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Blog

The Seven Most Expensive Words in Business

August 19, 2019
Author: Pete Coutu

There is an old adage said to encompass the seven most expensive words in business: “This is how we’ve always done it.” It is a warning that past success is no guarantee for future success, especially in a world that is increasingly dependent on technology, which itself is evolving at a quickening pace.

On the surface, the forest products supply chain can seem removed from many of the complexities that come with technological advancement. Honestly, how advanced can the process really get? 1) Grow and harvest trees, 2) haul trees to a mill facility where they will be turned into a wood-based product. Replant, and repeat steps 1 and 2.

While the process itself is unlikely to change, there is always tremendous room for improvement within the framework of the process. From advanced genetic improvements in tree saplings that maximize growth and volume, to harvesting equipment that more efficiently harvests trees in less time, to mill automation and business intelligence platforms that optimize the manufacturing process, technology is very much a part of the modern forest supply chain.

In a manufacturing process where as much as 75% of the cost of the finished product can be attributed to raw material costs (wood), what would happen if “This is how we’ve always done it” becomes the company line? We all know the result wouldn’t be profitable… or pretty.

 

Benchmarking: The Key to Improvement

We often evaluate performance by determining whether a particular process, product or service is in the top quartile, or top 10 percent of its peer group. Benchmarking, in this respect, is the most effective way of evaluating current performance. It effectively allows you to identify your position in the market and uncover the inefficiencies and their causes that allow you to develop and implement strategic solutions.

But how do we achieve truly superior performance? By focusing on the details, on the pennies, and on incremental gains. In the wood raw material supply chain, even a 1% improvement can make a tremendous impact on profitability. How does a company gain an additional 1% in efficiency to reduce cost? With the application of reliable, granular data.

On an annual basis, the average North American sawmill consumes roughly 600,000 tons of sawtimber (larger, modern sawmills consume nearly twice as much), and the average pulp mill consumes in excess of 1.5 million tons. When purchasing wood raw material on this scale, a 1% improvement can have a significant impact.

Forest2Market’s deep databases of actual transaction data equip our customers with the most accurate and precise raw material pricing data available—down to the penny. Using our benchmarks and reports, our customers are able to pinpoint individual cost component inefficiencies in their supply chains including origin, destination, volume, price, species, product and a host of other unique attributes of individual loads of wood. They can then use this market intelligence to implement new strategies, eliminate inefficiencies and track improvements over time. Forest2Market also has supply chain experts available to help interpret the data and implement strategies grounded in data-driven decision making.

 

Case Studies

When breaking down the total delivered cost for an average-sized sawmill, stumpage is clearly the largest cost component (roughly half). However, a 1% reduction in the average freight cost ($0.07/ton) for the average-sized sawmill results in $42,300 of savings.

Applying this same methodology to the other cost components yields similar savings that, when combined, establish substantial cost-cutting measures totaling nearly $250,000. For the average-sized sawmill, this kind of savings creates real value with a lasting impact as noted in the chart below.

Waterfall1

 

When breaking down the total delivered cost for a large pulp mill, OSB or pellet facility, the cut-skid-load cost component is nearly the same as the stumpage component; together, these two components make up roughly 70% of the total delivered price for the facility’s wood raw materials.

A 1% savings on the average freight cost ($0.08/ton) equates to $120,750 in annual savings. As a freight rate ($/ton/mile) this suggests that a half-mile reduction in the average haul distance can contribute to total savings in this case of over $480,000.

Waterfall2

 

Avoiding the Pitfalls

As illustrated above, pennies matter. While there is no easy, “one-size-fits-all” solution for all participants in the forest value chain, it is imperative that industry-leading organizations avoid any tendency towards apathetical thinking, which leads to passive management, declining performance and an inability to react to the market signals that drive profitability. A continuous process of improvement that involves collecting the right datasets, analyzing this data and acting on this data is the sure path to superior performance.

While margins for wood products manufacturers have demonstrated significant volatility over the last year, reducing raw material cost is the key to competing in today’s global market—especially in the current economic and trade climate so immersed in uncertainty. A wood-consuming facility that understands the variable elements of its largest input cost—as well as its position in the market—is in a much better position to develop a successful supply chain strategy and avoid falling prey to the seven most expensive words in business.

 

supply chain optimization

 

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