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In my many years of working with clients in the lumber business, there is always one question I like to pose…and the many answers that I’ve been given are reflective of the gap that can exist between a company’s PURPOSE and its OPTIMIZATION STRATEGY.

The question is “What are you trying to make in this mill?”

The answers tend to go something like:

• “Random length, dimension lumber.”
• “8’ and 9’ studs.”
• “We specialize in decking.”
• “High grade 2x6s.”
• “Wide dimension lumber.”
• “Prime.”
• “The highest lumber recovery we can.”

In spite of the precision of these responses, they are all bad answers. The correct answer, of course, should reflect the company’s PURPOSE:

“We try to make the most PROFIT possible.”

Unless a mill is run as some kind of social experiment, we all understand that maximizing profit is what allows companies to achieve all of the other lofty goals that they aspire to over the long term…things like providing good paying jobs, having a positive impact on a community, being a good steward of the environment, maximizing return to shareholders, etc.

GARBAGE IN…GARBAGE OUT

At this point some of you might be thinking that the wrong answers above reflect a misunderstanding of the question, and that OF COURSE everyone is trying to make the most profit possible. But when you begin to dig into the OPTIMIZATION STRATEGY that is actively making breakdown decisions on every log, cant, and board in a mill, it is all too common to find the optimizer is setup with inputs that are not driving profitability. They’ll have erroneous inputs such as:

• A “multiple” placed onto the pricing of decking…or wides…or wane-free lumber…
• Flat pricing used to make all products “equal” so that lumber recovery is maximized…
• Market pricing used to get a lumber mix with the “highest average price”…

“Optimizers” are complex computer programs that allow sawmills to remove human error and influence from breakdown decisions, and to leverage all available data to ALWAYS make the “RIGHT” decision in the blink of an eye. But just like every other computer system out there, an Optimizer defines “RIGHT” based on the input parameters that it is given. PROPER INPUTS equal maximum profitability. IMPROPER INPUTS equal suboptimum profitability. The difference to your bottom line can be significant…running into the millions of dollars per mill per year.

In this blog series on lumber manufacturing, we’ve explored a couple of topics that have gotten us to this point.

• The first post in this series titled “T-Bones or 2x4s?” defined lumber manufacturing as a DECONSTRUCTIVE MANUFACTURING process that differs from all other forms of manufacturing. One where the maximum value that the lumber mill can hope to get out of the tree stem is defined by how perfectly they deconstruct the tree.
• The second article titled “Would your Optimizer call you “Predictable”?” introduced the idea of PREDICTABILITY as a foundational necessity to executing on your optimization strategy.

If you missed these articles, I invite you to go back and give them a read. Understanding Deconstructive Manufacturing, and Predictability are critical to understanding this topic of Optimization Strategy. You can find the entire series here.

MARGIN, MARGIN, MARGIN

For simplicity’s sake, I’m going to avoid discussions of wane allowances, product definitions, green lumber sizes, etc. and assume all of those things are setup properly.  Instead I’ll direct the discussion to the defining element that drives the optimized solution: pricing.

Achieving maximum profitability as a lumber mill means producing a product mix that generates the highest possible contribution margin per log. This is realized by using mill-specific, and product-specific contribution margin as the pricing in your optimizer.

Properly determining contribution margin isn’t straightforward. In fact, I’ve never walked into an organization and seen it done properly. Not only must applicable manufacturing costs be applied for the sawmill, kilns, and planer, but they must be applied based on the nature of the bottleneck of each lumber mill. Imagine that LUMBERCO is a large multinational corporation with many lumber mills scattered across North America, and that among their holdings are mills that are bottlenecked in the kilns, and others in the sawmill. Imagine still further that of those mills that are bottlenecked in the sawmill, some are bottlenecked at the primary breakdown, some at the trimmer, and some at the stacker. Each of these mills requires a different application of manufacturing costs in order to determine contribution margin of a given product in their facility.

Below are just a couple examples of poorly defined contribution margin pricing that drive an Optimization Strategy not aligned with the Purpose of maximizing profitability:

• If LUMBERCO has consistent optimization pricing across all its mills, or even across all its mills in a given region, they’re not reflecting the realities of each mill’s bottleneck-specific manufacturing cost.
• If a mill has applied a “standard manufacturing cost” per MBF to their entire product mix based on their P&L, they’ve developed an understanding of contribution margin that is a recipe for value destruction.

As was highlighted in our article “T-Bones or 2x4s?”, every optimization decision can have only one of two outcomes.  It can either 1) retain the maximum value inherent in the log/cant/board, or 2) lose value.  Put another way, every time steel meets wood, value is either retained or destroyed, and it is your Optimization Strategy that is defining every cut.

In the light of this reality, you need to review your Optimization Strategy to ensure that millions of dollars per year, per mill are not slipping through your fingers.

We can help.

STAY TUNED…

This is just the 3rd article in our series on lumber manufacturing. In the coming weeks and months we will be continuing with more thought provoking articles on all aspects of the business. Look for upcoming articles on Lumber Recovery, Kiln Drying, Timber Procurement, Production, Maintenance, Leadership, and more.

NEED HELP, OR WANT TO DISCUSS FURTHER?

Our focus is on helping forest products companies identify, and capture the millions of dollars a year that can be lost in each mill through sub-optimal execution.

With more than 20 years of successful experience helping dozens of companies in 15 countries across 3 continents, we can help you too.

Check out our services, and drop us a line. Let’s start a conversation.

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