Coordination between strategic forest management and tactical logistic and production planning in the forestry supply chain

• Author: Mikael Rönnqvist,Jiehong Kong
• DOI: http://doi.org/10.1111/itor.12089
• Published date: 01 September 2014
• Date: 01 September 2014

Intl. Trans. in Op. Res21 (2014) 703–735

DOI: 10.1111/itor.12089

INTERNATIONAL

TRANSACTIONS

IN OPERATIONAL

RESEARCH

Coordination between strategic forest management and tactical

logistic and production planning in the forestry supply chain

Jiehong Kongaand Mikael R¨

onnqvistb

aDepartment of Business and Management Science, NHH Norwegian School of Economics, No-5045, Bergen, Norway

bDepartment of Mechanical Engineering, Universit´

e Laval, G1K 7P4, Qu´

ebec, Canada

E-mail: kiki.jhkong@gmail.com [Kong]; mikael.ronnqvist@gmc.ulaval.ca[R ¨

onnqvist]

Received 5 July2013; received in revised form 1 March 2014; accepted 8 March 2014

Abstract

In this paper, we study the coordination mechanism in the forestry supply chain between strategic forest

management and tactical productionplanning. We first formulatean integrated model to establish a theoretical

benchmark for performance of the entiresupply chain. It is a mixed integer programming model that involves

harvesting, bucking, transportation, production, and sales decisions for both tactical and strategic planning

levels.We then present twosequential approaches S-A and S-B where the coordination is done throughinternal

pricing. S-A is the approach currently used in practice where harvesting in the forest is the main driver of

the supply chain activities and internal pricing is introduced to control bucking decision in a separate stage.

In contrast, S-B takes downstream demand information into consideration and internal pricing directly

influences harvesting decision in the first stage. In order to find the appropriate setting of internal pricing

that leads to the system optimum, we suggest two heuristics H-I and H-II. The internal pricing in H-I is

based on dual values and in H-II, it is derived from a Lagrangian decomposition. A real-life case study in

the Chilean forestry industry is used to compare the results of different approaches. It is shown that the new

sequential approach S-B generates as good feasible solution as that obtained from the integrated approach

but in much less time. Both heuristics H-I and H-II bring about near-optimal feasible solutions. H-II also

provides optimistic bound of the optimal objective function value, which can be used as a measure of the

solution quality.

Keywords: OR in natural resources; supply chain management; coordination mechanism; internal pricing; Lagrangian

decomposition; mixed integer programming

1. Introduction

The supply chains of roundwood and biomass in the forest products industry start with harvest

in the forest where different log types are generated from the bucking process. These logs are then

transported to downstream mills for further production of various final products. By-products

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International Transactionsin Operational Research C

2014 International Federation of OperationalResearch Societies

Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main St, Malden, MA02148,

USA.

704 J. Kong and M. R¨

onnqvist / Intl. Trans. in Op. Res 21 (2014) 703–735

Part 2

TransportaƟon/producƟon

Part 3

DistribuƟon/sales

Roundwood supply chain

Biomass supply chain

DC Market for pulp and

paper products

Market for lumber,

panel and

enginneered wood

products

Market for energy

and electricity

DC

Paper mill

Sawmill

Pulp mill

Harvest areas

Part 1

HarvesƟng/bucking

HeaƟng plants

Fig. 1. Illustration of the main supply chains in the forest products industry

from wood-processing facilities will be reutilized and transported to mills for either pulp and paper

production or power generation (Fig. 1). In addition, forestry supply chain planning encompasses

a wide range of decisions, from strategic to operational. At the strategic level, decisions include

forest management,silviculture treatments, road construction, facility location,process investments,

and product and market development. Tactical planning focuses on how to execute the forest

management or production and distribution issues, serving as a bridge between the long-term

comprehensive strategic planning and the short-term detailed operational planning that determines

the real-world operations (D’Amours et al., 2008).

Historically, the strategic forest management and the tactical industrial production are managed

in a decoupled manner. Forest management models often include estimates of market prices over

the entire planning period but do not consider situations where the demand depends nonlinearly

on prices or that there is spatial information on mill and demand location. On the other hand, the

tactical production planning does not impact the forest management. These issues are discussed in

Gunn (2007). This nonalignment can be partially explained by the fact that strategic planning may

span decades, while tactical planning maydeal with a maximum of five years. Another reason is that

the strategic decisions of forest managementaim to not only maximize the net present value (NPV),

but also attain social targets in order to meet sustainable socioeconomic development; whereas

the emphasis of tactical production is placed on commercial use of timber and fulfilling market

demands. The literature in the forestry domain is hence divided into two categories. Numerous

models based on operations research (OR) have been developed to aid forest managers and public

forestry organizations in their decision making. However, those widely recognized models, for

example, timber RAM (Navon, 1971), FORPLAN (Johnson et al., 1986) and SPECTRUM (Greer

and Meneghin, 1997), all used by the United States Department of Agriculture (USDA) Forest

Service, FOLPI in New Zealand (Garcia, 1984), and JLP in Finland (Lappi, 1992), do not take

into account the interaction with downstream operations. On the other hand, practitioners as

well as researchers proposed abundant OR models to optimize supply chain planning for the

forest products. Philpott and Everett (2001) developed a supply chain optimization model for the

Australian paper industry. Gunnarsson et al. (2007) consideredan integrated supply chain planning

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2014 The Authors.

International Transactionsin Operational Research C

2014 International Federation of OperationalResearch Societies

J. Kong and M. R¨

onnqvist / Intl. Trans. in Op.Res 21 (2014) 703–735 705

for a leading European pulp mill company. Singer and Donoso (2007) presented a model for

optimizing tactical planning decisions in the Chilean sawmill industry. Feng et al. (2008) proposed

a series of models to coordinate business units along the supply chain in a Canadian Oriented

Strand Board manufacturing company. The commonality of these models is that the availability of

logs is already decided and treated as constraints and the supply of raw materials is hence taken as

exogenous in the supply chain design.

Although relatively few articles combine the upstream forest management and harvesting oper-

ations with the downstream industrial planning, researchers have recognized the need for greater

integration and the resulting benefits. Two of the first authors to vertically integrate forest industry

was Barros and Weintraub (1982), who incorporated decisions concerning managing forest lands

and supply of timber for a pulp plant, a sawmill, and export. Gunn and Rai (1987) introduced a

model with an integrate viewpoint, which is somewhat similar to that of Barros and Weintraub

(1982) but enables calculation of regeneration harvest policies. Weintraub et al. (1986) discussed

the advantage of a two-level hierarchical approach where the strategic decisions first depend on

aggregated plant operation variables and then lead to production guidelines for a tactical model.

In order to reconcile the outputs occurring in the aggregation and disaggregation process, various

feedback and feed-forward mechanisms are proposed (Weintraub and Bare, 1996). In contrast to

these operational models,Jones and Ohlmann (2008) constructed an analytical model by combining

perspectives from forest economics and operations management in a verticallyintegrated paper mill.

Troncoso et al. (2011) evaluated the superiority of an integrated strategy where long-term forest

management and mid-term production planning in sawmills, pulp mills, and heating plants are

simultaneously determined and the objective is to maximize the NPV for the whole forestry supply

chains. It is shown that the NPV can increase up to 5% when the proposed integrated strategy

is implemented as compared to the conventional sequential approach where forest planner and

downstream plants optimize separately the operations.

Indeed, in theory, an integrated planning approach can obtain better NPV of the forest products

supply chain. However, due to the nature of distinct planning levels, inherent responsibilities of

different divisions, and limitation of existing decision support systems, as discussed earlier, it is

difficult to motivate the managers from various constituents of the supply chain to work together

under an integrated approach, even though the forest lands and mills belong to one company.

Therefore, the sequential approach is still widely used in practice (Troncoso et al., 2011).

The purpose of this paper is, with minor changes to the current decoupled planning method, to

find effective coordination mechanism using the notion of internal pricing between the strategic

forest management and tactical industrial planning. We first formulate an integrated model for the

entire supply chain, including harvest areas, sawmills, pulp mills, heating plants, and final markets.

This is a mixed integer programming(MIP) model that involves harvesting, bucking, transportation,

production and sales decisions for both tactical and strategic planning levels. We then present two

sequential approaches,S-A and S-B. S-A is the approach currently used in practice whereharvesting

in forest is the main driver of the supplychain activities and internal pricing is introduced to control

bucking decision in a separate stage. In contrast, S-B takes into account downstream demand

information and internal pricing directly influences harvesting decision in the first stage. A real-life

case study in the Chilean forest industry (also used in Troncoso et al., 2011) is implemented to

compare the results of the different approaches. It is shown that the new sequential approach S-B

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2014 The Authors.

International Transactionsin Operational Research C

2014 International Federation of OperationalResearch Societies