cases or convey a real sense of any true capabilities.
The key strategic takeaway? Don't get overextended like the giant tankers caught in unpredictable seas. Small can be very mighty, especially in times of turmoil.
When choosing a contract manufacturer or an active ingredient supplier—beyond the initial understanding of general cultural fit, compatible professional values, required proficiencies and resources, financial and regulatory validation, and combined interest in working together—consider the following to address formally where possible:
Operational Characteristics
1. Rigorous quality control and accuracy testing, including potency tests at every mixing or infusion point
2. Robust internal random sampling protocols utilized throughout the various manufacturing stages
3. Regular equipment calibration and maintenance
4. Redundancy plans for crucial equipment and processes
5. Availability of alternative sourcing options in case of supply chain disruption
Significant failures within these first five points may bring major issues for your brand by potentially compromising product integrity, delivery, and inventory—affecting your entire procurement supply chain.
6. Well-established primary supplier and sub-contractor relationships
7. Structured cleaning, sanitation, and sterilization protocols
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8. Prioritization of hygienic workspaces and procedures
9. Clear definitions of automated and manual processes
10. Comprehensive employee training resources
11.?Enterprise resource planning systems and protocols
12.?Comprehensive project management systems
13.?Transparent, responsive, and pragmatic communication
14.?Well-defined deliverables and organized documentation records
15.?Reasonable scalability capabilities of the partner's operations to meet future demands
16.?Flexibility in accommodating customization requests
17.?Innovation and ability to provide suggestions for improvement
18.?Compatibility of the partner's technology with your business's systems
19.?Environmental sustainability practices and certifications
20.?Relevant information from current and past clients
This list intentionally prioritizes service elements that directly impact your immediate products and projects.
To that end, partners who focus on compliance, quality, and specialization are ultimately able to more effectively offer these advantages over those who attempt to be all encompassing.
By analyzing key operational indicators, you’ll be better equipped to establish whether a manufacturing partner is the right fit for your business.
It can’t be overstated the absolute importance of thorough contract review and legal guidance to establish a solid foundation for success.
By no means is this a comprehensive final review of contract manufacturing operations or legal requirements.
It's intended as a reference guide and initial building block for businesses to expand upon or to use to examine existing and future agreements.
In that context, consider the additional following aspects to address and clarify during contractual conversations with your legal counsel and prospective partner(s):
Contractual Terms
21.?Effective date and termination date; extension terms
22.?Licensing and corporate information
23.?Initial production timetable; lead times
24.?Product, labeling, packaging standards, and associated fees
25.?Development of products, packaging, including exclusivity
26.?Purchase agreement(s) and order protocols
27.?Individual product specifications
28.?Chain of custody and state tracking
29.?Production documentation
30.?Delivery and payment
31.?Reimbursement conditions
32.?Inspection and return period
33.?Cost of Goods Sold
34.?Sub-contractor and supplier terms as applicable
35.?Permitted territories
36.?Confidentiality terms
37.?Compliance protocols and formal assurances
38.?Quality control protocols, 3rd party integrations, and associated fees
39.?Discontinuation or change in specifications for the products
40.?Notice for changes to the agreement in specified sections
41.?Licensing and technical knowledge
42.?Non-disclosure details
43.?IP ownership and protection
44.?Indemnification
45.?Mediation of disputes
46.?Process and product expense assignments
47.?Relationship created definition
48.?Termination clause
Some points are clearly more obvious than others, but all play a role in defining and streamlining your manufacturing relationships in an effort to avoid unnecessary future challenges.
While a handshake agreement is often all you need with the perfect partner, contracts are there for the worst-case scenario and to protect you and your company’s interests when you need it most.
I hope this is of assistance to some of you and your businesses!
Lawyers, compliance experts, and manufacturers—anything to add?