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The answer to this key question is often not known by mill staff or log procurement managers. Generally, rules of thumb like ‘try to stay above an 8” top’ or ‘we don’t compete with export logs’ are common answers. This conveys a general understanding of what log fits the mill. BUT, given logs are the #1 cost item for sawmills, perhaps a more precise, analytical, and data-driven understanding of the optimal log would be warranted?

Log size and quality also directly affect mill KPIs like grade yield, production per hour, and recovery. A sawmill superintendent trying to hit the production per hour target while running an average SED that is 1” smaller than budgeted would be facing an uphill battle. Trying to aggressively manage these KPIs while passively accepting the sawmill log diet as a ‘given’ is not using all the tools available to a mill manager.

DATA-DRIVEN LOG PROCUREMENT

One way of identifying the optimal log for your mill is developing a RETURN-TO-LOG MODEL, or RTL. An RTL model breaks logs into classes (like 1- 2” top diameter breaks) and then uses log tests or simulations to determine the net value (production rates, product mix / value, and recovery) achieved to the mill by each log size. The RTL outputs provide values for each log size that can then be compared to current market log prices. RTL values greater than market log prices are positive margin logs, and the highest margin log is the optimal log for the mill.

RTL models take time to develop and need to be frequently updated to stay current with changes to lumber market pricing and mill production statistics. BUT with logs as the #1 cost item for sawmills, having a data-driven log procurement strategy pays dividends. Avoiding negative-margin, problem logs can be just as important as targeting high-margin logs. Increasing high-margin logs or decreasing negative-margin logs as a percent of the log mix by just a few percent can result in millions of increased profitability annually.

ACTIONABLE PROCUREMENT DECISIONS

That all sounds great, but anyone who has been around log procurement understands it can be a messy business. Seasonality, fire weather or fire salvage, bad roads, managing log inventory, 3-year stumpage sales, and camp-run pricing vs. top size matrix pricing are just a few of the wrinkles that come to mind. Obviously buying only and exactly the optimal log of say 8.5” to 10” tops on a 36-foot log is not possible. But with the very large annual log budget of PNW sawmills, increasing the mix of that log by just a few percent, while bringing in fewer of the wrong log, can result in very meaningful margin increases.

LOG MARKET CHANGES

The logs your mill will be sourcing 3-5 years in the future may be different than the logs you are running now, and the logs you ran in the past. Just a few recent, very substantial changes in the PNW log market include: the Oregon Dept. of Forestry HCP harvest reduction; the 2020 Labor Day fires; 3 Oregon sawmills closing; and several $50+ million capital investments announced by multiple companies to expand production capacity.

Each of those changes has over a 50 MMBF/year impact on log supply or demand with differential effects in local sub-markets. These changes will also likely result in changes to the log size distribution. For example, with the 2020 Labor Day fires causing an age class “pinch point” for many industrial owners, log size may be decreasing to keep short-term harvest levels up.

With all this flux in the log market, now is a good time to understand what your mill’s optimal log is, and more importantly, what you can do to optimize the log diet to your mill in an increasingly competitive log market. If logs are expensive and in short supply, that is all the more reason to be more selective on the logs you are purchasing!

PROCUREMENT BEST PRACTICES

Having an RTL model, keeping it updated, and using it to support data-driven log procurement decisions are certainly best practices in the industry. Additionally, there are several other best practices in log procurement that mills should follow:

• TIMBER SALE APPRAISALS – Is there a rigorous appraisal framework for timber sales that are often complex, large and multi-year?
• ACTUAL VS. APPRAISED REVIEWS – How did the sale cut-out on species mix, delivered log price, and log size distribution vs. the original appraisal?
• LOG BUYING KPIs – Are KPIs available for the log buyer to track log size, log price by source, log quality, and % optimal logs vs. % problem logs?
• LOG BUYER TRAINING – Is the log buyer appropriately trained in negotiations, RTLs, and strategic thinking to manage the #1 cost item for the mill?
• LOG YARD MANAGEMENT – Is the yard managed on FIFO, are logs rotated appropriately, and are decks managed with the goal of assisting in optimizing mill production rates?
• PROCUREMENT MEETINGS – Are sawmill staff involved in key procurement decisions and is the log buyer aware of what impact log size or log quality issues can have on the mill?
• FEE TIMBERLAND VERTICAL INTEGRATION – What is the vertical integration policy for company fee timberlands with the mill, are transfer prices based on market prices, and do the fee timberlands sell some logs externally but save the optimal logs for the company mill?

FEE TIMBERLAND VERTICAL INTEGRATION

That last bullet point, frankly, could deserve a separate article all to itself. Common fee timberland to mill integration strategies include:

• MILL SUBSIDIZES THE TIMBERLANDS – The mill pays very high log prices for haul-logical logs and also buys the problem logs that the timberland division has difficulty selling externally.
• TIMBERLANDS SUBSIDIZE THE MILL – The mill buys fee logs at historical accounting cost or depletion rates. This shifts timberland profitability to the mill which can give an incomplete picture of mill profitability, especially if it is an older or under-capitalized mill.
• SELLING TOO MUCH EXTERNALLY – Transfer prices may be based on a simple #2 sawlog price, so the fee timberlands sell the premium logs externally. In reality, those logs may be optimal logs for the mill and would result in higher total company profit when processed internally.
• NOT SELLING ENOUGH EXTERNALLY– A 100% integration policy may result in some low-margin or negative-margin logs being run through the mill that should have been sold externally. These could be very small or very big logs, or just logs hauled from a very long distance.

In general, market-based transfer pricing methods result in the highest combined company profitability, but other intricacies, unique to each company, also need to be taken into account. An updated RTL model to guide decisions on what logs are sold externally vs. internally is important.

Transfer pricing policy between divisions is always a touchy subject for management but it is also incredibly important for total company profitability.

If your organization would like to improve your log procurement practices in the face of a very challenging and changing PNW log market, we can help.

STAY TUNED…

This is our 8th article in our series on wood products manufacturing. We will be continuing this series with more thought-provoking articles on all aspects of the business. Look for upcoming articles on Production, Maintenance, and more.

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