Supply chain management in forestry––case studies at Södra Cell AB

Abstract

The use of supply chain management and optimisation is of increasing importance in the forest industry. The overall wood-flow starts with standing trees in forests and continues with harvesting, bucking, sorting, transportation to terminals, sawmills, pulp mills, paper mills and heating plants, conversion into products such as pulp, paper, lumber, and ends at different customers. Many planning problems arise along the chain and these cover different time horizons. Co-ordinating the wood-flow is a vital concern for many companies. We study Södra, one of the larger Swedish forest companies, which is involved in all stages of the wood-flow. We focus in particular on Södra Cell AB, a company within Södra, which is responsible for pulp production. We describe the operations at Södra Cell and the decision support tools used for supply chain planning. We describe five major projects or cases which focus on improving their supply chain management and optimisation. These cases include the introduction of new technologies for sales and orders, new distribution structures using terminals, and the development of integrated optimisation models and methods.

Introduction

The forest industry is of great national and regional importance to countries like Sweden, Finland, Chile and New Zealand. Problems in this area cover a variety of aspects from road building, harvesting, transportation, and production at saw-, pulp-, paper mills and heating plants. Being heavily dependent on the export market, the forest industry has to ensure that its costs and revenues are competitive. This means that it has had to increase or maintain the efficiency of all its operations. A general opinion in the forest industry today is that the potential lies in improved integration between different parts of the supply chain (SC) or wood-flow chain and the use of sophisticated techniques to increase the utilization of raw materials and production capacities. Several actors are involved in the wood-flow. The situation can vary from country to country and since the case described in this paper is taken from Sweden, we focus on the Swedish situation. The situation and the use of decision support systems in for example Chile is described in Epstein et al. (1999). The main actors using SC planning in Sweden are industrial forest-enterprises, with large forest assets as well as their own pulp and paper industries and sawmills, and forest owners' associations, which represent the private entities and have their own pulp- and sawmills. To carry out the operations there are also loggers and transporters, harvesting and carrying the wood from the forests to the mills. They may be categorized as independent entrepreneurs working for a single forest enterprise, often members of an association that handles price-negotiations etc, or as large transport-organizations owned by a large number of entrepreneurs carrying wood for several forest enterprises.

Customer orientation is in focus of the forest industry. The idea of customer orientation is that the right kind of products (or raw material) should be delivered to the customer in the right quantity and at the right time. In this way, the customer has the opportunity to improve on his utilization of the raw material as well as obtaining increased efficiency in production planning. Customer orientation will dramatically increase the demand put on the logistics and production system. The requirements on all parts of the overall supply chain in terms of quality and flexibility will increase as well as the need and request for timed deliveries. This gives rise to a demand for increased general knowledge about the SC and for methods and tools for better planning and control. The further development of practical and robust decision support tools based on optimisation models and methods are an important prerequisite for producing a general view and efficient resolution in the complex situation that the forest industry is moving towards. By robust decision support tool, we mean a model that always provides a solution (where infeasibilities are easily detected), an optimal or near-optimal solution which is provided within a limited solution time, and that the method is insensitive to parameter settings. Operations Research (OR) models and methods arising in SC are described in Shapiro (2001) or Tayur et al. (1999). Compared to other industrial sectors, forestry has relatively few advanced decision support systems and has put less funding into research and development. Moreover, the proportion of personnel with professional engineering degrees is much smaller in the forest industry in comparison with other industrial sectors. Other challenges in forestry are described in Martell et al. (1998). A general overview of OR models and methods in forestry is given in Rönnqvist (2003).

Södra Cell AB is one of the world's leading manufacturers of market pulp intended for paper production. A considerable proportion of all pulp used in European non-integrated paper industries (writing paper, board, tissue, etc.) originates from pulp mills owned by Södra Cell AB. With five pulp mills in use (three in Sweden and two in Norway), Södra Cell produces two million tonnes of pulp per year. Södra Cell AB is a subsidiary of Södra, an economic association owned by more than 34,000 forest owners in southern Sweden. The competition on the world market is hard and it is crucial to have products that meet customer requirements. The production of pulp must be cost effective which requires more efficient integration of the production and logistic planning. Decision support systems are seen as a necessary tool to accomplish this.

The world market for wood pulp amounts to approximately 42 million tonnes (in 2002) per annum. Market pulp, i.e. pulp sold on the market to another company, accounts for about 25% of the total turnover of pulp, the rest is mainly integrated pulp, i.e. pulp that is produced and used for paper production within the same company. Some paper mills with their own pulp production may in addition need pulp from the market to be fully supplied. Other paper companies have no pulp production at all, and are therefore dependent on market pulp for their whole supply. In Western Europe, market pulp amounts to 14.5 million tonnes, which is 62% of the total pulp turnover in the region.

The pulp market is mainly divided by fibre type. Softwood pulp is made from different pine and spruce species growing in the large boreal areas of the world e.g. Canada, Scandinavia and Russia. The wood has comparably long fibres and the pulp is therefore typically used for giving strength to paper. Hardwood is mainly made from birch and eucalyptus, and has short fibres. Birch is growing in the boreal area, whereas eucalyptus grows in the temperate areas e.g. Brazil, the Iberian Peninsula, Australia etc. In order to give printing paper an opaque appearance and good printing properties hardwood is used.

The tradition in the pulp business has been that the supplier delivers the pulp CIF (Cost, Insurance, Freight) to a European port. The INCOTERM (INternational COmmercial TERM) CIF denotes that the supplier covers costs for handling, insurance and freight up to the named port of destination. Thereafter, the buyer takes full responsibility for the pulp and covers all costs to its final destination.

Also according to tradition, the buyer indicates which port should be used for the delivery. The result of this is that suppliers often have to use many ports in order to be competitive. This is negative for the efficiency in the supply chain from pulp mill to destination port since the efficiency in vessel utilisation benefits from carrying large volumes to few ports rather than small volumes to many ports. The existing tradition in the commercial relationship with customers has thus set the framework for the logistics. The possibilities of modifying the business models and configuring the supply chain differently have therefore been restricted.

The main reasons behind the past strength in the CIF-model from the customer's perspective are probably the following:

• Flexibility in sourcing of pulp––having the control over the logistics from the port onwards makes it very easy to change suppliers. The inventories maintained both at the port and at the paper mill are useful for negotiating the prices with different suppliers. The larger the stock the greater the freedom when acting on the pulp market in order to try to buy pulp when prices are low (see Fig. 1).

• Purchasing power of logistics services––having also the inbound pulp to offer logistics providers when purchasing logistics services may give a better position in negotiations.

• Integrated logistics systems––the logistical system for distributing final products may be integrated with the inbound transport of pulp (e.g. in block train haulage).

Return on capital employed (ROCE) has become an important indicator of the efficiency in companies. The measurement is very sensitive to the amount of capital that is tied in inventories of raw materials and finished products. In recent years, companies therefore have tended to focus more and more on reducing their working capital. These efforts give companies the incentive to find other ways of procuring raw materials and distributing products based on the new objectives which accounts for growing interest in ideas and theories related to supply chain management (SCM). Thus, there is also a clear interest among pulp customers to explore the potentials of supply chain management in collaboration with suppliers.

An efficient SCM is important for many companies. This is in particular true for companies where the supply chain consists of many integrated stages. Södra is such a company as it is divided into several subcompanies responsible for their particular part of the wood chain. In this paper we will use Södra Cell AB and its relation with other companies within Södra and external customers as an example to illustrate how SCM and/or supply chain optimisation (SCO) are used in five case studies to improve the overall performance of the company. The outline of the paper is as follows. In this section we have described forestry and the pulp market and how these affect Södra Cell. In Section 2 we describe Södra and its organisation, its supply chain and its current supply chain modules. In Section 3 we describe five case studies where specific projects have been undertaken in order to improve the performance of the supply chain. Two of the projects are concerned with supply chain management and three with supply chain optimisation. The main purpose of this application-oriented paper is to show how SCM and OR models and methods are applied in practice for a forest company. We will not describe each of the projects in detail. For a more technical description of e.g. the OR models and methods we refer to technical reports or published articles.