by Dr. Gene Wengert, The WoodDoctor’s Rx
The main job or the objective of every sawing operation is to make money. Or stated another way, lumber manufacturing is (or should be) a money-making process! As raw material costs have risen over the past decade, without a proportionate rise in the price of lumber, achieving this “money-making” objective with the mill has become more and more difficult. In this article, we will look at many practical approaches for increasing profitability with the mill through value-added manufacturing. We will define value-added manufacturing; we will give many examples of how to make a value-added product; and we will consider the marketing and economic aspects of these new approaches to remaining in business.
1. Make the product we sell more valuable; make a better product for which the customer will pay more money. In other words, we want to increase the value of theproduct without increasing the raw material or processing costs as much.
2. Reduce the cost of raw material required to make the product, perhaps by reducing waste so that there is more product per log (without reducing the quality or value of the product).
3. Reduce processing costs without reducing product value or reducing yield.
The Profit Equation
This profit equation is a simple equation, but there are some important concepts or ideas that we must not overlook or miss. First, based on this simple equation, there are three ways to increase profitability:
PROFIT = [Product value when sold] - [Raw material cost] - [Processing cost]
Let’s consider this profit equation in more detail. First, a subtle, but important concept in this profit equation is: In other words, the most expensive wood product that a mill can manufacture generates no profit until it is sold.
A second concept expressed in this equation, perhaps almost too obvious to mention, is: Considering the raw material costs, any time a mill can make more products from the same amount of raw material (that is, the yield is improved), profits will also increase (unless the yield increase is obtained by spending too much money on processing). This idea becomes even more important when the raw material costs are compared to processing costs. With today’s sawmill, raw material costs (that is, log costs) are 3 to 4 times greater than processing costs—that is, raw material costs are 75 to 80% of the total manufacturing cost and processing costs are 20 to 25%. (Note: The proportion of total costs for raw material has increased over the past 20 years from under 25% to over 75%.) This increased importance of raw material costs results in a new emphasis in the mill on quality and on waste reduction. No longer are production rates or production costs the keys for mill profitability; yield is the key. This shift means that sawmills using narrowkerf blades are becoming more the favored technology for high-profit sawing operations.
In addition to getting more product from the same raw material, profitable operations need to focus on increasing the amount of value added products they make, and this usually requires that more manufacturing be done at the mill. In the future, profitable mills will pay much more attention to quality and appearance, to remanufacturing opportunities, to marketing improvements, and to the wants and needs of the customer.
TECHNIQUE #1: Add value to present product
This is an appealing approach to value-added manufacturing as the capital cost is usually quite low. As a start, ask yourself, your employees, and your customers (Especially ask the customers!) what you can do to make your product better. In other words, you need to make what the customer wants. Another approach involves renaming the product that you’re making. For example, change the name of “lowgrade” lumber to “industrial-grade” lumber. If you have bird’s eye hard maple lumber that a grader would call No.1 Common, rename this particular grade of lumber—perhaps a name like, “Wild Turkey Maple”— which will give special value to the product, both in the customers’ and employees’ eyes. Another example: If you have ordinary pine lumber, call it “blackjack pine.” A good example of this approach is “Choice Wood” (TM) from Weyerhaeuser. They guarantee that this lumber will be defect-free. It comes only in certain sizes (such as 2-1/2 inches or 5-1/2 inches wide, and 2, 3, 4, and 6-foot lengths), is always S4S, and is always kiln dried. In a recent trade catalog, this product was priced at over $10,000 per MBF (nominal size) for walnut, oak, and cherry. The market is the hobbyist and small scale, professional woodworker; these people value this product and will pay the price to get exactly what they need—correct MC, surfaced, defect-free lumber.
As another example, consider the wood going into your scrap-pile, or hog. Is it possible to convert some of the “waste” in the conveyor to short lumber? Pulp chips or fuel chips are seldom worth more than $25 per ton. But short-length lumber is worth no less than $250 per ton and often more.
A recent ad in the Hardwood Market Report listed red oak shorts, 24 inches long, kiln-dried, 4/4 for $225 per MBF. One of the largest kitchen cabinet manufacturers is buying short lumber (20-inches long and 3-inches wide, green) at prices over $300 per MBF. Hobbyists love short lumber too, especially if it is kiln dried. Prices are often $3000 per MBF. And just about every gardener needs tomato stakes—1” x 1” x 4’, 5’, and 6’ long. One mill in Ohio sold tomato stakes for $.125 per lineal foot (equivalent to $1500 per MBF). And what gardener doesn’t need some sawdust for mulch—$1 per bag. Or consider manufacturing wooden fireplace mantles—perhaps custom-made from a customer’s favorite tree at a cost of no less than $450 per MBF.
TECHNIQUE #2: Sell the same product you now manufacture, but sell it to a different market where it is more valuable
As we mentioned in Technique #1, the hobbyist is a potential market for lumber. Often, they will pay much more for a piece of lumber than will the large furniture plant. Defects in the grading rules (defects as defined by one customer) often are viewed as character marks by another one. One small mill in Wisconsin began selling lumber to hobbyists and small businesses as a sideline; it wasn’t long before people in these markets became their major customers. Another operation in Virginia increased the value of their product when they called it picture frame stock.
Another opportunity for the hardwood mill is to convince a customer that they can use a lower grade of lumber (such as No.2 Common) and achieve a lower overall cost for their product. But, rather than just sell them this lower grade at market price, modify the grading rule slightly so that the lower grade with the rule modification fits their needs even better (and of course, raise the price accordingly— both you and the customer should benefit
||7 Steps for Making More Money when Manufacturing Lumber
1. Safety must be the #1 concern, not profits. An accident can be very expensive.
2. Get the best logs at the lowest price; store logs properly.
3. Maximize profit by getting the best yield from the resource provided. Appreciate the role of the debarker, opening face, log turning (when and sequence), edging, trimming, grading, remanufacturing, cant size and drying quality.
4. Production rate is not much of an issue with respect to profitability.
5. Keep everyone working with the mill aware of the value of the product and the customer’s needs.
6. Measure quality; document quality.
7. Package the lumber or secondary wood product to reflects its high quality.
Ideas for Increasing Sawmill Profitability
In the Log Yard
• Double-check log grades to make sure you get what you pay for
• Calculate estimated values for each log; remove low-grade logs
• Process logs by value classes
• Check log lengths to avoid overlylong logs
• End coat logs to prevent stain, dry ends, and checks
• FIFO or LIFO for stain control
• Check lumber thickness to get the best thickness
• Check sawyer’s procedures — patterns, opening face, rotation
• Consider short-length lumber
• Send sawyer to grading classes
• Send sawyer to visit major customers
• Know quality requirements for each customer
When Edging and Trimming
• Check lumber for adequate wane
• Check the number of pieces requiring remanufacturing when grading — 5% is probably optimum
• Negotiate edging reduction agreement with purchaser
• Send edgermen to grading classes
• Advanced lumber grading training for graders
• Send graders to visit major customers
• Visit major customers
• Compile quality list for each customer
• Explore opportunities for shortlength lumber
• Consider S2S and S4S
• Consider adding a kiln
• Consider moulding
• Improve packaging
|Study the wood-using industries in your area. Ascertain what grade of lumber they are using. Perhaps you can supply their needs, saving transportation costs for both of you. For example, often there is a better return if you sell low-grade lumber to a flooring mill than if you sell it to a pallet manufacturer. Also, determine if there is a better market for thicker products, which will cost you less to manufacture and will have higher yields, than thinner products. Maybe the city or county needs 6 x 6s for landscape timbers, or a non-wood industry needs 4 x 4s for facilitating material handling. Compare the profitability of selling 6 x 6s versus the profitability of sawing this timber into lumber.
TECHNIQUE #3: Manufacture a new product
Lumber and its by-products are used for thousands and thousands of different products. Maybe you want to consider manufacturing one of these products yourself, rather than shipping the raw material to another firm. In other words, you want to extract a little more value-added from the wood before you ship it. In this case, you would be entering an existing market for wood. A word or two of caution in this case: “Often competition is well-established, has markets already developed and has manufacturing and raw material costs under control. Their equipment may already be depreciated, so that their production costs seem unbelievably low to the newcomer with brand-new equipment. SO, be careful; analyze the market situation very carefully.” As an expansion of
this idea, see the example presented later in this article.
Another alternative is to consider making a wood product where you will be substituting wood (and all the good features of wood, including that it is a renewable resource) for a nonwood product. (How about aspen for sticks for ice cream bars instead of plastic? The wood is tasteless, odorless, clean, splinterless.) Or, you could enter an existing market, but a market not well-served or a market with room for expansion. (One example of this approach is to make bowling alleys for an emerging or developing country. We’ve heard that Mexico is putting in an average of two bowling lane facilities every week. The huge, growing market for hard maple and all the other wood fixtures for lanes is a opportunity for someone!)
Or, finally, you could consider entering a totally new and developing market for wood, such as the wooden bridge market that began developing several years ago.
TECHNIQUE #4: Get more value from the present resource
In this technique, we are considering improvements in processing that will produce less lower-grade (or low-value) material and less waste or by-products. There are many examples.
End coat logs to prevent end checking and stain development. For logs that are “accidentally” stored longer than expected, the financial gain or improvement by end coating is over 10%, based on a University of Wisconsin study by Linaries and Wengert. For other logs that have just a little checking or stain and that are typically cut several inches over-length to allow for trimming the defects, the savings in being able to cut shorter logs is over 4%.
Although most experienced sawyers will achieve approximately the same footage of lumber per log (that is, their over-run is nearly identical from mill to mill if they are sawing the same size and quality of log on the same equipment), the value of the lumber varies greatly depending on the choice of the opening face, the size of the opening face, and when the sawyer rotates the log on the carriage. In tests done at Purdue University by Cassens, the best sawyer could achieve 8 to 22% more value from a log by proper sawing procedures than the ordinary, average sawyer!
End coating oak lumber right after sawing will reduce end checks by 4-1/2 inches per piece of lumber. That is 4-1/2 inches of more usable lumber for your customer. End coating costs about $2.50 per MBF, but your customer will see benefits of $50 or more per MBF. But the hardwood lumber grading rules do not give you much if any credit for check-free ends, so you will need to educate your customer on the increased value of your lumber and why it also costs a little more. (“I would rather justify my prices being high than try to excuse my quality being low!”)
Don’t sell unprocessed raw materials without first calculating the profit that you can make if you were to process the same log into lumber or other products. For example, consider a 22-inch diameter veneer log. The lumber produced will have a value of $1,590 per MBF. If processing costs are $125 per MBF, then at a log cost of $1,465 per MBF, the log will have zero profit. If the veneer log can be sold for $1465 per MBF or more (Don’t forget to subtract any veneer log handling costs!), then selling the veneer log will generate more profit than sawing the log into lumber. On the other hand, if the veneer log price is under $1465 per MBF, sawing is more profitable, on the average.
Process logs and lumber in such a manner that the lumber will be free of stain. Consider remanufacturing warped lumber into a piece that is flat and straight before grading and selling.
TECHNIQUE #5: Improve marketing and sales
Bring your marketing and sales expertise within the company up to the highest level possible. Don’t worry about the price of your product. In a survey of wood users by Bush and others at Virginia Tech, only 17% of the companies listed price as the #1 criteria when purchasing wood products, while 27% had an extremely low interest in price and were more concerned about quality and delivery time. As stated earlier, a good motto is, “I’d rather justify my prices being high than excuse my quality being low.”
Consider your marketing brochures and advertisements.
Use different approaches for different markets. For short lumber and specialty lumber, consider local advertisement techniques—local newspapers, woodworking associations, trade school teachers, and woodworking shows. One of the important processes in value-added manufacturing is to constantly be on the lookout for new markets.