Toward full, multiple, and optimal wood fibre utilization: A modeling perspective

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1 Toward full, multiple, and optimal wood fibre utilization: A modeling perspective by Chao Li 1 ABSTRACT The slow growth rates of Canada s considerable forest fibre supply give it exceptional characteristics. It is a challenge for forest managers, researchers, and stakeholders to realize the highest value creation from this opportunity for the benefit of Canadians. Ideally, this should be achieved with full, multiple, and optimal wood fibre utilization, whereby all quality classes of wood fibre are used to their fullest potential, and all possible value creation options are considered. This paper describes the concept of value chains in a global context, and how they can be applied to forestry using a modeling framework. This is followed by a discussion on how this modeling framework can be used to address the optimal use of wood fibre, and how it can be used to address forest management-related issues and concerns. Key words: forest management, ecological modeling, wood fibre valuation, forest inventory improvement RÉSUMÉ Les faibles taux de croissance de l immense source de fibre de bois du Canada permettent à celle-ci d avoir des caractéristiques exceptionnelles. C est un défi pour les gestionnaires forestiers, les chercheurs et les intervenants de pouvoir maximiser la valeur de cette ressource pour le bénéfice de tous les Canadiens. Idéalement, ceci devrait se faire par une utilisation complète, diversifiée et optimale de la fibre de bois, où toutes les classes de qualité de fibre de bois seraient utilisées au maximum de leurs possibilités et où toutes les options de création de valeur seraient étudiées. Cet article décrit le concept de chaîne de valeur dans son contexte général et comment elle peut être utilisée en foresterie au moyen d un cadre de modélisation. L article est suivi d une discussion sur l utilité du cadre de modélisation pour atteindre une utilisation optimale de la fibre de bois et pour répondre aux questions et aux enjeux reliés à l aménagement forestier. Mots clés : aménagement forestier, modélisation écologique, valeur de la fibre de bois, amélioration de l inventaire forestier Introduction Canada has million hectares of forests and other wooded land cover, which is about 46% of the total land mass of the country. This accounts for up to 10% of the world s forest cover, about 30% of the world s boreal forest, and more than 25% of the world s temperate rainforest (Canadian Forest Service 2006). The Chao Li vast forest land provides a great commodity source for the forest sector, including a contribution of 2.9% to Canada s GDP, $31.9 billion to Canada s trade balance, and 2.1% to Canada s total employment in 2005 (Canadian Forest Service 2006). Despite these positive contributions to the Canadian economy, Canada s forests generally have slower growth rates than many other forestry regions; this has partially contributed to the challenge of the Canadian forest sector s competitiveness in the global wood fibre market. Regardless of the challenges that forest managers, researchers, and stakeholders are facing today, great efforts have been made to enhance the economic value of Canadian forest fibre and related products. To meet these challenges, the concept of a value chain (Porter 1985) has been introduced into business models, which has subsequently shifted our forest management paradigm from being volume-based to being value-based. Focusing on value from our forest resources allows our systems to facilitate the realization of a full, multiple, and optimal wood fibre utilization strategy. Full wood fibre utilization occurs when all quality classes of wood fibre are used, not just the best quality wood fibre. Multiple wood fibre utilization ensures that the use of wood fibre is not limited to wood and pulp and paper products; wood fibre is also used for other existing and emerging markets such as bioenergy, pharmaceuticals, and non-traditional markets. If the current soaring unit price of carbon credits in international trading systems stays high, we may even seen wood fibre being used as a carbon credit in carbon credit trading systems! Finally, an optimal wood fibre utilization strategy matches the right fibre to the right product at the right price and at the right market time. Given this background, the objectives of this paper are twofold: (1) to describe the concept of value chains and how they can be applied to forestry in terms of structuring a modeling framework with a focus on the part of the forest products value chain nearest the source: the upstream segment (i.e., estimating the dynamics of raw wood fibre supply); and 1 Canadian Wood Fibre Centre, Canadian Forest Service, Natural Resources Canada, Street, Edmonton, Alberta T6H 3S5. cli@nrcan.gc.ca MAY/JUNE 2009, VOL. 85, NO. 3 THE FORESTRY CHRONICLE 377

2 (2) to discuss how this modeling framework can be used to address full, multiple, and optimal use of wood fibre, as well as how the framework can be used to address forest management-related issues and concerns. A value chain is defined as a chain of activities. Products pass through all activities, or processes, of the chain in a specified order, and at each activity, or process, the product gains some value (see < >). Global value chain is defined as value chains that are divided among multiple firms and spread across wide swaths of geographic space (see < >). A Modeling Framework of the Upstream Part of the Forest Products Value Chain Under a value-based forest management paradigm, the best economic strategy for achieving the goal of maximizing the net benefits (or the difference between the value creation and costs) is to obtain the best market opportunity by matching fibre attributes with end products that best utilize the quality of the available fibre. This is because a reduced realization of value creation potential could result from using high-quality wood fibre for low-value products, and the fluctuating market conditions may only supply limited opportunities for favourable product price and demand. This is a complex task, and perhaps the first step toward implementing this economic strategy is to build a conceptual framework that includes all potential options of value creation that allow one to identify the best possible fibre utilization strategies using optimization technology. Optimization is the process of making a best choice in the face of conflicting requirements. In forestry, available fibre usually only supplies one of the many possible usages, and hence, the application of optimization technology is to select the best choice among various end usages for the available wood supply, subject to satisfying the requirements from ecological, environmental, and social sustainability. The concepts of value chain (Porter 1985) and global value chain (GVC) (Gereffi et al. 2005) can serve as a guiding principle for this conceptual framework. Forest Products Value Chain The concept of a value chain (or value chain analysis) was originally developed in business management circles to enhance efficiency in business (Porter 1985) and has since been applied to many other fields such as information technology, biometrics, and knowledge management. The applications of this concept are within a single firm or a unified management system where the business transaction information is available. Under this concept, all the primary activities can be conceptualized into five generic stages: inbound logistics, operations, outbound logistics, market and sales, and service. All the support activities can be categorized as one of four things: infrastructure, human resource management, technology development, and procurement. Since transaction information is generally unavailable to outsiders of a firm or a management system, the implementation of the value chain concept may not be straightforward in the forest sector, a sector which consists of multiple management systems with various management objectives. Efforts toward managing these complex systems have been made by linking research programs at different research institutes (Fig. 1) for the purpose of optimization across the forest products value chain, which can be segmented into three parts: 1) upstream, which deals with raw wood supply from forests affected by the results of harvesting and other management options 2, 2) midstream, which focuses on supply chain and logistics optimization 3, and 3) downstream, which focuses on wood and pulp and paper products, market price, and consumer demand 4. Collaborative research efforts among these multiple institutes might benefit from the concept of GVC (Gereffi et al. 2005), in which focus is directed at understanding value chains that are divided among multiple firms and spread across wide geographic space. Three variables play a large role in determining how GVC are governed and change: the complexity of transactions from different firms, the ability to codify the transactions, and the capabilities of the supply base. The dilemma of whether to focus on the upstream or downstream segments of the value chain is reflected in the literature. For example, Singer and Donoso (2008) provide an analytical framework based on the neoclassical theory of the firm, for which the best competitive advantage is the one that maximizes production efficiency. Using the linear programming of the operations research technology and data from the Aseraderos Arauco Sociedad Anónima, the largest sawmilling company in the southern hemisphere, Singer and Donoso (2008) were able to show that the company should concentrate on the upstream activities because in Latin America, the comparative advantage is in the forest itself. In the upstream part of the value chain, forest growth and management determine the wood supply, which in turn is directly related to the value creation from various forest products. The indicators and indexes associated with forest dynamics are the components necessary to demonstrate that wood harvesting was done in a sustainable manner to satisfy the requirements from social, governmental, and environmental groups concerns, including market acceptance. Under the current forest harvest planning process, volumebased growth and yield research has developed solid methodology and technology. However, with the shifting forest management paradigm from volume-based to value-based, wood fibre valuation has become important for using a common currency to evaluate the consequences of various management operations. A number of factors significantly influence wood quality and fibre supply, including major forest operations such as silvicultural practices and plantation methods as well as natural disturbances and forest protection from various risks. The level of fibre utilization in the harvest planning process probably has the biggest effect on current and future wood supply and value creation; therefore, it has been a focal point for forest management agencies and industries in making trade-offs with the conservation of wildlife habitat and old-growth forests (J. Liu and G. Carlson, Manitoba Conservation, Winnipeg, Manitoba, personal communication, August 19, 2008). Cost reduction, including operations research application to supply chain and logistics, is the main focus of the midstream part of the value chain. At this point in the value chain, 2 At FPInnovations, upstream value chain research is mostly carried out by the Canadian Wood Fibre Centre (CWFC) division through its forest ecology work. 3 At FPInnovations, midstream research is mostly carried out by the Forest Engineering Research Institute of Canada (FERIC) division. 4 At FPInnovations, downstream research work is mostly carried out by the Forintek and the Pulp and Paper Research Institute of Canada (Paprican) divisions. 378 MAI/JUIN 2009, VOL. 85, N o 3 THE FORESTRY CHRONICLE

3 careful consideration is given to the fibre allocation process, a process which examines the locations for obtaining wood fibre based on supply chain optimization. These locations are not necessarily the same locations as those used in the forest harvest planning process. Furthermore, harvest operations, transportation, design and maintenance of roads, spatial distributions of mills and warehouses, and the development of business networks and cooperation are also evaluated at this stage. Operations research and the type of optimization, either sequential or global, are the main tools used to achieve the goal of cost reduction. The downstream part of the value chain consists of various wood and pulp and paper products, as well as market price and consumer demands. Suitable fibre attributes for different forest products can vary based on physical dimensions and mechanical properties in lumber products, chip size, fibre attributes, and chemical properties. This complexity may have to be dealt with individually at the mill level in order to achieve maximized value creation. The market demand and price of each type of forest product can fluctuate frequently, and the timely forecast of best market conditions is needed in order to realize maximum value creation. Upstream Part of Forest Products Value Chain The results of supply chain optimization (in the midstream section) are very sensitive to the wood supply scenarios (from the upstream section) because of the bullwhip effect (S. D Amours, FORAC at the University of Laval, personal communication, Feb. 26, 2008). Therefore, the generation of forest wood supply scenarios under various forest management strategies and operations becomes important in evaluating the possible economic consequences of these operations across the value chain. For this reason, the development of an integrated modeling framework for the upstream part of the forest products value chain becomes crucial. Fig. 2 is a brief diagram of such a modeling framework. Many existing research results contribute to the modeling framework for the upstream part of the forest products value chain, as indicated by the grey-coloured boxes in Fig. 2. Box 1 in Fig. 2 (volume-based, quantity-driven forest inventory) refers to the polygon-based spatial operational forest inventory, which is the basic information for harvest planning carried out by provincial forest management agencies and forest industry companies. It represents, by far, the best forest information available. The polygons vary in sizes ranging from less than 1 hectare to several hundred hectares. Box 5 in Fig. 2 (various options in forest management operations) contains information from Boxes 6, 7, and 8 (plantation, silviculture, and protection). A substantial amount of information on these topics is available from existing research results. The challenge, therefore, is to synthesize and assemble the information within a unified system so that the effect and relative importance of the management options to forest dynamics, and thus the fibre supply, can be assessed. Development of a modeling framework is probably the best approach to this unified system, in which forest inventory, forest growth patterns, forest management and protection options, the valuation of wood supply as a result of forest dynamics, end products from wood fibre and associated costs, and non-timber values could be integrated. Several spatially explicit forest dynamics models can serve as a prototype for this modeling framework such as Patchworks (Spatial Planning Systems, see < spatial.ca/products/index.html >), Remsoft Spatial Planning System (Remsoft Analytics, see < products.php >) and the EDM model (Li et al. 2008). The economic valuation of fibre supply is a major missing component to such a modeling framework. These missing components contain essential data for economic analysis; they are also the linkages to the parts of the mid- and downstream sections of the value chain, which include estimates of various costs, products, and prices. Estimating value creation potential is achieved through the valuation of wood fibre supply, which is not only related to the tree species, site conditions, and market conditions, but also to the types of end products in lumber and pulp and paper industries and in biofuel and bio-refinery industries. Using the Optitek technology, a software simulator developed by Forintek for the lumber manufacturing industry to maximize production of end products, Zhang et al. (2006) suggested that value creation may not always be proportional to volume as generally assumed by forest managers. The method of scaling-up information 5 is also important for valuation of wood supply (Li et al. 2009), because significant value inaccuracies will occur if the standard method of scaling-up volume information is used (about 27% underestimate value in the test data). All these variables contribute to the complexity of wood fibre supply valuation, and they must be taken into account to avoid inaccurate estimates. In addition to forest products, wood supply may also be attributable to non-timber values (including potential carbon credits for carbon trading systems), which are important for sustainable resource development and for the well-being of forest communities. Usefulness of the Modeling Framework Estimation of Value Creation Potential for Full, Multiple, and Optimal Utilization of Wood Fibre Our modeling framework is designed to estimate value creation potential for full, multiple, and optimal utilization of wood fibre, and the modeling output that this model provides can provide a fuller picture of regional wood fibre supply and associated value creation potential. This information is vital to forest managers in determining the best use for each forest stand. The model output represents the spatial value creation potential of fibre supply over time. The marginal value creation can be estimated by calculating the difference between these value creation potentials and the costs of harvesting and logistics estimated by the supply chain optimization (Boxes 11 and 12 of Fig. 2). The simulated spatial marginal value could provide insight to forest managers on how net benefits could change over space and time under various wood fibre supply scenarios as a result of different forest management options. This information will be useful in determining the optimal regional wood fibre utilization strategy. Ensuring full utilization of wood fibre is a key forest management objective in the quest for the best use of our wood supply, and can be a primary contribution in sustainable forest resource development and in addressing social and environmental concerns. Wood quality is a key factor contributing to the enhancement of fibre value because the value creation of wood fibre is determined by both quantity and quality of the supply. Low-quality wood fibre supply can result from either poor site conditions or the effects from nat- 5 Scaling-up information is taking information from individual tree variable measurements up to stand-level variable estimation. 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4 Fig. 1. Structure of a forest products value chain. Fig. 2. Structure of a modeling framework for an upstream part of the forest products value chain. 380 MAI/JUIN 2009, VOL. 85, N o 3 THE FORESTRY CHRONICLE

5 ural disturbance of high-quality wood fibre supply (Watson 1998). By incorporating site classification and natural disturbance regimes, the modeling framework can estimate the spatial distributions of wood quality classes over time. This information will be useful in calculating the value creation potential from the low wood quality and also the salvage harvest potential. Identification of Important Variables and Test of Information Scaling-Up Methods The relative importance of many variables collected from plot sampling measurements needs to be assessed to identify important variables in the improvement of our understanding of regional wood supply and value creation potential. This is particularly useful in efficient forest research when resources are limited. For example, Li et al. (2009) reported that the diameter at breast height may contribute the most variation (74%) in explaining the biased estimation in lumber recovery, followed by tree height (17%), and taper (9%). How to scale carefully collected tree-level information up to stand, landscape, regional, and national levels has been, and continues to be, a significant challenge in forest sciences and in forest management practices. A value-based forest management model adds new layers of complexity because the changes in volume and value creation are not proportional, meaning that the methodology in volume-based forest management might not be suitable for value-based forest management. For instance, about a 27% under-estimate in black spruce value creation could be expected when using the standard method of scaling measurements of tree variables up to the stand level (Li et al. 2009)! Recommendations for Operational Forest Inventory Improvement Forest managers are concerned about the accuracy of operational forest inventory. However, there is no consensus on strategies for data improvement. Two distinct approaches are often debated: first, improving existing forest inventory by increasing either the number of sampling plots or the accuracy of the measurements, and second, replacing existing forest inventory with new data based on other highly developed technologies such as the LiDAR remote sensing images. The first approach has been developed, and standard procedures are available. However, some issues remain, and the following questions should be addressed: 1) how many sampling plots are needed to adequately support improving the inventory system and thus provide a more precise measurement of the inventory? 2) in order to meet the needs of forest management and industrial agencies, what level of accuracy is needed when measuring tree variables such as diameter at breast height and height? The second approach is still in the research stage, so it is too early to conclude how much improvement will be available through these new technologies. Regardless of which approach is chosen, some essential points need to be taken into account, including the following: 1) it is neither economically possible nor efficient to measure each individual tree and each stand of trees; therefore, some sort of approximation must be made through sampling designs to ensure reasonable accuracy of forest inventory for harvesting and other planned activities; 2) the sampling design applies to both the first and second approaches of forest inventory improvement, and they are essentially the same as the spatially distributed modeling approach, i.e., supervised classification using training site data to explain or extrapolate attributes of other sites across the region; 3) it would be ideal for tree-based measurement and plot design to be standardized to ensure compatibility among different regions; and 4) scaling-up information issues are critical and must be considered in the design. The modeling framework will allow the tests of different sampling designs and classification systems for assessing the best way to improve the measurement of forest inventory. Conclusions The concept of value chain optimization is useful in guiding principles for developing a modeling framework for an upstream-focused forest products value chain. The modeling framework presented here is largely based on research results of forest management and protection, and economic valuation of wood information from an operational forest inventory. The framework can be used for estimating value creation potential for full and multiple utilization, identifying important variables and examining methods of scaling-up information, assessing different sampling designs and classification systems for improving the forest inventory, and addressing some social and environmental concerns to ensure sustained value creation and reducing barriers in global markets. Acknowledgements Thanks to George Bruemmer, Raoul Wiart, and Sen Wang of CWFC for their support and encouragement. The concept and formulation of the framework in Fig. 1 benefited from discussions with a number of experts and executives from FPInnovations. Thanks also to two anonymous reviewers and Brenda Laishley of the Canadian Forest Service for their constructive comments, which improved an earlier version of this manuscript. References Canadian Forest Service The state of Canada s forests, [sixteenth report to parliament]: forest industry competitiveness. Natural Resources Canada, Canadian Forest Service, Ottawa, ON. 79 p. Gereffi, G., J. Humphrey and T. Sturgeon The governance of global value chains. Review of International Political Economy 12: Li, C., H. Hans, H. Barclay, J. Liu, G. Carlson and D. Campbell Comparison of spatially explicit foret landscape fire disturbance models. Forest Ecology and Management 254: Li, C., H. Barclay, H. Hans, J. Liu, R. Klos and G. Carlson Modeling in forest management: an information scaling-up perspective. Ecological Complexity (in press). Singer, M. and P. Donoso Upstream or downstream in the value chain? Journal of Business Research 61: Porter, M.E Competitive Advantage: Creating and Sustaining Superior Performance. Free Press. 557 p. Watson, P Highlights of the 1998 FERIC Burnt Wood Workshop, Whitecourt, Alberta, June 18, Conference Report CR 489, Paprican. 8 p. Zhang, S.Y., Y.C. Lei and Z.H. Jiang Modelling the relationship of tree-level product value with tree characteristics in black spruce. The Forestry Chronicle 82: MAY/JUNE 2009, VOL. 85, NO. 3 THE FORESTRY CHRONICLE 381