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IJOPM 27,5

Internal supply chain management in the Chilean sawmill industry

Marcos Singer and Patricio Donoso
n, Escuela de Administracio lica de Chile, Santiago, Chile Ponticia Universidad Cato
Abstract
Purpose The existing business paradigm in the sawmill industry is that improvements are achieved by enhancements at each individual sawmilling plant. The authors investigate a collaborative approach, and propose a model for optimizing production and inventory planning decisions within a system of plants. Design/methodology/approach The methodology models the sawmill production process in terms of two transformation stages and two inventory stages. The authors then extend the model to account for supply chain decisions consisting of timber transfers among plants. They apply the model at 11 Chilean sawmills to evaluate whether they can benet from operating in a more integrated manner. Findings The authors nd an opportunity to increase prots by more than 15 percent through a higher utilization of the capacity and a better assignment of production orders. Research limitations/implications The study neglects the possibility of exchanging raw material among plants. Also, the ndings are derived from a computational simulation, so are estimates, not actual observations. Practical implications The study challenged the business paradigm of the company the authors performed the study for. Now, it is implementing the suggested improvements. Originality/value An investigation into how a number of sawmilling companies working together can prot from their distinctive competitive advantages, and which proved successful in challenging one companys business paradigms. Keywords Supply chain management, Optimization techniques, Chile, Wood technology Paper type Research paper

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International Journal of Operations & Production Management Vol. 27 No. 5, 2007 pp. 524-541 q Emerald Group Publishing Limited 0144-3577 DOI 10.1108/01443570710742393

1. Introduction Worldwide competition in the sawmill industry is very intense, with individual producers battling each other to supply markets and produce at lower cost. Latin-American exporting nations such as Argentina, Brazil, Chile, and Uruguay must compete against Canada, Sweden, Norway, and Finland, with the disadvantage of being located far from the main markets. While the average transportation cost of exported products for developed countries is 4.24 percent, South Americas is 9.83 percent and Chiles is 8.8 percent (Hummels, 1999). Furthermore, timber products face competition from other materials such as concrete, plastics, and steel. These challenges have given rise to an extensive body of literature aimed at assessing and improving the performance of individual sawmills. Yin (1998), for
This research has been partially sponsored by FONDECYT project number 102/0528. The authors thank Antonio Luque, Rodrigo Inostroza, Juan Pablo Pacheco and many other executives from Aserraderos Arauco.

example, uses data envelopment analysis (DEA) to estimate the efciency of sawmilling plants. Nyrud and Baardsen (2003) used DEA to evaluate the productivity growth of about 200 Norwegian sawmills between 1974 and 1991, and found that around 30 percent of the mills were efcient. Neda and Taraneh (2005) applied DEA to evaluate the performance of sawmills in British Columbia in 2002, concluding that only 7 percent of them were efcient. Roos et al. (2001) used cluster analysis to assess three strategies for increasing sawmill protability: pursue greater value added (Peterson strand, 1996) and increase plant size et al., 1999), improve labor productivity (A nsson, 2003). (Ma nnqvist (2005) claim that the Bryan and McDougall (1998) and Carlsson and Ro potential of the forest industry lies in supply chain management (SCM). By integrating the different parts of the supply chain, it is possible to increase utilization of raw materials and production capacities. Hayter (1976) describes the growth of the Canadian corporation MacMillan Bloedel as the result of pooling complementary organizational resources and taking advantage of optimal supply decisions for its production plants. Jones (1999) estimates that integration can result in a 15-60 percent reduction in inventory and a 20-30 percent improvement in delivery performance, which in the case of New Zealand companies led to an overall cost reduction of between 20 and 30 percent. Hecker et al. (2000) reported savings of US$8.00 per cubic metre due nsson (2004) found that vertically integrated to inventory reductions in Germany. Ma rms in Sweden are more efcient due to their ability to optimize an integrated objective function when planning their operations. Despite the evidence about the benets of integration, a survey conducted by Janssen et al. (2004) shows that practitioners have systematically overlooked such a strategy, favouring improvements in the individual plants. The forest management literature has also failed to investigate the entire potential of SCM. To see this, in Figure 1, we have adapted to the sawmill industry the supply chain planning hierarchy nnqvist (2005). by Carlsson and Ro

Internal supply chain management 525

Procurement: Harvesting, Transport Harvest planning (5yr): -Forest policy -Transport capacity Supply balancing (1yr): -Harvest volume -Acquisitions Supply planning (3m): -Requirement per assortment per region Adjustments (1m): -Assignments per mill -Wood exchange Transportation: (Daily) -Routing, combinations

Production: Sawed timber Strategic planning (5yr): -Investment at sawmills

Distribution: Haulage of timber

Sales: Supplying customers

-Chartering of ships -Port structure

-Market segments -Strategic customers Budgeting (1yr): -Contracts regular customers -Aggregate estimations -Orders regular customers -Short term estimations -Call-offs regular customers -Spot orders Operative: (Daily) -Order and delivery process

Budgeting / Forecast (1yr): -Capacity per product -Demand per product -Volumes per sawmill -Transport volumes Production planning: (3m) -Campaigns at sawmill Change-overs(1m): -Fine tuning subject to feasibility Production Scheduling: (Daily) -Sequencing orders Inventory planning: (3m) -Ships timetables Transport plan: (1m) -Ships routing -Trains, truck loading Transportation: (Daily) -Routing, combinations

Figure 1. Planning hierarchy in the sawmill supply chain

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The harvest planning and strategic planning levels have usually been combined with planning for cellulose (pulp) plants and plywood and berboard plants (Barros and Weintraub, 1982). Troncoso and Garrido (2005) solved the integrated problem of production, facility location, and freight distribution with a dynamic model of mixed-integer programming. The procurement column has been studied in depth. Wagner et al. (1996) improved log allocation at Temple-Inland sawmills, which helped the company increase its annual prots by US$5 million. Epstein et al. (1999a) presented a survey of applications in the Chilean forestry industry. In another study, Epstein et al. (1999b) described a system for the short-term harvesting task that determines what timber volume to cut, what bucking patterns (number and length of log pieces obtained from a tree) to apply and which harvesting machinery to use. Weintraub et al. (2000) examined the state-of-the-art in forest management, including new concerns about environmental issues. Arce et al. (2002) introduced a system for optimizing the selection of bucking patterns for the entire forest, which takes into account customer demand and transportation costs. The sales column has also received attention. Vlosky and Westbrook (2002) and Vlosky and Smith (2003) investigated the use of internet-based technologies by sawmills for commercial purposes. Shook et al. (2004) analyzed why a number of nnqvist (1997, e-commerce exchanges failed. As for the operating level, Todoroki and Ro 1999) used mathematical programming to determine optimal production output. Todoroki nnqvist (2002) described a system that maximizes yields from logs while also and Ro addressing demands for products. Kivinen et al. (2005) explained how to evaluate such a system in terms of the similarity between demand and actual output. Limited attention has been devoted to simultaneous planning of the supply, production and inventory of the sawmill supply chain, although integration has been a major concern for the SCM literature. According to Power (2005), supply chain integration promotes the coordination of core processes across organizational boundaries. Theoretically, Cachon and Zipkin (1999) prove that individualistic management can signicantly increase the supply chains inventory cost. Singer et al. (2003) prove something similar regarding quality. In both cases, the parties can approach optimality if they coordinate their operation. Frohlich and Westbrook (2001) and Rosenzweig et al. (2003) provide empirical evidence that supply chain integration leads directly to improved business performance. Our paper intends to show how SCM can improve the performance of rms in the saw mill industry. In Section 2, we set out a description of the sawmill process. Section 3 translates this description into a single-plant model that optimizes production and inventory planning. In Section 4, we explain how to expand the model to the supply chain problem. In Section 5, we describe the case of Aserraderos Arauco Sociedad nima (AASA), a Chilean corporation of sawmilling companies. Although the Ano companies share several functions, they are managed as independent economic units, each seeking to maximize its individual prots. In Section 6, we describe how they can become what Lejeune and Yakova (2005) dene as a co-operative supply chain, with wide information sharing and communality of goals. Our simulation implies that this collaborative strategy may increase prots by more than 15 percent. Finally, in Section 7, we offer our main conclusions. 2. The sawmill transformation process To plan supply, production, and inventory in an integrated fashion, recent publications have stressed the necessity of understanding the rms internal capabilities.

Cousins (2005) explains that managers adopt specic relationship modes with suppliers and customers in accordance with their companys competitive advantages in the marketplace. Fynes et al. (2005) showed that the impact of the supply chain relationship depends on the specic manufacturing strategy adopted by the rm. With these observations in mind, we rst model the internal process of the sawmill in terms of two transformation stages: sawing and drying-sanding (nishing). There are also two stock stages: green inventory (after sawing) and dried inventory (after drying and sanding). Figure 2 is a simplied representation of the products ow and stocks within a sawmill. The rst stage begins with the purchase of raw material, i.e. logs from both thinned and regular (unthinned) stands. Thinning is a treatment usually carried out at sixth year in the life of a stand, when branches are cut in order to yield a better quality timber. Regular and thinned logs are categorized into different diameters (16-18 or 20-22 cm) and graded according to the characteristics of the forest that supplies each sawmill. The productivity of the sawing process, measured in terms of the volume of logs processed per hour, is different for each type and diameter of log. Depending on the type of cut to be made, three kinds of primary or green products are obtained: G1, G2 and G3 (GR1, GR2 and GR3 denote the products obtained from regular logs; GT1, GT2 and GT3 refer to those from thinned logs). There are maximum proportions for the utilization of the raw materials that are derived by arranging rectangular sections in the cylindrical logs, as shown in Figure 3. Also, the cutting process loses raw material as sawdust. Table I shows maximum production yields of two sawmills, A1 and A2, for different combinations of green products (note that percentages are slightly higher for thinned logs due to fewer knots). For example, from a regular 16-18 cm log, sawmill A1 can use up to 21 percent to produce G1 and up to 17 percent to produce G2, but the sum
Sawing Green inventory GRl 16-18 Regular GR2 20-22 GR3 Sale GR3 Sale GR2 F2 Sale Drying-sanding (finishing) GRl F1 Dried inventory

Internal supply chain management 527

GTl 16-18 Thinned GT2 20-22 GT3 Sale Sale

GTl F1 GT2 F2 GT3 Sale

Stage

Product

Flow

Inventory

Figure 2. Sawmill structure

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of both percentages must be less than 27 percent. Once the sawing process is completed, products G1, G2, and G3 are either sent to the drying and sanding stage, sold in the market or placed in storage. The second, or kiln-drying and sanding stage converts the green products into nished products F1 and F2 in certain established proportions that depend on the type of green and nished products and on the sawmill. For example, for each m3 of thinned G1 logs cut in sawmill A2, a total of 0.8 m3 is allotted for the production of F1 and the remaining 0.2 m3 for the production of F2. There is a loss of product yield during the drying and sanding process of the green material due to cracking, splitting, and chipping off. For this reason, we took into account a certain percentage of material loss during the process of drying and sanding. Productivity for the drying and the sanding processes, measured in m3 per hour, depends on the green product utilized in each sawmill. The parameters are related to the input, without considering the associated volume losses. The capacity of the milling, drying and sanding stages depends on each sawmill and on the given time period. Production cost is expressed in terms of output. Transportation cost to the port is constant for each plant. Storage cost depends on the sawmill, the product and the time period (being higher in winter because of the humidity). Minimum sales also depend on the sawmill, the product and the time period, while prices depend exclusively on the product and the time period. Once the drying and sanding process has been nalized, the plant may sell the production or store the products, if there are expectations of a rise in prices. With minor changes, Figure 2 could show the exploitation process of other natural resources. Copper ore comes from different pits (in the gure, thinned or regular). Each source has a distribution of qualities in terms of concentration and impurities
Green products G1

Figure 3. Examples of sawing schemes for different log diameters

G2 G3 Diameter 16-18 Diameter 20-22

Diameter 16-18

Combinations G1 G2 G1 G3 G1 G1 G2 G1 G3 G1

Regular A1 (percent) A2 (percent) 21 17 27 19 36 23 18 29 20 39 11 12 21 15 41 10 14 25 17 40

Thinned A1 (percent) A2 (percent) 23 19 29 20 39 24 19 30 21 41 12 12 22 16 44 15 16 28 18 49

G2 G2 G3 G2 G2 G3

20-22 Table I. Maximum production from each type of log for sawmills A1 and A2

(diameters). The ore can be converted into copper concentrate (green inventory) and sold as it is, or transferred to smelters (drying and sanding). Other examples are the fruit industry and the shery industry. Therefore, with the proper adjustments, this research can be applied to other areas. 3. The single-plant production model We model the sawmill operation with a linear program that maximizes prot within the planning horizon. The range of the decision variables is in months, so both the location of the facilities and the production capacities are given. We assume unlimited availability of raw material, as did Troncoso and Garrido (2005). We also assume that the raw material markets are integrated, as is the case in Sweden and Finland (Toivonen et al., 2002), which means that log prices are given. Finally, since most of the production is for the global market, we assume that demand is unlimited and prices for nal products are given. We, then, dene the following: Indices: r [ {regular, thinned}: type of raw material d [ {16-18, 20-22}: g [ {G1, G2, G3}: f [ {F1, F2}: t [ {1, 2, 3,. . .}: Parameters: Cr : Pr,d : MHt : DHt : SHt : MPr,d : DPr,g : SPr,g : Mr,d,g : Mr,d, : Mr,d : QGg,t : QFf,t : cost of type r logs ($/m3) proportion of type r logs of diameter d (percent) sawmilling hours available during period t (h) kiln-drying hours available during period t (h) sanding hours available during period t (h) sawmilling productivity of type r logs of diameter d (m3/h) kiln-drying productivity of type r logs of product g (m3/h) sanding productivity of type r logs of product g (m3/h) maximum proportion of type r logs of diameter d converted into g (percent) maximum proportion of type r logs of diameter d converted into G1 G2 (percent) maximum proportion of type r logs of diameter d to be converted into green product (percent) minimum quantity of green product g to be sold in period t (m3) minimum quantity of nished product f to be sold in period t (m3) diameter of logs green products nished products, i.e. kiln-dried and sanded time periods

Internal supply chain management 529

IJOPM 27,5

Gg,t : Ff,t : TR : Yr,g,f :

sale price of green product g at time t ($/m3) sale price of nished product f at time t ($/m3) transportation cost to the port ($/m3) indicator (1 yes; 0 no) if green product g from type r logs must go for drying and sanding to make product f (percent) volume loss of product f (percent) sawmilling cost for product g obtained ($/m3) kiln-drying cost for product f obtained ($/m3) sanding cost for product f obtained ($/m3) inventory cost of nal product f at time t ($/m3) initial inventory of green product g from type r logs (m3) initial inventory of nal product f (m3) earnings ($) acquisitions of type r logs at time t (m3) product g obtained from type r logs of diameter d in time period t (m3) green product sales type g from logs type r in time period t (m3) nished product sales type f in time period t (m3) product g from type r logs moved to drying and sanding in period t (m3) inventory of green product g from type r logs at time t (m3) inventory of nal product f at time period t (m3)

530
Af : MC : DC : SC : ICf,t : IGr,g : IFf : Variables: z: ar,t : or,d,g,t : gsr,g,t : fsf,t : mr,g,t : igr,g,t : iff,t :

The linear program is as follows: Maximize z revenues 2 production costs 2 inventory costscosts of raw material X X Gg;t 2 TRgsr;g;t F f ;t 2 TRfsf ;t
r;g ;t f ;t

2 MC

or;d;g;t 2 DC SC

mr;g;t Y r;g;f 1 2 Af 2

X X ICf ;t iff ;t 2 C r ar;t

f ;t r ;t

r ;d;g ;t

r;f ;g ;t

subject to: X or;d;g;t

r;d;g

MPr;d

# MHt ; t Sawing capacity

X mr;g;t
r ;g

DPr;g

# DHt ; t Drying capacity

X mr ;g ;t
r ;g

Internal supply chain management 531

SPr;g

# SHt ; t Sanding capacity

Or;d;g;t # P r;d ar;t M r;d;g ; r ; d; g ; t Max proportions Or;d;G1;t Or;d;G2;t # P r;d ar;t M r;d; ; r ; d ; t Max proportions Or;d;G1;t Or;d;G2;t Or;d;G3;t # P r;d ar;t M r;d ; r ; d ; t Max proportions X gsr;g;t $ QGg;t ; g; t Min sales of g
r

fsf ;t $ QFf ;t ; f ; t Min sales of f igr;g;t21 X

d

or;d;g;t igr;g;t gsr;g;t mr;g;t ; r ; g; t Inventory of g

igr;g;0 IGr;g ; r ; g Initial inventory of g iff ;t21 X

r ;g

mr;g;t Y r;g;f 1 2 Af iff ;t fsf ;t ; f ; t Inventory of f

iff ;0 IFf ; f Initial inventory of f ar;t ; or;d;g;t ; gsr;g;t ; fsf ;t ; mr;g;t ; igr;g;t ; iff ;t $ 0 ; r ; d; g; f ; t 4. A supply chain model To extend the analysis to the supply chain operation, we consider the product transfers in Figure 4. Transferring green products optimizes the capacity utilization, while transferring nal products optimizes storage. Transferring logs could also be advantageous if the technology at one mill is more productive than that of the other due to the characteristics of the raw material, but this possibility will not be considered here. The joint operation of the sawmills can be modeled as a linear program based on a similar set of parameters and variables dened in the previous section, but including an additional index associated with each sawmill. For example, the variable measuring the acquisitions of type r logs at time ar,t becomes two new variables: ar,t,P1 for plant P1 and ar,t,P2 for plant P2. The following elements have also been added:

IJOPM 27,5
Regular P1 Sawing Thinned G1 G2 G3

G1

G2

Sales

Green inventory

G2 G3

Dried inventory F1 F2 Dried inventory

q

G1 Dryingsanding

F1 F2

F1 F2

532

Exchange

G1 G2 G3

Exchange

Green inventory

Regular Sawing P2 Thinned

G1 G2 G3

G1 G2 G3 Dryingsanding

F1 F2

F1 F2

Figure 4. Supply chain with two sawmills

G1

G2

Sales

Additional indices: p [ {P 1; P 2; . . .} : Plants Additional parameters: T p;q : Transportation cost from plant p to plant q$=m 3 ; with T p;p 1 Additional variables: tgr;g;t;p;q : green product g from logs r transferred from plant p to q at time t m 3 tff ;t;p;q : final product f transferred from plant p to plant q at time tm 3 The new optimization model includes the models for each individual sawmill. The new objective function is the sum of the original functions minus the transfer costs, the latter being equal to: X X T p;q tgr;g;t;p;q T p;q tff ;t;p;q :
r ;g ;t ;p;q f ;t ;p;q

The inventory equations must now incorporate the new transfer variables. The green product inventory equations become: X X X igr;g;t21;p or;d;g;t;p tgr;g;t;q;p igr;g;t;p gsr;g;t;p mr;g;t;p tgr;g;t;p;q
d q

; r; g; t; p The nal product inventory equations become:

iff ;t21;p

X
r ;g

mr;g;t;p Y r;g;f ;p 1 2 Af ;p

X X tff ;t;q;p iff ;t;p fsf ;t;p tff ;t;p;q

q q

; f ; t; p Minimum sales constraints for each sawmill, for both green and dried products, are fused in the following way: X X gsr;g;t;p $ QGg;t;p ; g; t
r;p p

Internal supply chain management 533

X
p

fsf ;t;p $

X QFf ;t;p
p

; f;t

Finally, we add the non-negativity constraints to the new transfer variables. As mentioned at the end of Section 2, with minor changes Figure 4 could show other natural resources industries. Copper mines-smelters transfer concentrate, sulfuric acid and other by-products to different mines-smelters (Caldentey and Mondschein, 2003), the fruit companies move products from packing to cooling facilities, and so on. 5. The case of a Chilean sawmill corporation In order to evaluate the practical application of our formulation, we tested it at AASA, the largest sawmilling corporation in the southern hemisphere. As of 2004, AASA consisted of 12 companies, each one managing a production plant (11 in Chile and one in Argentina) with an aggregate annual processing capacity of 4.3 million cubic meters of saw logs. This translates into an aggregate production capacity of 2.5 million cubic meters of lumber. The sawn timber is used for packaging, pallets, construction, and decorative products for the furniture and design industries. AASA also has ve companies for remanufactured wood products (window moldings, clear rips, decking balusters, etc.) as well as several facilities for manufacturing plywood and ber panels (Casadesus-Masanell et al., 2005). Figure 5 shows the location of the 11 sawmills n where AASAs headquarters are included in this study, and the city of Concepcio located. AASA is a clear showcase of how the cooperative strategy proposed by Carlsson nnqvist (2005) can complement individualistic attempts to increase and Ro productivity. The corporations high-level planning consists of assigning customer orders to the different plants. In addition to capacity and productivity, planners at headquarters must take into account a fairness criterion. Since, each sawmill is an independent company, lucrative as well as unprotable orders must be split equitably. Once assigned, pairwise negotiation among plant managers enables enhancement of the supply chain by taking advantage of the opportunities below: . Externalizing production functions. One plant hires another to perform some task because the latter possesses certain advantages for the work in question. Such contracts are registered as a reciprocity record, so nancial transfers are uncommon.

534
Coelemu San Vicente Concepcin Escuadrn Coronel Arauco Lebu La Araucana Horcones I Horcones II El Colorado Chilln Cholgun

Los ngeles City Sawmill Port Main highways Temuco International border Regional border

Figure 5. Location of AASA sawmilling plants

0 Valdivia Valdivia Km

Pacific Ocean

Production swaps. Two sawmills, each of which has certain competitive advantages over the other, exchange the execution of specic production orders. Hansen et al. (2002) reported this specialization strategy among plants. For instance, the technology or raw material at the Coelemu plant may be more suitable for an order placed with El Colorado, or vice versa. In such cases, they perform each others job and split the savings. Logistic swaps. Two sawmills exchange production orders, so that they can be executed by the one closest to the nal customer. For example, the Valdivia plant n, located to its north, to fulll an order placed by the northern may ask Mutru city of Santiago. Time swaps. Two sawmills exchange production orders to take advantage of differences in production levels. As an example, one of the mills may not be able to fulll an order on time while at the other, production is slack and raw material is available.

Chile 100

Viales

Argentina

IJOPM 27,5

Constitucin N

Mutrn El Cruce Talca

Following Lejeune and Yakovas (2005) terminology, interaction among the companies of AASA can be described as a collaborative SCM. The exchange of information takes place on a nearest-neighbour-basis through the pairwise negotiations. The goal alignment among the companies is limited, as each one wants to obtain the protable orders to maximize its individual utility. The corporation hired our services as academic consultants to implement a co-operative SCM, i.e. to intensify information sharing and align the goals of the 11 Chilean sawmilling companies. Notice that their described interaction is not a typical supply chain, where the roles of supplier and client are well dened. In this case, the relationships are contingent on the workload, available raw material and other circumstances. Still, the companies face the problems of any supply chain and can benet from an integrated SCM. In order to adapt the formulation in Sections 3 and 4 to the specic conditions of each of AASAs plants, we organized three one-day workshops with the planners of each sawmilling plant, and two members of the headquarters staff. The planner is the deputy manager of the plant, who usually holds a degree in engineering and has between ve and ten years of experience with the company. The rst workshop consisted on formulating the model that each plant planner had to understand and accept. In the following two months, the planners had to investigate the parameters, which in many cases they barely measured or registered, since at that time they did not use such information at all. In the meantime, we obtained parameters QGg,t, QFf,t, Gg,t and Ff,t from the corporations headquarters. In the second workshop, the group discussed the information gathered. Often, a planner provided an erroneous value for a given parameter, but given the expertise of his colleagues, the group was capable of detecting and correcting such mistakes. One month later, we organized a third workshop to present the main results of the optimization model, and different sensitivity analyses. The objective was to generate a number of reports, which the plant managers validated later on, as explained in the next section. The ultimate optimization model differs in some ways from the model in Sections 3 and 4. Instead of two diameter categories, plants may have four or ve. They may produce about seven types of green products and 21 nal products. We assumed only one time period, thus, simplifying the problem to a static model. In total, there are 453 decision variables and 483 constraints, not including non-negativity. Approximately, 50 constraints account for specic assignments and other considerations that are not included in the general model, which ensure the solution arrived at is realistic. We implemented the model in a Microsoft Excel spreadsheet using a Frontline System Solver, which solves the problem in a few seconds using a Pentium III processor. This planning level tool was designed to interact with currently running operational level programming systems. Such a combination of a high-level decision support tool with a transactional system is not uncommon. Brown et al. (2001) describe a similar setting for guiding Kellogg Companys production and distribution decisions. Singer et al. (2002) model the tax collection process in Chiles General Treasury. They generate annual production plans with a linear programming model embedded in Excel, while operational decisions are made by supervisors. Singer and Donoso (2005) assist strategic decision making at a Chilean steel manufacturer with an activity-based optimization system implemented in Excel. The company also runs the integrated software I2 for scheduling production.

Internal supply chain management 535

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6. Validation and analysis of the models results According to one of the validation procedures described by Kleindorfer et al. (1998), the workshops described in the previous section validated our model, as we contrasted it with the opinion of several experts. However, during the workshops, we made a number of corrections and adaptations that could bias the model away from reality. To avoid such error, we presented each manager with a report containing the actual production of his plant and the plan suggested by the model. Figure 6 shows the report of one of the plants. Products RB (G), TB (G) and RP (G) are green. The other 18 are kiln-dried and sanded. Managers are experts at evaluating feasibility, as every month they must accept the plan assigned by the headquarters, and then fulll it. We ask each manager to assess our suggested plan. Only if all of them think it is feasible, we consider the general solution to be valid. In summary, the group of planners and members of AASA staff, plus 11 managers, evaluated and approved either the formulation or the results provided by our model. We compared the actual monthly sales for September, October and November 2003 with the models optimal solution. The results for other time periods are omitted for reasons of condentiality, but our conclusions are similar. Figure 7 compares the average actual sales with the sales suggested by the model for both green and dried timber. Note that eight of the 11 plants are equipped for drying and sanding timber, while the others must subcontract these tasks. The aggregate quantities turned out to be similar: 158,533 m3 for the actual situation and 164,244 m3 for the models solution. Total cost was also similar: US$18,578,777 actual and US$18,436,626 for the model. As for revenues, they displayed an increase from US$21,500,529 actual to US$21,804,388 for the model. This implies an increment in prots from US$2,921,752 to US$3,367,762, a growth of 15.3 percent. Figure 8 compares actual to suggested transfers. A negative transfer is interpreted as a receipt. The Araucana plant, for example, actually transferred close to 6,000 m3 of timber, while we suggest transferring slightly more than 4,000 m3. Since, the mill does not have drying and sanding capability, no receipts are possible.
7 6 thousand m3 a month 5 4 3 2 1 0 RB RB TB TB RP RP MB 2+ AM S3 BC P9 NC R3 RN SE SK SF SG AP AE (G) (F) (G) (F) (G) (F) actual sales suggested sales

Figure 6. Actual and suggested sales for a specic plant

40 thousand m3 a month 35 30 25 20 15 10 5 0
e
do sI n Co el em u an di vi al sI n a n es a I

Internal supply chain management 537

uc

Vi

Cr

uc

ne

ut

gu

ne

ra

dr

actual sales dried actual sales green 8 thousand m3 transferred a month 6 4 2 0 2 4 6 8

suggested sales dried suggested sales green

Figure 7. Actual sales and suggested optimal sales of green and dried timber

lo

co

ua

Va l

Co

El

co

ra

Es c

actual transfer suggested transfer

actual reception suggested reception

10 12
uc an Co a lo ra do H or co ne S Es I cu ad r n Co el em u M ut r n Vi a le s Va ld iv ia El Cr uc H or co e ne S II Ch ol gu n ra

or

Ch

or

ol

Figure 8. Actual and suggested transfers and receptions of timber

n The increment in prots can be attributed to better SCM. As an example, Escuadro actually transferred less than 500 m3 of green timber and received more than 4,000 m3 to be dried and sanded. The model suggests this plant should transfer all of its green production and receive none, thus specializing in green products for which it is efcient. The model also suggests a reorientation of Horcones II, the newest plant in the group. Its actual sales of green timber are currently low compared to nished products. Our model recommends the opposite: a much higher production of green timber than n to dried and sanded. Also, there should be an increase in transfers from Mutru ales, from La Araucana to El Colorado and Horcones I, from El Colorado and Vin n to Horcones I, and from Valdivia to Cholgua n. Escuadro Our model further calls for an increase in aggregate production of green products by 48.5 percent, together with a decrease in aggregate production of nal products of

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21.6 percent. Although it was not part of our original hypothesis, these results conrm anecdotal evidence that countries specializing in the production of raw material should focus their efforts on upstream activities. According to Casadesus-Masanell et al. (2005), such a strategy is, in fact, pursued by the owners of AASA. Whereas, in the northern hemisphere, trees for use as saw logs reach maturity in 50-100 years, in Chile they require an average of 25 years. Thus, Chiles comparative advantage is in the forest itself. By contrast, the comparative advantage of sawmills in the northern hemisphere is their closeness to the centers of consumption. This justies the results for the Swedish industry obtained by Roos et al. (2001), who found that adding value is the most successful strategy to increase prots. 7. Conclusions Owing to worldwide competition, the sawmill industry has been the subject of extensive research. Recent publications focus on the options available to the individual plant for increasing added value and productivity. Less attention has been placed on collaborative supply chain strategies, although several researchers have pointed them out as one of the most promising opportunities. In this work, we investigated how a number of sawmilling companies working together can prot from their distinctive competitive advantages, such as capacity, production yield, variable cost and raw material availability. To do so, we took advantage of recent ndings on SCM, which conceive of it as a strategy that incorporates the specic features of each plant. We rst modeled the sawmill production process in order to identify what parameters inuence performance. Then we extended the model to allow transfers, externalizations, production swaps, and other collaborative arrangements. We tested our model at AASA, a corporation that consists of 11 sawmilling plants located in southern Chile. The corporation centralizes the assignment of production contracts, and plant managers optimize their individual operations by negotiating among themselves the exchange of production orders. To evaluate how close the company was to a global optimum, we simulated the conditions in September, October, and November 2003 and derived the optimal operating plan. After validating the feasibility of our solution, we found that there was an opportunity to increase prots by more than 15 percent. Because, the solution is in many ways counterintuitive, it is unlikely that managers could arrive at it spontaneously. For example, it prescribes an increase in transfers, incurring explicit transportation costs. And, it recommends some plants focusing almost exclusively on upstream production stages while leaving the nal stages to others. Several limitations in this study should be pointed out. First, we did not consider the possibility of exchanging raw material among plants, since the usual practice in the industry is that harvested logs are sent to the closest sawmill. Matching the logs specic quality with the most suitable plant may be an interesting issue for further research. Second, our ndings are derived from a computational simulation, which suffers from the epistemological limitations identied by Kleindorfer et al. (1998). We cannot guarantee, for example, that the 15 percent prot increase would actually be realized. It is, rather, our best estimate. Nevertheless, our study was successful in challenging AASAs business paradigms. Managers at the company are now convinced that better SCM can be protable, and

have decided to develop optimization systems that promise to bring about the potential increase in prot we estimated. This has meant improving the corporations information and accounting system to capture the data needed by the linear programming model. They are introducing new planning procedures and modernizing other management practices. The results of these measures will be observable in a year or two, at which point we hope to be able to report on them in an academic forum.
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