PELLETS Value Chain Natalie_Hughes_VCO

Developing a Framework to Model the Market-Driven Real-Time Production Planning and Management of the Wood

Pellet Industry in Ontario

By: Natalie Hughes, MScF Candidate Dr. Chander Shahi Dr. Reino Pulkki

Theme 4 Value Chain Optimization:

Outline

• Project introduction • Description of the value chain • Project objectives • The framework and DST • Research methods • Why wood pellets? • Significance and future steps

The Project

VCO Network Theme 4: – Value Optimizing Scheduling and Control

• Operational decision-making level

– Practical use for (manufacturing) companies

• Based on real-time market information

• Using the wood pellet industry in Ontario – Process flows at each stage of value chain

What Exactly is the Value Chain?

• Michael Porter (1985): – In a business unit, products pass through chain of

activities and gains some value at each activity

Figure 1. Michael Porter’s value chain Source: http://www.smartersolutions.com

What is Value Chain Optimization (VCO)?

• Provides an improved decision support system for components of the value chain

• Maximizes efficiency of process flows through value chain

• Value chain for wood pellets: – Raw material procurement – Inbound logistics – Processing/manufacturing – Inventory control – Outbound logistics – Sales/marketing

Value Chain for Wood Pellets

Figure 2. Value chain for wood pellets Source: Obernberger and Thek 2010

Value Chain for Wood Pellets

Downstream flow of information through value chain

Raw material procurement

Inbound logistics (raw material)

Processing Storage (finished product)

Outbound logistics

Marketplace (sales)


Inbound logistics (raw material)

Processing Storage (finished product)

Outbound logistics

Market Signals

(DRIVER)

Upstream flow of information, working backwards through value chain (using market signals as driver)

Short –Term Project Objectives

1) Collect current Ontario market demand data – Residential and industrial

2) Gather information from industry stakeholders

3) Obtain current upstream data about procurement, manufacturing, logistics and transportation/distribution activities

4) Combine this data to create a framework

Long-Term Objectives

1) Develop the framework into a real-time, market-driven decision support tool (DST) for the Ontario wood pellet industry

2) Modify this DST for further application to entire Canadian wood pellet industry

The Framework

• Will be developed based on the wood pellet value chain (Figure 2)

• Will be focused on three major activities: – Harvesting/procurement – Transportation – Production control

The Framework Upstream flow of information, working backwards through value chain (using market signals as driver)


Inbound Logistics (raw material) Processing Storage (finished

product) Outbound Logistics (finished product) Market Signals (DRIVER)

Which types of raw materials are being used (i.e., chipped biomass, chipped roundwood and

sawdust)?

Where is the raw material coming

from?

Scheduling processing based on

raw material availability

Existing storage capacity in

manufacturing facilities

Where and when to ship?

Current demand data for Ontario (residential and industrial)

How much of each type of raw material is

required?

Where is the raw material going to?

Labour and materials costs

Potential for storage capacity

expansion in facilities

Shipping methods (rail, truck)

Statistical databases for general demand data

Where is the raw material located?

Production capacity of each plant Cost of storage in

facilities

Which method of shipping is most cost-

effective based on location?

Community demand profiles

What type of harvesting technology is being

employed?

Raw material storage capacity of each

plant Business demand profiles

Can more efficient harvesting practices be

employed (i.e., innovative on-site

chipper)?

Associative model of market demand (ie. can specific economic

indicators predict market demand?)

The Framework • Created in MS Excel • Extension of the basic wood pellet value chain

– Each segment has in-depth information linked to it • Data fed into a decision support tool (DST) to

optimize the flow of resources – i.e., with minimum cost or maximum revenue

output • Upstream flow of value chain • Market demand signals used as DST driver

The Framework - Inputs

Market Signals (DRIVER) • Current demand data for Ontario

– Residential and industrial • Statistical databases for general demand data • Community demand profiles • Business demand profiles • Associative model of market demand

– i.e., can specific economic indicators predict market demand?


Outbound Logistics (finished product) • Where and when to ship? • Shipping methods (rail, truck)

– CN catering to pellet manufacturers; boasting high capacity, connectivity, speed, reliability and environmental responsibility

• Determine most cost-effective method of shipping – Based on location


• Existing storage capacity in

manufacturing facilities • Potential for storage

capacity expansion in facilities

• Cost of storage in facilities • Avoid pellets sitting in

storage too long

Storage (finished product)


Processing • Scheduling processing based on raw material

availability • Labour and materials costs • Improved (higher efficiency and lower cost)

means of processing – New equipment, facility layout, or wood pellet “recipe”


Figure 3. Cost breakdown of wood pellet processing without (top) and with (bottom) drying of biomass

Source: Northern Ontario Value-Added Initiative


Inbound Logistics (raw material) • Where is raw material coming from/going to? • Production capacity of each plant • Raw material storage capacity of each plant • Capitalize on the material when it is available

– Growing/competitive market creates competition for raw materials


Raw Material Procurement • Types of raw materials to be used

– i.e., chipped biomass, chipped roundwood and sawdust

• Quantity of each type of raw material required • Location of raw material • Type of harvesting technology being employed • Ability to employ higher efficiency harvesting

practices – i.e., innovative on-site chipper

The Decision Support Tool (DST)

• Will maximize the profit margin (or minimize the costs) associated with wood pellet production for a given level of market demand

• Will help Ontario wood pellet companies to change their input/output activities according to real-time market signals

Research Methods

• Previous studies by students/VCO Network participants – Extension of relevant topics

• Questionnaire/interviews with current/previous

industry players in Ontario

• Peer-reviewed journals – For market signals and general wood pellet (industrial)

information

Research Methods

• Market signal prediction and response for DST: – Statistical databases for up-to-date market

information – Community and business demand profiles – Use an associative model based on linear

regression to identify sensitivity of market demand for wood pellets to economic trends

• i.e., what drives the domestic demand for wood pellets?

Why Wood Pellets? • Important commodity adding value to low-grade wood

materials

• Growing in popularity

• Many advantageous attributes as fuel source: – High heating value – Low moisture content – Transportation – Storage

• Ontario’s Green Energy and Green Economy Act will phase out coal-fired power generation by 2014

Canadian Wood Pellet Scene • Wealth of forest resources essential for wood pellet

creation – More biomass resources per capita than any other nation

• World-class competitor in wood pellet industry

• World-leader in bioenergy technology development

• Modern transportation systems, advanced manufacturing sector and an availability of skilled labour

• 39 operational wood pellet plants with a total capacity of 3.22 million tonnes (2011)

Who Cares? • Wood pellet companies

– Producers and distributors in Ontario and Canada • Consumers

– Lower costs • Policy Makers

– Incentives for shift to wood pellets • Environmentalists

– Optimized transportation + processing = minimized emissions

Future Steps . . .

• VCO Network PhD project for further development of DST for Ontario wood pellet manufacturers

• Modify and expand DST to optimize: – Canadian wood pellet industry – Canadian forest products industry as a whole

Acknowledgements

Project Committee Members: • Dr. Chander Shahi – Primary Supervisor • Dr. Reino Pulkki – Co-Supervisor • Dr. Kevin Crowe – Committee Member

Funding: • NSERC Strategic Network on VCO

References • Ackom, E.K., Mabee, W.E., Saddler, J.N. 2010. Industrial Sustainability of Competing Wood

Energy Options in Canada. Applied Biochemical Biotechnology, 162:2259-2272. • CanBio. 2012. Go Pellets Canada. Online: http://www.gopelletscanada.com/ • CN - North America’s Railroad. 2012. Wood pellets. Online: http://www.cn.ca/en/shipping-

alternative-energy-products-wood-pellets.htm. • Government of Canada. 2011. Invest in Canada Summary. Online:

http://investincanada.gc.ca/eng/publications/invest-in-canada-summary.aspx. • Government of Ontario (Ministry of Energy). 2012. Green Energy Act. Online:

http://www.energy.gov.on.ca/en/green-energy-act/. • Laval University. 2010. NSERC Strategic Network on Value Chain Optimization: Optimizing the

forest bioeconomy. Laval University, Quebec, QC. Online: http://www.reseauvco.ca/en/vco-network/.

• Li, C. 2009. Toward full, multiple, and optimal wood fibre utilizaion: a modeling perspective. The Forestry Chronicle, 85(3): 377-381.

• Lofstedt, R. 1996. The use of biomass energy in a regional context: the case of Vaxko Energi, Sweden. Biomass and Bioenergy, 11(1):33-42.

• MacKenzie, J. and Bruemmer, G. Enhancing Canada’s forest fibre. 2009. The Forestry Chronicle, 85(3): 353-354.

• Northern Ontario Value-Added Initiative (NOVA). 2010. The Pellet Tool Kit, A basic how-to guide prior to starting your pellet project. FP Innovations. 12pp.

• Obernberger, I. and Gerold Thek. 2010. The Pellet Handbook, The Production and Thermal Utilisation of Pellets. MPG Books, London, UK. 549 pp.

References - Pictures • http://www.dreamstime.com/ (wood pellet hardwood tree) • http://ogctumblingprogram.blogspot.ca/2010/03/going-to-provincial-championships.html (Ontario flag) • http://www.crooktree.com/?Action=VF&id=929140819 (harvesting machine) • http://www.ravenfirewood.com/ (Pellet bag) • http://www.smartersolutions.com (Michael Porter’s Value Chain) • http://www.sbcfiremaster.com/our-products/ (pellets) • http://www.mywoodpelletsolution.com/wood-pellet-storage/ (silo) • http://soshable.com/tag/2010/ (Canadian flag) • http://www.ourbc.com/travel_bc/bc_cities/thompson_okanagan/avola.htm (CN train) • http://www.grandeg.lv/?item_id=49&l=2 (pellet conveyor) • http://www.glosco-wood.com/service5.aspx (sawdust) • http://drcarolshow.com/blog/red-yellow-green-the-relationship-traffic-light/ (traffic light) • http://www.energy.gov.on.ca/en/green-energy-act/ (green energy handbook) • http://www.ecolutioncanada.com/wood-pellets.php?lang=english (clear pellet bags) • http://www.nottobetrustedwithknives.com/tag/canada-day/ (Canadian maple leaf) • http://insightfulmommy.com/zap-the-two-steps-forward-one-step-back-syndrome (stairs) • http://www.takepart.com/article/2008/04/08/fighting-goliath-texans-take-big-coal/ (no pollution) • http://moneytree1000.yolasite.com/ (money tree) • http://www.nserc-crsng.gc.ca/index_eng.asp (NSERC logo) • http://www.lakeheadu.ca (Lakehead logo) • http://www.123rf.com/photo_10874968_pine-tree-shaped-wooden-pellets-isolated-on-white.html (pellet pine tree) • http://www.arfuels.ca/ (AR Fuels logo)

THANK YOU!

Questions?

• Early stages of project

• All input and suggestions welcome and encouraged!

Documents

PELLETS Value Chain Natalie_Hughes_VCO