As we work with more contractors and licensees around British Columbia, it has become apparent that the concept of business management using analytics and big data has not been a mainstay of the harvesting supply chain. The forest industry has relied so much on the fact that contractors will do their best to deliver logs, no matter the challenges, that the concept of working smarter with data is often ignored. The focus has been on rate cost cutting instead of value.
Many of the licensees and sawmills in the Province have data and talk about how they benchmark contractor performance and benchmark industry market rates for harvesting services. The problem is, their data is managed and massaged to ensure their harvesting rates paid are competitive to industry market rates and then they benchmark that massaged data to their peers. It is the definition of a feedback loop.
Contractors usually only have their own data and, in rare situations, their customer data to compare so they are no better off in understanding what is going on around them. If you will pardon the pun, the focus on market rates means the industry cannot see for the forest for the trees. Value considerations have no bearing. All that matters are the rate and its appearance of market competitiveness.
Here is the funny thing – the odd funny not the haha funny – the actual rate earned is largely immaterial. Everyone in the industry benchmarks the contracted rate as the market rate. But the contracted rate is just a paper rate. It does not mean the actual effective earned rate. The contracted rate is the best-case scenario for a contractor. It’s a rate that is largely pre-determined by their customer and assumes almost everything will go according to plan. There is little or no risk consideration. And no incentive to do better.
By risk consideration, we do not mean that the theoretical profit in the rate is not high enough. Rather the rate itself assumes the represented volume is actually there in sufficient quantity and quality, that the equipment needed for the block never breaks down, that the contractor has top quartile equipment operators, and weather does not impact the schedule. If any one of these things occur, the earned rate is less than the contracted rate.
Take a situation where a contractor and licensee negotiate a unit rate based on a specific volume on a block. The rate is built up assuming certainly hourly productivity, certain hourly equipment rates, a number of hours or days in the schedule required, and the total overhead dollars that many operating days require. The total of those total expenses for the block are then divided across the planned volume. If the volume quantity is not delivered, the contractor will not generate enough cash flow for overhead. If it takes more days than planned to deliver the volume, the contractor will not generate enough cash flow for overhead. In both cases, the negotiated rate may not have considered factors that affect the volume and schedule. There is rarely the incentive for a contractor to deliver more volume than planned or to deliver it faster because they most often have a set schedule of volume to deliver.
Contractors rarely earn the contracted rate. Their unit costs are usually higher than contemplated in the contracted rate and the total productivity is usually less than planned. On paper it all looks the same but in reality there are significant variations. The market competitive rate feedback loop means that contractors struggle to outperform their contracted rate and their customers focus on the paper rate. No one wins.
What everyone has forgotten in this feedback loop is that there is no value proposition for either party. The customers want to keep the paper rate as low as possible to tell themselves it is market competitive and the contractors want to drive the rate as high as possible to build some opportunity for themselves. Those two agendas are completely at odds and not resolvable as they exist today.
What if the light bulb went off and the industry stopped lying to itself that the paper rate matters? What if the industry used data and analytics to build a proper value proposition to plan and harvest the best fibre for the market instead? What if a funny thing happened in B.C.’s forest sector. What if we got better?