PREMIUM LUMBER, LIMITED

COMM3501 – PRODUCTION AND OPERATIONS MANAGEMENT

GROUP CASE STUDY 2011

Case – Lumber Wrap Packaging – Premium Lumber Limited

Premium Lumber Limited

P.L.L. is an industry leading, forestry company in Eastern Canada (New Brunswick, Nova Scotia, Prince Edward Island, Quebec, Ontario, Newfoundland) and the United States. P.L.L. is vertically integrated, i.e. it plants and cultivates trees, cuts, prepares and delivers finished lumber to the end-users using various sales outlets.

What separates P.L.L., from its competitors, is that it is very diversified. It possesses several affiliate companies which operate under their own name in following industries:

Foresty and Forest Products.

Transportation

Naval Construction and Marine Industries

Heavy Equipment, Construction, and Construction Material

Consumer Products

2

Lumber Wrap

Premium’s manufactured lumber is bundled, wrapped and loaded at the Sawmill and then delivered to various sales outlets, contractors, and countries. Lumber wrap packaging is very important because it serves to protect the finished product from the weather and rigors of transportation allowing the wood to maintain its specifications and quality.

Lumber wrap is composed of either polyethylene or polypropylene material. It is often applied manually to the bundle of lumber, but can also be applied by automated machines.

Lumber Wrap is a challenging supply chain. There are various options for supply. There exist several manufacturers/suppliers, some of them located overseas, which can offer various solutions for this specific need. Moreover, this type of supply chain requires an initial capital investment (printing plates) that takes time to be produced before the lumber wrap can be made.

Details on the packaging material used presently at P.L.L.

P.L.L. uses roughly 3,000,000 linear feet per year

Roll dimensions are 115" X 3000 linear feet.

The weight of a roll is roughly 272 Kg.

A 40ft HQ container can handle 96 rolls

48’ Flatbed trucks are used to haul lumber wrap from warehouse to mill site. They can carry 120 rolls

Minimum order is 2 pallet (12 rolls)

Packaging is regarded also as a source of marketing since the company logo is printed on the packaging and it is often in full view of the public. Packaging used must support a high quality image impression.

Packaging protects wood against the rain, snow, sun and the damage of displacement.

3

P.L.L. operates 12 sawmills which all use this product and none of them can store more than a half-truck load on site.

Without Lumber wrap, P.L.L. cannot deliver lumber. There is little room for error, the supply of lumber wrap must be constant, and without interruption.

P.L.L. has four different impressions on its packaging, which describe four types of lumber. Certain sawmills use several of them others use only one. It all depends on what lumber products are made at the sawmill. Each different imprint requires a different printing plate (grade, size and species).

The inventory at one P.L.L. sawmill is not necessarily the same as another.

The current contract had been negotiated for a three year period.

CBI is the current supplier.

It is very important to receive feedback from the sales department before making a final decision since this packaging is sold on the final product. The sales department must give its approval on the appearance and quality of the final packaging.

The Costs

The current cost of a linear foot of lumber wrap FOB Montreal warehouse is $0.35 CDN

The cost of delivery of a linear foot delivered to one of the P.L.L. sites from the warehouse in Montreal is $0.012 (time of delivery = 3 days).

The cost of delivery of a linear foot delivered to one of the sites belonging to P.L.L. from the Prince George warehouse is $0.03 (time of delivery = 7 days).

4

The cost of delivery of a linear foot delivered to one of the sites belonging to P.L.L. from a warehouse in Qingdao is $0.05 (including local warehousing) . (time of delivery = 30 days).

The Quote

“The lumber industry has been particularly difficult over the last few years. It is necessary to find ways to reduce our costs.”

- Jacques Boudreau, General Manager, Scierie St. Croix

“I remember, some years ago, we changed to a new supplier of lumber packaging. The new material was completely inadequate, it would tear during packing, the staples would pass through and we would have to start again from scratch. Since then, each time the purchasing department approaches us with a change, they declare being a good deal for the company, I remember that useless wrap, and I feel my anger resurfacing.”

- Gilles Poitras, employee, Scierie Petit-Rocher

“A crack in the supply chain of lumber wrap would be disastrous. Last year we did not receive our lumber wrap shipment on time, and were without packaging for three days. We could not deliver any goods for a week. I can ensure you that the manager was very interested in hearing the explanation behind this poor planning. ”

- Caroline Langille, employee, Scierie Barachois

“Lumber Wrap Packaging is one of the largest costs for any sawmill. We need to find a way of being more effective, of changing the process, or of developing a new product.”

- Renée Jendrons, Vice President Supply Chain, Premium Lumber Limited

5

Your Responsibility

You, Mark Wheatley, and your group are responsible to manage this product and its supply chain. The contract with your current supplier finishes in six months. Operating without a guarantee of supply is not an acceptable option. It is vital to have a plan before the contract expires.

The Vice President of Supply Chain Management believes the cost of lumber packaging is too great and needs to be reduced. Hearing his opinion on the subject, it launches you to find a better way of providing lumber wrap while reducing the costs.

“This is a very delicate supply chain for our sawmills. The product represents a significant portion of their budgets. It is important not to neglect the supply chain, and it is necessary for consistent supply so that the company is not found in a situation where we cannot deliver our products to our customers.

Moreover, the Vice-president could create several chances of promotion in my career if I manage to make this a success. One thing is for sure, success or failure, people will not forget me.”

- Mark Wheatley, Supply Chain Manager, BeauBois Limitée

Your Proposal

Groups of four students must make a recommendation in writing to the Company management. Your paper is not to exceed eight pages, excluding any appendices you wish to include. Use ten-point font or larger, single-spacing, with one-inch margins (or more) on each side. Your recommendation should address the following points:

Why you choose a certain Product/Supplier and not another.

The supply chain used and the different players included.

The means of transportation.

The process of inventory control

The total cost analysis.

The duration of the contract

6

Appendix A – Proposals

Rainville Limited

October 15, 2009

Proposal

Price

OPTION A - $0.36 per linear foot, delivered

OPTION B - $0.33 per linear foot, not delivered

(distribution center in Prince George, British Columbia, Canada)

Made of polypropylene

Guarantee

Our products are made on order so we cannot offer any guarantee other than that the delivered product will be of the exact specifications as required by P.L.L.

Policy of return

None.

Maintenance

We have a bilingual representative based in Moncton, NB.

7

Terms of payment

P.L.L. must pay their invoices 30 days after receiving the product at their sawmill.

Price Change Mechanism:

The price of packaging will be adjusted the first day of Q1, Q2, Q3 and Q4 according to the formula below.

New price = current price + (current price * % of change in the polypropylene price * 50%)

In the formula above the percentage of change in the polypropylene price is calculated by taking the difference between the average of the price in the two previous quarters and converting them into a percentage.

Example:

For the price for Q3 calculate

Average costs of polypropylene: Q1 = 0.60$/lb Q2 = 0.70$/lb % Difference = (0.70-0.60) /0.60 = 0.16667 = 16.67%

Current price of a linear foot is 0.30$

New price = 0.30$ + (0.30$ * 16.67% * 50%) = $0.325

8

CBI (Current Supplier)

October 3, 2009

We are happy to provide to BeauBois, Limited our answer to your request for a proposal for lumber wrap. We have been happy with our agreement during the three last years and we hope to increase the benefit of this relation in the future. Our answer is as follows:

Proposal

Price

OPTION A - $0.355 per linear foot, delivered

OPTION B - $0.34 per linear foot, not delivered. Product manufactured out of Polypropylene (Distribution center located in Montreal, Quebec, Canada).

Guarantee

The guarantee provided by CBI is that its products will meet the requirements of P.L.L.. We unfortunately cannot offer an added guarantee since the product although protecting by packaging is very heavy and the potential for cracks during handling is always present and out of our control.

Nonetheless, we want to add that we feel we have a strong relationship with P.L.L., and have always been there when you needed us. We are constantly seeking to improve our product to better satisfy the needs of P.L.L.

.

9

Policy of return

Since all our products are printed and made on order we cannot offer a return.

Maintenance

CBI is proud to have local representation in all the markets where we supply our customers. We have a bilingual representative based in Quebec City, Quebec.

.

Terms of payment

P.L.L. must pay their invoices 60 days after receiving the product at their sawmill.

Price Change Mechanism :

The price of packaging will be adjusted on the first day of Q1, Q2, Q3 and Q4 according to the formula below.

New price = current price + (current price * % of change in the polypropylene price * 70%)

In the formula above, the percentage of change in the price of polypropylene is calculated, by taking the difference between the average price in the previous quarter and the preceding quarter.

10

Example: The price for Q3 calculates the average cost of polypropylene:

Q1 = 0.60$/lb Q2 = 0.70$/lb

% Difference = (0.70-0.60) /0.60 = 0.16667 = 16.67%

Current price of a linear foot is 0.30$

New price = 0.30$ + (0.30$ * 16.67% * 70%) = $0.335

11

Qingdao Wrap

October 16, 2009

Proposal

Price

OPTION A - $0.25 USD per linear foot, FOB Qingdao, China. Manufactured out of polyethylene LDPE (50%) and polyethylene HDPE (50%)

The product can only be ordered by full container. (96 rolls of 3000 linear feet) (Product must be collected in China, at the port of Qingdao)

Guarantee

The product will meet the specifications required by P.L.L.

Policy of return

No policy of return.

Maintenance

None

Terms of payment

P.L.L. must pay their invoices 30 days after receipt of the product at their sawmill.

12

Price Mechanism:

None, the price is fixed for a six (6) month period.

13

Appendix B – Product Index

14

15

16

17

18

19

20