Theme 4 Value Chain Optimization:

Developing a Framework to Model the Market-Driven RealTime Production Planning and Management of the Wood Pellet Industry in Ontario
By: Natalie Hughes, MScF Candidate Dr. Chander Shahi Dr. Reino Pulkki

Outline
Project introduction Description of the value chain Project objectives The framework and DST Research methods Why wood pellets? Significance and future steps

The Project
VCO Network Theme 4:
Value Optimizing Scheduling and Control

Operational decision-making level

Practical use for (manufacturing) companies

Based on real-time market information Using the wood pellet industry in Ontario
Process flows at each stage of value chain

What Exactly is the Value Chain?

Michael Porter (1985):
In a business unit, products pass through chain of activities and gains some value at each activity

Figure 1. Michael Porters value chain

Source: http://www.smartersolutions.com

What is Value Chain Optimization (VCO)?

Provides an improved decision support system for components of the value chain Maximizes efficiency of process flows through value chain Value chain for wood pellets:
Raw material procurement Inbound logistics Processing/manufacturing Inventory control Outbound logistics Sales/marketing

Value Chain for Wood Pellets

Figure 2. Value chain for wood pellets

Source: Obernberger and Thek 2010

Value Chain for Wood Pellets

Raw material procurement Inbound logistics (raw material) Processing Storage (finished product) Outbound logistics Market Signals (DRIVER)

Upstream flow of information, working backwards through value chain (using market signals as driver) Downstream
Raw material procurement Inbound logistics (raw material)
flow of information through value chain

Processing

Storage (finished product)

Outbound logistics

Marketplace (sales)

Short Term Project Objectives

1) Collect current Ontario market demand data
Residential and industrial

2) Gather information from industry stakeholders 3) Obtain current upstream data about procurement, manufacturing, logistics and transportation/distribution activities 4) Combine this data to create a framework

Long-Term Objectives
1) Develop the framework into a real-time, market-driven decision support tool (DST) for the Ontario wood pellet industry 2) Modify this DST for further application to entire Canadian wood pellet industry

The Framework
Will be developed based on the wood pellet value chain (Figure 2) Will be focused on three major activities:
Harvesting/procurement Transportation Production control

The Framework
Upstream flow of information, working backwards through value chain (using market signals as driver)

Raw material procurement Which types of raw materials are being used (i.e., chipped biomass, chipped roundwood and sawdust)?

Inbound Logistics (raw material)

Processing

Storage (finished Outbound Logistics product) (finished product)

Market Signals (DRIVER)

Scheduling Existing storage Where is the raw processing based on capacity in material coming raw material manufacturing from? availability facilities Labour and materials costs Potential for storage capacity expansion in facilities

Where and when to Current demand data for Ontario ship? (residential and industrial)

How much of each type Where is the raw of raw material is material going to? required? Where is the raw material located? Production capacity of each plant

Shipping methods (rail, truck)

Statistical databases for general demand data

Which method of Cost of storage in shipping is most costfacilities effective based on location?

Community demand profiles

What type of harvesting Raw material storage technology is being capacity of each employed? plant Can more efficient harvesting practices be employed (i.e., innovative on-site chipper)?

Business demand profiles Associative model of market demand (ie. can specific economic indicators predict market demand?)

The Framework
Created in MS Excel Extension of the basic wood pellet value chain
Each segment has in-depth information linked to it

Data fed into a decision support tool (DST) to optimize the flow of resources
i.e., with minimum cost or maximum revenue output

Upstream flow of value chain Market demand signals used as DST driver

The Framework - Inputs

Market Signals (DRIVER) Current demand data for Ontario
Residential and industrial

Statistical databases for general demand data Community demand profiles Business demand profiles Associative model of market demand
i.e., can specific economic indicators predict market demand?

The Framework - Inputs

Outbound Logistics (finished product) Where and when to ship? Shipping methods (rail, truck)
CN catering to pellet manufacturers; boasting high capacity, connectivity, speed, reliability and environmental responsibility

Determine most cost-effective method of shipping

Based on location

The Framework - Inputs

Existing storage capacity in manufacturing facilities Potential for storage capacity expansion in facilities Cost of storage in facilities Avoid pellets sitting in storage too long

Storage (finished product)

The Framework - Inputs

Processing Scheduling processing based on raw material availability Labour and materials costs Improved (higher efficiency and lower cost) means of processing
New equipment, facility layout, or wood pellet recipe

The Framework - Inputs

Figure 3. Cost breakdown of wood pellet processing without (top) and with (bottom) drying of biomass
Source: Northern Ontario Value-Added Initiative

The Framework - Inputs

Inbound Logistics (raw material) Where is raw material coming from/going to? Production capacity of each plant Raw material storage capacity of each plant Capitalize on the material when it is available
Growing/competitive market creates competition for raw materials

The Framework - Inputs

Raw Material Procurement
Types of raw materials to be used

Quantity of each type of raw material required Location of raw material Type of harvesting technology being employed Ability to employ higher efficiency harvesting practices
i.e., innovative on-site chipper

i.e., chipped biomass, chipped roundwood and sawdust

The Decision Support Tool (DST)

Will maximize the profit margin (or minimize the costs) associated with wood pellet production for a given level of market demand Will help Ontario wood pellet companies to change their input/output activities according to real-time market signals

Research Methods
Previous studies by students/VCO Network participants
Extension of relevant topics

Questionnaire/interviews with current/previous industry players in Ontario Peer-reviewed journals

For market signals and general wood pellet (industrial) information

Research Methods
Market signal prediction and response for DST:
Statistical databases for up-to-date market information Community and business demand profiles Use an associative model based on linear regression to identify sensitivity of market demand for wood pellets to economic trends
i.e., what drives the domestic demand for wood pellets?

Why Wood Pellets?

Important commodity adding value to low-grade wood materials Growing in popularity Many advantageous attributes as fuel source:
High heating value Low moisture content Transportation Storage

Ontarios Green Energy and Green Economy Act will phase out coal-fired power generation by 2014

Canadian Wood Pellet Scene

Wealth of forest resources essential for wood pellet creation More biomass resources per capita than any other nation World-class competitor in wood pellet industry World-leader in bioenergy technology development Modern transportation systems, advanced manufacturing sector and an availability of skilled labour 39 operational wood pellet plants with a total capacity of 3.22 million tonnes (2011)

Who Cares?
Wood pellet companies
Producers and distributors in Ontario and Canada

Consumers
Lower costs

Policy Makers
Incentives for shift to wood pellets

Environmentalists
Optimized transportation + processing = minimized emissions

Future Steps . . .
VCO Network PhD project for further development of DST for Ontario wood pellet manufacturers Modify and expand DST to optimize:
Canadian wood pellet industry Canadian forest products industry as a whole

Acknowledgements
Project Committee Members: Dr. Chander Shahi Primary Supervisor Dr. Reino Pulkki Co-Supervisor Dr. Kevin Crowe Committee Member Funding: NSERC Strategic Network on VCO

References
Ackom, E.K., Mabee, W.E., Saddler, J.N. 2010. Industrial Sustainability of Competing Wood Energy Options in Canada. Applied Biochemical Biotechnology, 162:2259-2272. CanBio. 2012. Go Pellets Canada. Online: http://www.gopelletscanada.com/ CN - North Americas Railroad. 2012. Wood pellets. Online: http://www.cn.ca/en/shippingalternative-energy-products-wood-pellets.htm. Government of Canada. 2011. Invest in Canada Summary. Online: http://investincanada.gc.ca/eng/publications/invest-in-canada-summary.aspx. Government of Ontario (Ministry of Energy). 2012. Green Energy Act. Online: http://www.energy.gov.on.ca/en/green-energy-act/. Laval University. 2010. NSERC Strategic Network on Value Chain Optimization: Optimizing the forest bioeconomy. Laval University, Quebec, QC. Online: http://www.reseauvco.ca/en/vconetwork/. Li, C. 2009. Toward full, multiple, and optimal wood fibre utilizaion: a modeling perspective. The Forestry Chronicle, 85(3): 377-381. Lofstedt, R. 1996. The use of biomass energy in a regional context: the case of Vaxko Energi, Sweden. Biomass and Bioenergy, 11(1):33-42. MacKenzie, J. and Bruemmer, G. Enhancing Canadas forest fibre. 2009. The Forestry Chronicle, 85(3): 353-354. Northern Ontario Value-Added Initiative (NOVA). 2010. The Pellet Tool Kit, A basic how-to guide prior to starting your pellet project. FP Innovations. 12pp. Obernberger, I. and Gerold Thek. 2010. The Pellet Handbook, The Production and Thermal Utilisation of Pellets. MPG Books, London, UK. 549 pp.

References - Pictures
http://www.dreamstime.com/ (wood pellet hardwood tree) http://ogctumblingprogram.blogspot.ca/2010/03/going-to-provincial-championships.html (Ontario flag) http://www.crooktree.com/?Action=VF&id=929140819 (harvesting machine) http://www.ravenfirewood.com/ (Pellet bag) http://www.smartersolutions.com (Michael Porters Value Chain) http://www.sbcfiremaster.com/our-products/ (pellets) http://www.mywoodpelletsolution.com/wood-pellet-storage/ (silo) http://soshable.com/tag/2010/ (Canadian flag) http://www.ourbc.com/travel_bc/bc_cities/thompson_okanagan/avola.htm (CN train) http://www.grandeg.lv/?item_id=49&l=2 (pellet conveyor) http://www.glosco-wood.com/service5.aspx (sawdust) http://drcarolshow.com/blog/red-yellow-green-the-relationship-traffic-light/ (traffic light) http://www.energy.gov.on.ca/en/green-energy-act/ (green energy handbook) http://www.ecolutioncanada.com/wood-pellets.php?lang=english (clear pellet bags) http://www.nottobetrustedwithknives.com/tag/canada-day/ (Canadian maple leaf) http://insightfulmommy.com/zap-the-two-steps-forward-one-step-back-syndrome (stairs) http://www.takepart.com/article/2008/04/08/fighting-goliath-texans-take-big-coal/ (no pollution) http://moneytree1000.yolasite.com/ (money tree) http://www.nserc-crsng.gc.ca/index_eng.asp (NSERC logo) http://www.lakeheadu.ca (Lakehead logo) http://www.123rf.com/photo_10874968_pine-tree-shaped-wooden-pellets-isolated-on-white.html (pellet pine tree) http://www.arfuels.ca/ (AR Fuels logo)

THANK YOU!

Questions?
Early stages of project All input and suggestions welcome and encouraged!