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How Does a Marijuana Supply Chain Business Operate?

The legal marijuana market in the United States is predicted to reach $24 billion by 2025. But despite its exponential growth and potential for revenue generation, marijuana is still illegal at the federal level. It is also one of the most regulated sectors in the U.S. Thus, cannabis businesses in legal states have to follow […]

How Does a Marijuana Supply Chain Business Operate

The legal marijuana market in the United States is predicted to reach $24 billion by 2025. But despite its exponential growth and potential for revenue generation, marijuana is still illegal at the federal level. It is also one of the most regulated sectors in the U.S.

Thus, cannabis businesses in legal states have to follow many compliance regulations. They must track marijuana products across the supply chain from seed to sale. If you are looking to cash in on the green rush, you must clearly understand the industry’s supply chain. Read on for more insight.

The Marijuana Supply Chain

The marijuana supply chain comprises five stages:

  • Cultivation
  • Manufacturing
  • Distribution
  • Transportation
  • Retail


Marijuana is an agricultural product like any other. Thus, its supply chain starts with cultivation. Most cultivators grow their plants in greenhouse environments, where they can control environmental factors like temperature and humidity. This increases their yields and improves the quality of their buds.

The marijuana cultivation process contains six stages:

  • Germination
  • Seedling
  • Vegetative
  • Pre-flowering
  • Flowering
  • Harvesting

After harvesting, the cultivators will group the plants into batches. Moreover, they will assign a unique batch number for each batch. The plants will also be subjected to lab testing. The primary purpose of lab testing is to evaluate the potency of the cannabis flower and test for the presence of pesticides and other harmful chemicals.


Most growers process the cannabis flower themselves. But a minority sell it as raw materials to wholesalers. The manufacturing/processing stage involves drying and curing the marijuana plants. The manufacturers will also convert the marijuana plants into various finished products. These include concentrates, edibles, and trimmed buds.

Useful cannabinoids and terpenes are extracted at this stage. That said, there are two basic methods of cannabinoid extraction:


Solvent Extraction

This method typically involves using solvents like ethanol, carbon dioxide, and alcohol. Solvent extraction creates various marijuana extracts, including:

  • Shatter
  • Cannabis oil
  • Wax
  • Butane hash oil

Non-solvent Extraction

This method uses natural elements like heat, water, and pressure to extract cannabinoids. Since it doesn’t involve the use of chemicals, non-solvent extraction is generally safer. It produces extracts like:

  • Kief
  • Rosin
  • Hash

The manufacturers sell some of these concentrates as-is. They also add others to edibles, topicals, and vaporizers. Moreover, the marijuana products will undergo further testing. A laboratory will take a small sample to represent the entire batch of products. The manufacturers will need to post the lab reports in the state’s regulatory framework.


This is probably the most regulated stage in the marijuana supply chain. Moving marijuana products across stateliness requires tons of paperwork. This is especially true in cases where the products are being transported through an illegal state.

Marijuana distributors also perform additional roles besides transportation, calling for more regulation. These roles include:

  • Shipping products for wholesalers
  • Storing marijuana products temporarily 
  • Serving as an auxiliary sales team
  • Facilitating cash transactions between wholesalers and dispensaries


After marijuana products have been lab-tested and approved, the next step in the marijuana supply chain is transportation to marijuana dispensaries (retailers). However, unlike traditional agricultural products, the industry can only transport marijuana under strict regulations

For starters, marijuana distributors need a type 11 license. They can only deliver marijuana products to retailers if they have this license. This is because the distributors need to collect excise tax after each delivery. They must also remit the collected taxes to relevant authorities within a specified timeframe.


This is where the marijuana supply chain ends. Marijuana retailers stock a wide variety of products to meet their customers’ needs and preferences. The most common products in a typical marijuana dispensary include cannabis flowers, edibles, topicals, pre-rolls, and concentrates. 

Marijuana dispensaries generally fall under two categories:

  • Brick-and-mortar stores: This is your typical cannabis dispensary with a physical location.
  • Online stores: Online cannabis stores sell cannabis through e-commerce. 

Like all other players in the marijuana supply chain, retailers have their fair share of compliance issues. For example, they are only allowed to stock products from licensed brands. They also need to provide lab reports for all the products in their inventory. 


Top Challenges in the Marijuana Supply Chain

Licensing Regulations

Each state has unique licensing regulations. Some states like New Jersey and Florida require cannabis brands to handle all stages in the supply chain independently, from growing to retail. 

Other states like Washington offer different licenses for (producers) growers, (processors) manufacturers, and retailers. That said, marijuana producers in Washington can hold a processing license but not a retail license.

In states where different companies cultivate and manufacture marijuana, the plants generally take longer to move through the supply chain. Additionally, most legal states have restrictions on where manufacturing facilities and dispensaries can set up shop. 

The differences in licensing regulations across different states can create confusion for entrepreneurs. This is especially true if they conduct their business in different states.


Despite being legal in most states, cannabis is still illegal at the federal level. This often creates issues for newly-legalized states, particularly when it comes to where cultivators can get their initial plants. The main reason behind this is that the sale of cannabis products across state lines is not permitted. Until, of course, it is legalized at the federal level.

Rising Interest Rates

Due to the precarious legality of cannabis, entrepreneurs have limited access to banking services. This often results in high-interest rates, making it harder to raise capital and finance future growth. 

The industry might also face further turmoil in the future. This is because the Federal Reserve has announced its plans to raise interest rates three times by the end of 2022 to fight inflation. 

The Bottom Line

Despite being one of the fastest-growing sectors in the U.S., the cannabis industry has numerous regulations within the supply chain. However, as more states move towards decriminalization, some of these challenges will be eliminated. 

But, in the meantime, you need to arm yourself with the right knowledge and preparation to overcome these issues. This will also help you take advantage of the current freedom and opportunities in the cannabis industry.