Value Chain Advantages
By Jean Favreau FPInnovations Feric Division
What does the concept of value chain mean?
The concept of value chain was introduced by Michael Porter in his book Competitive Advantage (Porter 1986). It is based on the concept of supply chain management (Stadtler and Kilger 2002), but with the notion of product value added to that of costs. With the value chain, activities of the value creation network are broken down into elementary operations. This is done to determine which activities are potentially the most competitive among those ranging from the physical creation of the product to its delivery to the customer (e.g., supply, receiving, handling, storage, processing, distribution, marketing, product-related services). The value chain also includes technology, human resources and the administrative support to help these creation activities. A value creation network is simply a virtual business based on information sharing and joint planning. Suppliers are an important element to consider since they are network partners.
The main competitive advantages can be seen when the company compares the elements of cost, customer satisfaction and net value with those of its competitors. The network can improve a chain’s performance by strengthening its connections or links. The decision-making and steering system must be flexible so it can react to change and avoid rigid rules. The decisive competitive advantage is the prime consideration to ensure good coordination and integration between chain links. It can be further improved by optimizing the network overall. The table at left compares the differences between the “traditional” and the “value chain” business model.
Why should the Canadian forest sector have value creation networks?
Traditionally focused on cutting costs in isolated business units, the Canadian forest industry is now gasping for air, and for many reasons. The industry must get away from commodity products by concentrating on the inherent advantages of Canada’s forests and developing new products that are not only easier to trace, but that are also certified and highlight Canadian wood and expertise.
Reinvent The Sector
It is imperative to reinvent the Canadian forest sector by developing a new business model. Value creation networks offer an excellent opportunity to stand out among global competition. The implementation of value chains in the forest industry makes it possible to take full advantage of forest resources and expertise, way beyond what any single business could do on its own. The concept of value chain is already firmly rooted in several industrial sectors, and continuing to work with the traditional approach will only widen the gap between the two business models.
A study published in the March 2007 issue of the Harvard Business Review gave the sources and potentials of savings in ascending order of ease of implementation for 37 companies. The easiest savings consist of reducing production costs so as to achieve 25% of a company’s maximum potential savings. A company could get 35% more savings by streamlining and automating its internal processes. Then the highest savings (40%) and most difficult to achieve consist of restructuring and consolidating the organization. This is precisely where the concept of value creation network fits in. By using this study as a reference, the forest industry could achieve savings of 40%! However, this is not yet proven and would vary depending on the region and possible changes to the industrial structure. In recent years, FPInnovations has conducted a number of studies that have clearly shown the potential profits associated with revising existing business models. These profits are often possible when yesterday’s competitors become today’s partners. For example, recent studies on wood transportation have shown that costs drop by 5% to 15% when a regional carrier optimizes its shipments to several mills.
Laying The Ground Work
As illustrated above, it is necessary to be highly innovative and conduct a lot of research to implement the value chain concept. Since its foundation in 2007, the mission of FPInnovations has been to optimize the forest sector value chain. By merging the Feric, Forintek and Paprican research institutes with the Canadian Wood Fibre Centre of Natural Resources Canada, FPInnovations has set a first concrete example of a value creation network and paved the way for industry members. This network also includes many partners and suppliers of innovative solutions for the industry of the future.
Numerous technology transfer and research projects are currently underway, such as flexible and competitive supply and transportation systems, leading-edge wood products, next-generation pulp and paper, new nanoproducts and applications, and new energy and chemical products derived from forest biomass. A working group made up of various FPInnovations researchers has the specific mandate to seek solutions for optimizing both the value chain and the many discoveries of other company researchers and partners such as university researchers.
The Paprican Division, headed by Gail Sherson, is actively working on characterizing the benefits of Canadian wood fibre throughout the country using high performance technologies. Already, promising results have been applied in British Columbia to determine harvest sectors that will increase lumber value. Also being developed are optimization models that are geared to finding the best ways to process and use this wood fibre and that will keep Canada a step ahead of the competition.
The Forintek Division, thanks to research by Francis Fournier’s team, worked closely with the Feric Division to develop a platform where FPInterface and Optitek software could work in tandem to establish the net value of products directly on the forest map. Several harvest and processing scenarios were analyzed for woodlands belonging to Kruger in the Mauricie region. The combined power of the two software programs was called upon to help Kruger make five-year planning decisions. In Western Canada, the team headed by Darrell Wong has several projects for optimizing lumber value using various bucking patterns, which maximize the allocation of wood to a series of sawmills according to different time horizons and take market value into account.
The Feric Division conducts research to optimize forestry operations and transportation in a context where supply is in “pull” production mode. A series of software programs and data acquisition systems called Suite FP is being developed and several modules have already been implemented for our members, such as Irving and Kruger. This software series allows determining a work program and monitoring logging operations in “semi-real” time. Control panels, essential for flexibility and good decision making, are also being developed for contractors, our key partners. Feric also actively seeks logistical solutions to help the transportation sector perform better. High-performance tools are being developed or implemented to reduce empty truck travel time, loading and unloading time and time in multi-modal systems.
The Canadian Wood Fibre Centre (CWFC) of Natural Resources Canada focuses on finding medium- and long-term solutions to maximize the value of Canadian forests. Innovative proposals in forest management and silvicultural practices are currently being studied in order to increase the wood volume available for harvest. The CWFC also analyzes future markets to understand Canada’s place in tomorrow’s forest marketplace. Researchers are working on better forecasting wood volumes and attributes by using advanced statistical methods and state-of-the-art technologies such as light detection and ranging (LIDAR).
Lastly, all divisions are working together to harmonize their solutions along the value chain. This teamwork has partnered with the coastal forest industry, the BC Ministry of Forests and Range, and Natural Resources Canada to identify and evaluate potential solutions to transform the BC coastal forest sector by exploring non-traditional products and innovative processes. This teamwork has also resulted in the implementation of sorting yards across the country. Sorting yards are designed to concentrate wood, which is then further separated before being shipped to the highest bidder in a timely manner. Implementing cutting-edge technologies to better determine the internal and external attributes of wood and optimize the activities associated with wood supply is an intrinsic part of the concept. FPInnovations, in conjunction with a number of partners, carries out economic analyses and fosters dialogue among government, industry and manufacturers. This concept is very compatible with a high performing value chain.
What challenges lie ahead?
Even if the research carried out by FPInnovations is promising when it comes to implementing value networks in the forest industry, industry members must be actively involved to ensure success. The Canadian forest sector must be able to meet the following challenges:
- Integrate planning and processing in forests and mills;
- Reduce production cycle time and develop flexibility along the chain;
- Improve the sharing of information in a context where forest activities are isolated;
- Adapt and develop tools to control inventories along the value chain;
- Overcome obstacles associated with seasonal forest production factors;
- Develop cost-sharing formulas to help forge partnerships between stakeholders working on the same woodlands, but who have different objectives;
- Review forest policies to facilitate the implementation of value creation networks.
There are certainly a number of technological challenges to meet before the concept of value chain becomes a reality in the Canadian forest industry. Wood supply alone is perhaps the most difficult link to integrate into the chain. Are there any other industrial sectors that must deal with managing such a complex supply network? The greatest challenge, however, lies in the willingness to work as a team. A chain performs best when information flows smoothly between links!