UndercuttingProductivityChart

We often hear that volume undercutting on blocks causes significant impacts on harvesting productivity. We decided to analyze TimberTracks™ data to gain a better understanding of the impact of undercutting. The results were surprising.

Methodology
As a control factor we performed analysis in June 2016 from a single BC interior Timber Supply Area. No other filters were applied. The data totaled about 4.9 million m3. Approximately 63% (the “Undercut Pro Rata”) of the volume was from blocks that experienced undercut variance averaging 13% (the “Undercut Variance”) and 37% (the “Overcut Pro Rata”) experienced overcut variance averaging 17% (the “Overcut Variance”).

Target volumes typically come from timber cruises or sometimes customer contracts. The volume delivered represents the actual measured volume paid by the customer. The variance is between the target and actual.

We examined four phases – falling, skidding, processing, and loading. The weighted average productivity for each phase by undercut and overcut was calculated and a variance was established for each phase.

We used the overcut tree-to-truck rate and phase productivities as the baseline. We determined overcut volume phase hourly equipment rates based on productivities. Using these proxy hourly equipment rates, we then applied the undercut volume productivities to arrive at a representative comparable tree-to-truck cost comparison (the “Representative Undercut Rate”).

We adjusted the Representative Undercut Rate to account for the differential in weighted average paid rates between undercut and overcut volume (the “Under/Over Differential”). The difference then determined the economic impact of undercut versus overcut blocks.

We assumed a contractor operating at overcut volume rates would achieve a 10% operating profit margin and then calculated the financial impact of the productivity differential experienced in undercut blocks.

Summary
The weighted average paid tree-to-truck rate was $20.91/m3 for undercut volume and $20.48/m3 for overcut volume. This $0.43/m3 represents the Under/Over Differential of rates.

We calculated the adjusted undercut volume by productivities to arrive at a $22.01/m3 Representative Undercut Rate. After adjusting for the Under/Over Differential and weighting the Undercut Pro Rata and Overcut Pro Rata, the average impact of undercutting increases harvesting costs by $0.69/m3.

In our analysis we have not speculated on the cause of undercutting. All other things being equal, the impact of productivity differentials between undercut and overcut blocks could impact the average harvesting contractor’s profitability by over 30% per year.

Next Steps
The next step would be work with contractors and licensees to further investigate the cause and effect. The determination of root causes and action items to reduce the gap in undercutting or effects of productivity in undercut scenarios could have a profound effect on the supply chain sustainability.