Understanding VMI Agreements in the Hemp Industry
Previously I mentioned a general overview about hemp, including hemp cultivation, legal framework, and business operations surrounding it as part of Info Hemp. Now I’m going to touch on some specifics regarding a common contractual issue that affects all legal cannabis industries. Most of you who are involved in the hemp or cannabis industry, especially cultivators or distributors, will have to deal with a VMI, or Vendor Managed Inventory, agreement. This time we’re going to take a deeper dive into a VMI agreement template. Many people ask, what is a VMI or vendor managed inventory agreement, or what is a VMI agreement template? The basic definition is that it’s an agreement between two businesses that allows one of them to manage the other business’ inventory. They’re particularly useful in the cannabis industry, but any business that requires inventory, and a reliable source for that inventory, will use a VMI agreement in some form or another. This is why throughout this article we are going to touch on how to utilize a VMI agreement template for your hemp business.
One of the biggest issues faced by hemp businesses is having enough inventory available at the right time and at the right place to meet the demands of production and retail sales. A VMI agreement can be a beneficial tool to achieve this goal. A VMI agreement is typically used between businesses to ensure there is a constant flow of inventory from one business to the other. In short, a VMI agreement is the agreement between a supplier and purchaser of inventory where the supplier makes the decision when the inventory should be replenished and the purchaser accepts whatever decisions the supplier makes.
There are many common reasons in the cannabis industry, and specifically the hemp industry, that a VMI agreement can be useful: As you can see, the VMI agreement is a useful tool for the hemp and cannabis industries. Most often, this agreement is between a supplier and a purchaser. The supplier has access to the purchaser’s data, including data such as sales and inventory, so the supplier can make decisions regarding levels of inventory and the timing of that inventory so that the purchaser of the inventory is not without product. As supply and demand, and overall marketplace conditions, change within the industry, there will be fluctuations in inventory available to the purchaser and that supplier.
The VMI agreement can play a significant role in the compliance of cannabis regulations and laws. In the hemp and legal cannabis industries, there are many regulations that affect your business and your ability to conduct business within the state or federally. It is extremely important to ensure you are complying with all hemp and cannabis regulations and laws in your state. For example, cannabis retains tetrahydrocannabinol, better known as THC, a substance that is prohibited by the federal government, meaning it is illegal on the federal level to grow, cultivate, or sell, and otherwise possesses in “Schedule I” of the federal Controlled Substances Act. Some states operate medical and recreational cannabis programs, but there are many regulations regarding how those programs must be operated within your state. For medical cannabis, the doctor overseeing the program, or even the patient, must have certain credentials. In some states, it is required that cannabis be tested by an approved agency to ensure it passes to meet quality and safety requirements. The cultivation of hemp per the 2018 Farm Bill applies only to hemp grown, produced, handled, or sold per what is outlined in the 2018 Farm Bill. If your state does not have an approved state plan, then those activities must be conducted in accordance with applicable federal law.
The federal government has provided state agencies the ability to pass their own regulations concerning industrial hemp, defined as a schedule III controlled substance, but the states must submit their regulations to the federal government for approval or otherwise obtain a waiver. In your agreement, you can designate requirements that must be met by the provider regarding hemp testing or other quality specifications found in the agreement. Keeping with the cannabis example, there are states that have medical and recreational cannabis programs, and with those comes regulations and laws. In some states, the regulations will require that businesses conduct business only with other licensed businesses. It is important to keep these things in mind when executing a VMI agreement, or any contract, if you’re doing business in the cannabis industry.
The benefits of utilizing a VMI agreement is that you know you will always have inventory available when you need it, and that you do not have to constantly monitor your inventory and make adjustments in orders, or spending unnecessary time and money performing these tasks. As the cannabis and hemp industry continues to grow, you’ll soon find yourself adjusting your inventory levels. This is why a VMI agreement is useful, because it can save you and your employees much needed time by allowing your supplier to worry about your company’s inventory, while you do what you do best: cultivate hemp and grow your business.
There are many examples of other industries that have used VMI agreements and the outcome of implementing such agreements into those industries. We have already discussed how the cannabis and hemp industry will employ such agreements. Now, let’s see how other industries have used VMI agreements and how it has helped those companies. A VMI agreement can aid in the general supply chain management of your hemp. The role in which to use a VMI agreement is not only the management of inventory, but the quality of that inventory. Distributing high-quality inventory from suppliers will aid in your business and will increase sales over time, given that your customers continue to return for those same quality goods.
Here are some examples of how to implement a VMI in your hemp business, or other hemp business. Many businesses also find it beneficial to utilize a VMI agreement for: In some cases, there could be a delay in the customer receiving its inventory from its supplier. When a delay occurs, it is important that you resolve the issue as soon as possible and ensure that the customer has been provided with the necessary inventory or other compensation. Communication is extremely important. It is wise to provide your customer with a contact person so they may voice their concerns, issue, or questions, and that person will be able to alert you to what the customer needs and they can make a decision on how to proceed.
It is important to remember that although you are implementing a VMI agreement into your business, that the product that is being distributed is still subject to federal regulations as well as any state regulations. For the cannabis or hemp industry, you will still have to ensure that the product is of the highest quality, meets all state and federal regulations, and you are mindful of the financial obligations and rights outlined in the agreement. Although the VMI agreement is designed to alleviate the burden of inventory management, it is still important to remember that your business will have other responsibilities that accompany the inventory distribution. A VMI agreement will not mitigate those other responsibilities and obligations you may have. It is recommended that you remain in contact with your supplier regarding those things.
Another way to maintain your business is to ensure that your general ledger is updated periodically so that you have an accurate reading of where your business stands financially. The VMI agreement can also aid in your accounting needs, such as invoicing, payment, receipts, and other accounting duties. Some of the challenges that hemp businesses may face in the implementation of a VMI agreement would be the potential delays in the distribution process, discontinuation of a [previously] ordered item, or a depletion of those items. When such a delay or depletion of an item occurs, the parties must come to an agreement as to how they wish to proceed, and it would be wise for the supplier to gauge the needs of their customer and come to an agreement regarding compensation or payment.
The key to implementing a VMI agreement or template is ensuring that all parties are aware of their obligations under the agreement, and that they take those obligations seriously. Companies will have to establish guidelines that will control the overall delivery of supplies, including specifying the quality of the product and other details, and it is up to the supplier to meet those specifications. An easy way to mitigate any potential issues from occurring is to be thorough in your negotiations with the supplier. It is recommended that you include a force majeure clause, or otherwise a list of uncontrollable circumstances, that will allow you and the supplier to reevaluate the contract during times of natural disaster, an epidemic, acts of war, labor disputes, and other situations that may disrupt the flow of supplies. The supplier will be responsible to provide you with additional resources when such a delay occurs.
The hemp industry is a new frontier that everyone is venturing into, and because of this, they will treat their hemp contracts seriously and will enforce their rights as spelled out under the agreement. Given that, when entering or negotiating a VMI agreement or template, there are some key components that you should keep in mind. The components to a good contract have been outlined above and they are helpful regardless of what industry you or your business is involved in. It is important to remember that a contract is a legally binding agreement and that it is enforceable. Given that, it is important that the parties understand what is expected of them under the agreement and that the parties realize what is at stake if the contract is breached or terminated.
Related posts:
