How to Achieve Major, Sustainable Cost Reduction in Cannabis?
It’s no secret that many cost reduction strategies (e.g., staff cuts) are unable to reduce corporate expenses by more than 10-15% over the long run.
Why?
One major reason is that managers fail to address a hidden but pernicious source of cost, namely complexity. Complexity – manifested through redundant processes, excessive paperwork, duplication of effort and bloated product portfolios & bill of materials - leads to cost structures that are 25-40% higher than is necessary to produce a given level of output.
As an example, lets looks at the 2024 SG&A numbers at 11 large MSOs. Jesse Redmond from Water Tower Research LLC found that their expenses averaged a whopping 35% of sales. All but two MSOs had SG&A costs higher than the average CPG business (their SG&A is 20% of revenues).
If large cannabis businesses are serious about cost reduction, they need to tackle complexity across the entire enterprise and simplify, simplify.
I have led complexity reduction strategies that have saved financial institutions, CPG companies and healthcare firms millions in direct cost savings (e.g., lower input costs) plus five times more dollars in indirect, longer term savings (e.g,, reduced production downtimes).
These were well run organizations, not undisciplined basket cases. They just added products, staff, and practices without paying attention to the long-term consequences.
You can imagine what’s been happening at rapidly growing and frequently pivoting cannabis firms, many of which function like a large start-up.
Complexity reduction efforts include a variety of company-specific initiatives, such as:
1. Culling underperforming SKUs to reduce inventories and drop uneconomical sales & marketing efforts;
2. Reengineering processes to minimize the number of expensive and time-consuming touches;
3. Standardizing reporting, policies, and IT systems to drive uniformity and reduce errors.
Cutting complexity, however, is hard work. You must go deep into analyzing the data, processes, and roles & responsibilities plus there will be organizational headwinds such as vested interests, missing data and employee lethargy.
You also need to be mindful that complexity can creep back. Simplification initiatives also need to impart key competencies such as product line and vendor management.
The last word goes to Steve Jobs:
“That’s been on my mantras – focus and simplicity. Simple can be harder than complex. You have to work hard to get your thinking clean to make it simple. But its worth it in the end because once you get there, you can move mountains.”
Let’s talk about how I can help untangle your complexity, freeing up valuable capital, time, and innovation.
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