The Basics of Retail Cannabis Inventory Management

Cannabis Inventory management is more than tracking stock—it’s about maintaining accuracy, meeting regulatory standards, and creating an efficient process that supports customer satisfaction and profitability.

In this foundational article, we’ll explore the initial steps you can take to shape what cannabis inventory management looks like for your business. 

We’ll try not to overwhelm you, keeping this introduction to a few key concepts that include:

• What makes managing cannabis inventory unique
• Important terms and processes to know
• What next steps look like when you’re ready to build on this foundation

What is Cannabis Inventory Management?

Cannabis inventory management is the process of overseeing and controlling products as they move through your retail operation, from receiving shipments to the sale of goods. 

It ensures that the right amount of stock is available to meet demand without overstocking or risking stockouts. 

For cannabis retailers, Inventory Management processes are particularly important due to strict regulatory requirements alongside some unique characteristics of cannabis products that don’t confront other retail industries.

Why is Dispensary Inventory Management Important?

In a heavily regulated industry like cannabis, inventory management does more than ensure you have the right products on the shelf. Having well thought-out inventory management processes means dispensary retailers can:

• Maintain Compliance: Cannabis retailers are subject to strict regulatory standards regarding how products are handled. Things can go sideways for your business quickly if you don’t maintain an operation in-line with those rules.
• Enhance Profitability: For most retailers, Gross Margins are thin. Avoiding overstocking and understocking helps reduce waste, manage costs, and maximize sales.
• Improve Customer Satisfaction: With the right stock levels, you can consistently meet customer demand, ensuring they find what they’re looking for when they want it.

The Benefits 

A strong inventory management process offers several advantages, especially in a cannabis retail environment.

Here are the broad strokes:

• Accuracy: Avoid costly mistakes by having clear, up-to-date knowledge of stock levels.
• Efficiency: Streamline operations, from receiving to stocking and sales, saving time and resources.
• Risk Reduction: Keep regulators off your back, prevent loss through better stock tracking, and maintain tight security.
• Informed Decision-Making: Use data from your inventory management system to make smarter purchasing and pricing decisions.

Terms to Know

Understanding these core terms and concepts will help you understand what to be on the lookout for regularly as it relates to inventory. 

This lays the foundation for effective inventory management and more streamlined operations. 

Here are the terms we think every purchasing professional should know:

1. Stock Levels: The quantity of each product available. Monitoring stock levels closely helps prevent both stockouts and overstock.
2. PAR Levels (Periodic Automatic Replenishment): Minimum stock levels you set for each product. Once stock falls below this threshold, it signals it’s time to reorder.
3. Overstock and Understock:
   1. Overstock refers to having more product than you can sell within a reasonable period, which ties up capital and storage space.
   2. Understock means having too little product, which can lead to stockouts and missed sales.
4. Stockouts: When a product is completely out of stock. Stockouts can lead to lost sales and frustrated customers.
5. Lookback Periods: These are specific time frames (e.g., the past 7 days, month) used to analyze sales trends. They’re valuable for forecasting demand and adjusting inventory.
6. Inventory Turnover: How often products are sold and restocked within a set time frame. High turnover generally means products are moving quickly, while low turnover may indicate overstock or low demand.
7. Reorder Points: The stock level that triggers a reorder to prevent stockouts. This is usually set slightly above the minimum stock level to allow for lead time.

If you want to learn more about useful terms, check out our glossary of useful terms for cannabis dispensary inventory buyers.

Processes to Know

The best running dispensaries develop and follow specific processes for managing inventory. Here are a few core processes to consider:

Receiving and Tracking Shipments

Every product entering the store must be tracked from the moment it arrives. This includes verifying quantities, recording batch information, and integrating shipments into inventory software to maintain an accurate record.

Rotating Stock

For cannabis products, stock rotation is crucial to prevent expiration. The FIFO and FEFO methods help ensure that older products are sold before newer ones, reducing waste and keeping products fresh for customers.

Audits and Cycle Counting

Regular cycle counts and audits help catch and correct discrepancies early. Frequent counting not only keeps you in compliance but also improves inventory accuracy, reducing stockouts or overstock situations. Having good data hygiene is essential for this process. Read our guide on the subject.

Demand Planning & Forecasting

Using sales data from defined lookback periods helps predict future demand. This allows for better ordering practices, ensuring that stock levels align with customer needs and seasonal trends.

We have a three-part blog series on this topic if you want to read more about the subject:

• Understanding Demand Planning & Forecasting
• Getting Started with Demand Planning & Forecasting
• Advanced Demand Planning & Forecasting

What Makes Cannabis Inventory Management Different

Managing inventory in cannabis retail comes with a unique set of obstacles compared to traditional retail environments. The most common challenges include:

1. Compliance and Tracking

Cannabis retailers have to comply with strict “seed-to-sale” tracking regulations, which, as the name suggests, are designed to monitor products from raw material to retail sale. 

2. Handling Perishables

Cannabis products, particularly flower and edibles/beverages, have limited shelf lives. This requires careful management to ensure products are sold before expiration and that stock levels match demand. 

Retailers often implement “First In, First Out” (FIFO) or “First-to-Expire, First-Out” (FEFO) methods to manage perishables effectively.

3. Security Concerns

Due to the high value of cannabis products, lack of safe banking options, and regulatory requirements, cannabis retailers have to implement additional security measures to protect inventory, staff, and facilities. 

4. Frequent Audits

Cannabis retailers are subject to more frequent and detailed inventory audits to verify compliance with regulatory standards. This means accurate and consistent record-keeping is crucial. 

Inventory management software tailored for cannabis can automate reporting, reduce manual work (as well as errors), and help to ensure compliance, making audits a less labor-intensive task.

Emphasis on Compliance

We’re going hard on compliance in this article for two reasons:

1. Being explicit at the foundational level hammers home the message, ignore at your own peril, as well as helps people less familiar with these concepts become more knowledgeable and confident around their understanding of the industry.
2. Extra emphasis upfront means we can back off the topic later on down the line as we get more into the weeds of cannabis inventory management. Not that you can afford to consider compliance an afterthought at any point in your cannabis career.

That said, you're getting a double-dose of regulatory compliance coverage as it relates to cannabis inventory management. 

Understanding METRC (or Other State Tracking Systems)

In the U.S., most states require cannabis businesses to use a track-and-trace system like METRC (Marijuana Enforcement Tracking Reporting Compliance) or Biotrack to monitor the movement of products.

METRC and Biotrack are seed-to-sale tracking systems used by many states to ensure transparency and accountability in the cannabis supply chain. They require cannabis retailers to track every step of their product’s journey, from cultivation to sale, ensuring that nothing makes its way to the illicit market or gets sold without being properly taxed.

Cannabis retailers must input data for each transaction, including:

• Receiving products from vendors
• Transferring products between locations
• Selling products to customers
• Reporting waste or destruction of unsellable products

Non-Compliance is Not an Option

Compliance with state regulations is not optional—it’s a legal requirement that helps maintain the legitimacy of the cannabis industry. Failure to comply can result in hefty fines, suspension of your operating license, or even criminal charges. 

Accurate inventory management is crucial to staying compliant, as it ensures that every product in your store is accounted for, tracked properly, and reported as required by law.

In addition, regular audits are a key part of staying compliant. Discrepancies between your physical inventory and what's reported in your tracking system can lead to penalties, so maintaining accurate, up-to-date records is essential.

Where to go from here

By now you should understand that cannabis inventory management is much more than just counting products; it’s about maintaining compliance, optimizing stock levels, and getting operations tight so you don't lose money or customers. 

With the right tools and processes, you can effectively manage inventory, minimize losses, and create a smoother shopping experience for customers.

A lot of these burdens fall on the shoulders of inventory and purchasing professionals, but we made Happy Buyers, the only tool built for buyers in the retail cannabis space. 

Schedule a demo or learn more about how we simplify purchasing through guides for dispensary inventory managers and buyers.

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