The strategy and practice of wood procurement varies depending on the type of mill that will ultimately consume the wood raw materials. Most active mills in the US South are either producing pulp and paper or lumber, yet their fiber needs (and thus their supply chains) are quite different.
Pulp and paper mills primarily focus on purchasing fiber for the lowest price possible, as the size of the material they consume is not a real concern since they can chip almost any size tree and make pulp out of it. There are really only two principle directives for procuring wood for a pulp and paper mill: 1) never, under any circumstance, allow the mill to run out of raw material, and 2) purchase that raw material at the cheapest price possible.
Sawmills generally have the same concerns. They too focus on buying enough wood to log the mill while meeting production quotas and buying it at the least expensive price possible. Sawmills, however, have much more production flexibility than pulp and paper mills, primarily because market forces at any given time may change. They have the ability to operate nimbly, cutting production by moving from two shifts to one, or shortening the work week down to five or six days if necessary. At the same time, sawmills must manage their raw material costs while constantly focusing on log quality and size. They must always control the variability in log size that they run through their mills to maximize output and profits.
The majority of sawmills is the US South focus on producing dimension lumber, and the class leaders in this category operate on the principle that each mill has an ideal log size. This log is a specific diameter and length, and is ideally-suited for the mill’s unique processing setup; when the mill saws this log size, it runs at maximum efficiency.
As noted above, the ideal log for each mill will be a different diameter and length, and in a perfect world, each log would also be square. While we have not yet solved the challenge of growing square trees, forestry has made great strides through intensive management schemes, which result in plantations that grow fairly homogenously-sized trees. However, even the most rigorously managed pine plantation is not 100 percent homogenous, and log sizes can vary widely within a single tract. The variations in log size are even greater when buying across a wood basin containing fragmented, privately-owned tracts of land (each with their own management strategy). Because of this, sawmill procurement teams are constantly trying to locate and buy that perfect log, while at the same time making exceptions so that the mill can meet production quotas.
Sawmill log procurement foresters must find and successfully purchase tracts of timber that are as close as possible to their mill’s ideal log. This is not an easy task, which is why many mill log yards are typically full of logs that are close to—but do not quite meet—the criteria of the ideal log. The goal for the procurement team then has an addendum: the team is tasked with finding the perfectly-sized log, maximizing the mill’s market share of that log (while not overpaying), and reducing the variability in log size as much as possible.
How can Sawmills Improve This Process?
- Buying the right log size: There are methods for mills to track and verify of their procurement strategies. The most accurate way to do this is to measure loads at the scale house as they arrive, taking average SED, PLF, and stems/ton measurements. All of these measurements will give the mill manager and procurement team a good understanding of whether or not they are purchasing the ideal log.
- Not overpaying for the right log size: The mill can also perform “return to log” (RTL) calculations to determine if the price paid (on a delivered or stumpage basis) is profitable to the mill. Obviously, if the RTL calculations come back negative, adjustments need to be made. Paying too much—even for the perfect log—will put any mill at a large disadvantage very quickly.
Using Quality Data to go a Step Farther
As discussed above, mills can garner a solid understanding of the ideal log size and log price to run at a high efficiency, but there is always room for improvement. Procurement foresters are on the ground daily negotiating prices for logs to be delivered to their respective mills. Beyond the knowledge of what their particular mill pays for logs, procurement teams most likely have “field” conversations with loggers and wood dealers and get an idea for what competitors are paying for logs as well.
While this can be helpful information, it is anecdotal at best. Important business decisions should not be built on hearsay or shop-talk. Without a full, unbiased view of the market, individual mills will never know exactly how their log costs compare to their competitors. Because of this, they will lack scope and knowledge of the full market, making it much tougher to make improvements and remove cost from the supply chain.
Saving a sawmill money on raw material (logs), which can be up to 75 percent of the total cost of the mills finished product, should be one of the highest priorities for a mill that wants to aggressively compete in today’s rapidly changing market place. Once a mill’s management team has access to quality market information and data, they can truly assess where their log costs are. With this kind of data, they can then analyze and strategically plan for increasing market share of their ideal log while simultaneously reducing costs.