Improving Logger Production Profitability

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1 Improving Logger Production Profitability Ways to Improve Profitability Know your costs Operate efficiently Bid work realistically Regularly monitor job productivity and profitability Make informed business decisions 1

2 Why keep track of Production & Performance Metrics? If you can t measure it, you cannot improve it. Example Scenario: A Case Study of Three High-Performing Contract Loggers with Distinct Harvest Systems : Are they thriving, striving or just surviving? Written by Rene Germain and Steven Bick, et al Forest Products Journal, Vol. 66, No. 1 / 2 Will focus on the Harvest 2 (four person whole tree harvest system) Will review how they cost their equipment using the Productive Machine Hours (PMH) method Will apply that scenario and PMH costs to the Logger s Production Profitability Worksheet and demonstrate how this can be an important Management tool 2

3 Case Study Facts Crew Size: 4 Equipment Cost / PMH Feller-buncher $151 Grapple Skidder 1 $ 91 Grapple Skidder 2 $ 91 Loader / Slasher $119 Dozer $117 Case Study Facts Site Characteristics: 170 acre tract of northern hardwood Heavily cut over (was paper company land) now owned by a TIMO Cut averaged 30 tons/acre of pulpwood. 3

4 Using Productive Machine Hour (PMH) Costing Calculates hourly ownership & operating costs for each piece of equipment Treats depreciation as a variable cost based on the # of hours between major overhauls PMH includes labor cost, fuel cost, repair & maintenance, lubrication, interest expense, overhead and the opportunity cost of capital Opportunity Cost Risk Based Cost of Capital for a Small Business R E T U R N Year US Treasury Bond Yield XYZ Logging Co Historic Average Yield US Stock Market Small Business Cost of Capital RISK 4

5 Case Study Facts Contractor Estimates of Daily Production 3 MBF of saw logs 100 tons of pulpwood 60 tons of chips 12 cords of firewood Anticipated Job Completion: 24 days Table 5 Equipment Cost Factors COST FACTORS Fellerbuncher Skidder 1 Skidder 2 Purchase Price $635,000 $250,000 $250,000 Finance Amount $550,000 $200,000 $200,000 Loan Interest Rate 4% 4% 4% Loan Term (years) Machine Ownership Life (hours) 15,000 15,000 15,000 Machine Hours to Significant Repair 5,000 6,000 6,000 Percent Cost to Depreciate 40% 50% 50% Expected Annual Use (hours) 1,000 1,600 1,300 Monthly Payment $12,418 $4,516 $4,516 Repairs & Maintenance Cost per PMH $9 $8 $8 Fuel Cost per Gallon $4 $4 $4 Fuel Consumption Rate (gallons/hour) Lube Costs (per 1,000 hours) $2,000 $1,500 $1,500 Hourly Operator Costs $35 $30.00 $30.00 Ratio of Machine Hours to Operator Time 75% 85% 85% Annual Insurance Costs $4750 $3,000 $3,000 5

6 Table 5 Equipment Cost Factors COST FACTORS Loader/Slasher Chipper Dozer Purchase Price $300,000 $150,000 $175,000 Finance Amount $250,000 $100,000 $100,000 Loan Interest Rate 4% 5% 5% Loan Term (years) Machine Ownership Life (hours) 15,000 10,000 5,000 Machine Hours to Significant Repair 5,000 4,000 2,500 Percent Cost to Depreciate 40% 60% 65% Expected Annual Use (hours) 1, Monthly Payment $5,645 $2,303 $2,303 Repairs & Maintenance Cost per PMH $6 $18 $9 Fuel Cost per Gallon $4 $4 $4 Fuel Consumption Rate (gallons/hour) Lube Costs (per 1,000 hours) $1,000 $1,500 $1,500 Hourly Operator Costs $35 $0 $30 Ratio of Machine Hours to Operator Time 90% 100% 85% Annual Insurance Costs $1,500 $1,500 $1,000 Costs Factors in determining Productive Machine Hour (PMH) 6

7 Costs Factors in determining Productive Machine Hour (PMH) Table 7 ESTIMATED JOB COSTS Rate Elapsed time Subtotal Depreciation Fellerbuncher $151/PMH 120 hrs $18,120 $6,096 Skidder 1 $91/PMH 168 hrs $15,288 $3,500 Skidder 2 $91/PMH 120 hrs $10,920 $2,500 Loader/Slasher $91/PMH 192 hrs $17,472 $4,608 Chipper $119/PMH 36 hrs $4,284 $810 Dozer $117/PMH 24 hrs $2,808 $1,092 Overhead* $1,500/day 24 days $36,000 Other costs** $3,000 Total costs $107,892 $18,606 7

8 Table 7 REVENUE SCENARIOS Surviving Striving Thriving Contract Rate*** Revenue Contract Rate*** Revenue Contract Rate*** Revenue Sawtimber $140/MBF $10,080 $150/MBF $10,800 $160/MBF $11,520 Pulpwood $18/ton $43,200 $21/ton $50,400 $21/ton $50,400 Chips $18/ton $25,920 $20/ton $28,800 $21/ton $30,240 Firewood $40/cd $11,520 $60/cd $17,280 $60/cd $17,280 Total revenue $90,720 $107,280 $109,440 Net profit ($17,172) ($612) $1,548 ROI (82%) (3%) 7% Utilizing Performance and Profitability Metrics Logger s Production Profitability Worksheet 8

9 LOGGER S PRODUCTION PROFITABILITY WORKSHEET PLAN THE WORK WORK THE PLAN MEASURE THE RESULTS Job Plan Time, Revenue & Cost Projections 9

10 Week 1 Production Plan Week 2 Monitoring Progress 10

11 Week 3 Monitoring Progress Week 3 Job Summary - Performance to date 11

12 Week 4 Monitoring Progress Week 5 Monitoring Progress 12

13 Week 5 Job Summary upon Completion HOW CAN YOU IMPLEMENT IT? 1. Calculate the PMH cost for your equipment 2. Estimate the # of machine hours for your job 3. Determine what the Contract Terms will be. Test pricing scenarios. 4. Input the variables on the Production Plan page (left side) of the Job Summary 5 5. Determine what the Production Plan Goals will be by Week and input them (e.g. Week 1, Week 2, etc.). Then go back to Job Summary 5 to check your entries (5 Week Plan = Production Plan) 13

14 WHEN YOU USE IT 6. Do your updates on a weekly basis 7. Do regular Job Summaries as the job progresses 8. Review Favorable (Unfavorable) Variances. Make adjustments on the job accordingly 9. Compare your Production Profitability Worksheet results to your financial data (e.g. QuikBooks, etc.) for comparable periods to see how closely your PMH estimates and job profitability compare WHEN YOU USE IT 10. Adjust inputs and test variables for: Job Pricing Use it as a Bidding Tool Potential Impact of a new hire Impact of an equipment purchase 11. Build your database over time. Use it as a reference for comparable future bids where applicable 14

15 LOGGER S PRODUCTION PROFITABILITY WORKSHEET QUESTIONS? Mat Zlomek BusinessCoach2@gmail.com 15

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