A shorter version of this article is published in the Journal of Forestry by the Society of American Foresters.
Imagine yourself as a procurement forester. That’s not hard if you have worked in procurement but for those who have not, a little background might be necessary. In this article we will walk through a typical procurement process and eventually bump into an ethical issue that can puzzle even experienced procurement officers.
Generally, a procurement officer for a company is responsible for the management, administration and supervision of the company’s acquisition programs. In the forest industry specifically, procurement officers are typically in charge of contracting outside services (predominantly with logging crews), as well as managing the purchase of supplies, equipment and materials (most notably timber).
The mill log specifications are pine sawtimber 10-inch butt diameter and top diameter of 6 inches or greater. The mill you work for requires roughly 17,000 tons per week, or 680 truckloads of wood every week).
In this new position, your only task is to make sure the mill has a regular supply of wood. Your ¼ share of the weekly required amount of 680 truckloads is to purchase 170 truckloads per week. Since you manage five logging crews on average each crew would haul 34 loads of logs to the mill every week. This can vary per crew depending on the size of the wood and the distance from the logging site to the mill and other factors, but that’s the average.
The loggers you work with are independent contractors with their own goals and issues. They need to keep their crews busy cutting and hauling wood to generate enough cash flow to pay the crew as well as other business expenses like supplies, equipment, fuel, insurance, maintenance, and any other expenses that arise. If they run out of wood to harvest, they will lose production, and so will you unless the other crews can make up the shortfall.
Your first week on the job, you are introduced to the five crews you are managing. They are working on the stumpage your predecessor purchased. As you meet each new crew, your boss also produces a report on the amount of “standing inventory” on each tract and he shows you how to run the numbers on each tract to be able to estimate the amount of time it will take the crew to finish the job. It’s an easy calculation. You simply divide the amount of standing inventory remaining on the tract and divide by the average production per crew. Obviously, the calculation assumes normal conditions and the time needed to complete the job can be affected by weather, equipment breakdowns, or other obstacles. You finish the calculations and estimate that with the current inventory and production estimates will take about 12 weeks for the five crews to complete.
After this brief orientation, your boss emphasizes that you need to “Go buy timber.” You must start now to purchase new timber before the crews complete their current workload at the end of the estimated 12 weeks. Remember, they need to have regular work so they, and you, can meet your production goals. Without the steady flow of wood operations grind to a halt. They won’t be happy with you if you jeopardize their profits, and you will not meet your goal of 170 truckloads of logs at the mill each week. To add to the fun, you have to balance timber purchasing with managing the logging crews who are harvesting stumpage tracts.
So, now that the crews are working steadily for the next 12 weeks, you hop on the procurement treadmill and start doing all you can do to “buy timber” in the four counties you are assigned. You quickly learn that buying timber means chasing down any lead that comes your way.
Some leads come to you. You can be responding to sealed bid invitations sent to the office from forestry consultants. At the same time, landowners are contacting you directly in response to the mailing campaign your company has been offering.
Since leads generated by sealed bid invitations and company campaigns are seldom enough to fill your needs and they seem to ebb and flow, you will also be doing some cold calling. You will need to call on other landowners who own more than 100 acres of timber land in your operating area. If they are not ready to sell today, they may be ready later and you need to keep in touch to be ready when they are. Therefore, you are in the courthouse looking up who owns that parcel of nice-looking timber at the intersection of Hwy 1 and Teal Road. Fortunately, with today’s technology you can look up much of that information on your phone or tablet if the county records are digitized.
You find the owners and arrange to meet the landowners to discuss with them selling their timber to you. Many landowners you contact are already working with some of your competition, but they will be happy to take a bid from you as well. Rarely do you find a landowner who has not been contacted by someone else and wants to sell you his timber.
Finally, three weeks into your quest to buy timber, you get a good lead and a landowner who wants to sell his timber. Good thing too, because the clock is ticking, and your standing inventory is being depleted. In nine short weeks, you and your loggers will be out of work. In fact, each of your loggers has been pestering you to show them the next tract they will be working. They want to be sure they don’t run out of wood to harvest because they depend on the weekly cash flow to keep them going. No work, no cash flow, translates into no help, no fuel and no payments. Too many weeks of that, and you have lost one crew’s production capacity because they will have moved on to another procurement forester who will give them the work they need.
Excited about the good lead and a willing landowner, you cruise the timber on the landowner’s land and find out that he has a standing inventory of 10,000 tons of sawtimber. While cruising the timber you do not see any signs in the woods of anyone else having cruised the timber (no flagging, no scuffed marks at plot center).
You are elated. You walk into your boss’s office to discuss how much money to offer the landowner.
Unfortunately, for you, the mills are getting full and they have called your boss and dropped the prices that they are willing to pay for wood. Based on the lowered prices, you re-run the numbers and arrive at a price to pay the landowner that is fair and still produces a profit. But you are a rookie and have no cruising track record. To compensate for your lack of experience the boss decides to discount your bid by 1/3 to be safe and ensure the bid is a conservative offer with a great chance of being accepted.
You make the offer and the landowner laughs at you and says you’re much lower than another offer he has received. He asks if you want to reconsider. You say “sure;” and your back at the drawing board.
When you tell your boss, he wants to know the name of the competing firm. You have no idea. The question becomes “Does the landowner really have another offer or is he just trying to negotiate a better deal for himself? Your boss, seeing the “weeks of operation” number dwindle, reconsiders his 1/3 discounting of your numbers and you go back with a full offer. The landowner likes this price much better and agrees to your offer.
- Knowing I’m a rookie cruiser, I’m very careful and I measure everything. I don’t try to eyeball the tree diameters or heights. I was conservative in the cruising of this tract, and my boss discounts the overall price 1/3 so he can be conservative. Is the landowner being treated ethically when we deliberately set the stage towards a conservative number?
- Since I’m fully aware of our shrinking inventory and my boss’s daily angst about whether I’ve bought timber, I stretch my cruise to make sure I buy the tract. You may want to know how in the world do you stretch a cruise? Well, I might increase my diameters by an inch and see an extra log in each tree cruised, or if plot cruising, expand my plot just a bit to get the good-looking pine sawtimber tree accounted for! As an old professor told me years ago, cruising timber is more art than science and, now that I’m in the hot seat, I’m starting to understand his comment.
My boss, who doesn’t know I stretched the cruise, trusts my numbers and I end up with a bid that is very acceptable to the landowner. The purchase goes through and I have to sweat the cutout of the tract, but my logger is busy, and my boss is happy for the moment. All is good until the tract cuts short and I’ve got to explain why the tract cut short 25%. I just lost the company revenue and have greatly reduced the chances of any year-end bonuses. Procurement foresters who continue buying timber like this have short careers! Is stretching a cruise an ethical matter or just a professional matter?
- Now that I’ve lost money on one tract, my targeted production numbers have actually gotten further away, because they are both revenue and tonnage driven. What if I decide to make up the difference, I’ll have one of my loggers turn production into the mill as coming from the tract that lost money? (Assuming I do this before my boss finds out about the loss). Is this an ethical way out? (official term for this is kiting timber).
- What if the landowner lets me know that he has an amount he is expecting to receive for the timber on his land? What if his value is about half what it is really worth? Is it ethical for me to offer him what he wants and walk away with a 50% gain for the me and the company?
- What if we change a few other assumptions? You don’t have 12 weeks of inventory; you have one logger not working and four loggers about to run out of wood. You are desperate to keep the loggers working and more importantly keep your boss from firing you because you suck as a timber buyer! What happens to your motivation to “get a tract bought?” Do I stretch a cruise even further? Or make a back room deal with another forester who has a tract for sale, for a piece of the action?
- What if you work in a less competitive area and you find the landowner is willing to accept 1/3 of the real value of the timber? Is it ethical to pay him significantly less than you would if he had not underestimated the value of his timber so you can make profit and keep the logger and the mill busy? Is it the responsibility of the landowner to know the value of his timber? Do I as a procurement forester have a responsibility to make a fair offer based on my experience and knowledge of the market?
- And while we are discussing ethics, Is the landowner acting ethically if he really does not have another offer? Is it ok to pretend there is competition as a negotiation tactic?
The questions raised in this case study, can be the questions faced daily by a procurement forester. As a thirty-year veteran in the industry, I can tell you that without a firm ethical background things in the rough and tumble world of procurement can get very dicey. And as a certified forester and a certified fraud examiner I have witnessed firsthand the consequences of folks not answering these questions in an ethical manner.