Training in Planning and Management of Forest Industries in Developing
Countries. COURSE NOTES. AND. CASES FOR GROUP WORK. ITTO Project
PO 4/87 ...
ITTO Project PO 4/ 87 Rev. 1 (I) Training in Planning and Management of Forest Industries in Developing Countries
COURSE NOTES AND CASES FOR GROUP WORK
ITTO Project PO 4/ 87 Rev. 1 (I) Training in Planning and Management of Forest Industries in Developing Countries
COURSE NOTES AND CASES FOR GROUP WORK
TABLE OF CONTENTS
PART I - COURSE NOTES
MARKETING by Gordon E. Gresham WOOD SUPPLY . .......... by Jan Troensegaard ............................ ..................... ..... ............. FOREST INDUSTRY AS AN ENTERPRISE by Antonio Hermindez Murrieta ..... ....... . ..... . ............ ..... . ...... ...... . ..... COMPANY-WIDE TOTAL QUALITY APPROACH (CWTQ) . ...... by Antonio Hermindez Murrieta ....................... ......... ... .......... ... ..... HUMAN HUMAN RESOURCES AND MANAGEMENT by Antonio Hermindez Murrieta ........................... .............................. .. . SITE SELECTION AND INFRASTRUCTURE by Borje Kyrklund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. PROCESSING TECHNOLOGY by Kari Rinne ................................ ........................... ................. . . . . ........ FINANCIAL EY EVALUATION ALUATION by Kari Rinne . ................................ ........................................... .... ....... FINANCIAL MANAGEMENT by Antonio Hermindez Murrieta .............................. ............................ . . INSTITUTIONS by Borje Kyrklund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. MANAGERIAL ENTREPRENEURSHIP Hermindez Murrieta .............................. by Antonio Hernandez ENVIRONMENTAL ASPECTS OF FORESTRY AND FOREST INDUSTRY PROJECTS by Paul Driver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. SOCIO-ECONOMIC ASPECTS by Bo Ohlsson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. PROJECT IMPLEMENTATION by Borje Kyrklund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
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7 11 17 21 27 29 33 37 41 45
49 53 57
PART 11 CASES FOR GROUP WORK
........... . ......... . ...... 61 PREAMBLE TO GROUP WORK CASES ............................ CONSTRUCTION OF NEW, MEDIUM-SIZED SAWMILL . . . . . . . . . . . . . .. 65 CONSTRUCTION OF NEW, MEDIUMSIZED PLYWOOD MILL MILL.......................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 71 REHABILITATION OF MEDIUM-SIZED SAWMILL. ................... . . . . . . . . . . . . . . . . . .. 77 REHABILITATION OF LARGE PLYWOOD MILL .................... ............. . ... . .. 83
PART I
COURSE NOTES
MARKETING by Gordon E. Gresham
1.
MARKETING - AN EXECUTIVE FUNCTION?
While it is to an extent true to say that your best sales persons are born and not bred, nevertheless good training can teach almost anyone to be a good sales representative. Having said that, the best sales person will not produce results unless the company has provided market opportunities, which means the use of the corporate market strategy to put the sales person in the right place with the right products at the right price.
Marketing is what we do today to create opportunities for our daily sales. No one should feel that 'marketing' is an end to itself. It is the essential tool to sell the product day by day. So, when we speak of marketing being an 'executive' function we should mean executive in terms of doing something positive rather than being the prerogative of an executive person who never ventures out into the cold, hard commercial world of the market place.
2.
STRATEGY AND PHILOSOPHY
New enterprises and existing ones in need of renovation must take the first step in formulating their market strategy by deciding upon the CORPORATE IMAGE. It is essential that market strategy sets out to provide a positive corporate image, easily recognizable outside the company through its products, and within the company by its work ethics and policies.
1
.,
J.
EXAMINE THE PRODUCTS Do we make what we can sell, or sell what we can make?
There is a product and market development sequence which should be run over and over and over in order that the strategy can come up with optimum suggestions for: PRODUCT POTENTIAL MARKET POTENTIAL and PROFIT
4.
MARKETS EVERYWHERE
Having decided on what sort of enterprise we are and examined what we believe we can produce reliably and cost effectively, now comes the time to look at likely markets. There is no hard and fast sequence, the object is to assess closely all potential markets for our products. There are numerous questions which must be asked and answered, including: Are we export-led, or domestic market suppliers? What proportion is appropriate and possible for each market? Are we going to be a big player in a small market or a small player in a big market? Who, what and where is the competition? Where does our product range fit best into the market? Do we sell directly or through existing market systems? How do we get it there? Can the potential customers afford to pay us, and in the currency we need? What is our policy on credit?
2
5.
PRICING POLICY
With a natural raw material there are obvious limits in the species, volumes, qualities and sizes which can be produced; therefore, even with the best and most efficient production, there are price brackets which dictate the broad outlines of price policy. The market strategy must be based on the advantages of the product, geographical location, market niche or other positive factors. Pricing policy for exports must also take into account the preferred currency and currency exposure aspects as well as the capacity of the proposed customers to remain credit-worthy.
6.
PROFITS, THE REAL THING
The five-year market strategy and the annual rolling market plans will forecast, very accurately and objectively, the expected revenues from the sales efforts and initiatives, together with the costs and trading profit forecasts. Quite apart from possible cost increase at the input end and market price fluctuations at the output end, analysis of exchange rate variations, market growth in target markets and elsewhere, stability of governments, economic and population growth rates should be an ongoing task for the marketing management and sales department. All these factors and many more are going to influence the market strategy and the dayto-day, week-to-week sales emphasis.
7.
SALES TARGETS
Sensible and achievable sales targets have to be set for each product in the range, fully costed and assess~d for profitability. The product profile has to be agreed by the production management and must be known and understood right throughout the company so that every employee is aware of the total target and the daily performance which is expected. Careful monitoring day by day, week by week, and the monthly profit/loss results will indicate very quickly how close to target we are. No one should be afraid to take prompt action if targets are not being met. The market outlook for our products is important and should be forecast as an indication of whether or not there is need to modify market strategy to cope with unforeseen events at home or overseas.
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8.
PRODUCT DEVELOPMENT
Before considering new products, it is vital to constantly examine the current product profile and content to assess if the range, quality, specifications and so on can be improved and made more profitable. Generally it is more profitable to make a better product from existing comph~tely new one. production potential than to try to make a completely This is not to say that the marketing department should not be monitoring the market place and looking for improved products for improved profits. Using the product sequence will quickly indicate whether or not there is potential. 8.1
Upstream or downstream?
As indicated above; looking back upstream into existing production is likely to be at least as rewarding as looking downstream into an extended product range. To diversify can look very attractive, but the world is littered with failed enterprises which forgot to look after their core business while chasing off downstream in pursuit of diversification. The so-called value-added can often turn out to be only added cost. Every value-added proposition needs very careful analysis, remembering that the further down the product range, the less flexibility there is in market opportunities. Value-added products are increasingly important and assessments should look at the possibilities of sub-contracting some or all of the value-adding processing to smaller, local enterprises.
9.
PUBLICITY AND PROMOTION
It is useful to note that much positive publicity can be had free of charge. Corporate news can be disseminated through newspapers and journals which are always interested in editorial matter which someone else has written well. If the channel of distribution is through distributors, then an appropriate level of advertising and promotion should be part of the agreement, and it should always be borne in mind that anything that can be done to assist our distributor sell more of our product rather than someone else's will make sure he is able to buy again from us and remain loyal to us. The importance of the company image and logo should be fostered through the packaging of the products and the corporate style in everything which goes out to actual and potential buyers.
4
10.
CONCLUSION
Marketing is an activity which cannot be carried on in isolation. Certainly the marketing department can produce its own budget proposals, but the performance depends on the products made available by the production management and on the goodwill, cooperation and revenues provided by the customers.
Marketing is the bridge which brings together the product and the customer in a harmonious and mutually profitable relationship.
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6
WOOD SUPPLY by Jan Troensegaard
1.
INTRODUCTION
Forest industries have traditionally regarded wood as a commodity to be purchased from a supplier, public or private, either through direct sales or through a concession to harvest a particular forest. Only exceptionally have managers of forest industries been involved in the management of the resource itself. In view of dwindling forest resources in the tropics it is only natural that industries managers should now be more directly involved in the management of the raw material base for their enterprises in order to safeguard their sustainability. The objective of the lecture is to highlight the key issues affecting the wood supply to forest industries. The lecture will cover the forest resource situation in the region or sub-region with particular emphasis on the resources of the country(ies) of the participants. It will also cover the land use issues, the management of the forests, both natural forests and plantations, and forest harvesting and transport. In general, emphasis will be placed on methods that will permit a sustainable production of wood from the land resource base with due consideration to the protection against ecological damages. The presentation will be accompanied by slides illustrating the issues dealt with.
2.
THE RESOURCE
An overview of the principal components: coverage of forest with emphasis on productive closed forests, their stocking and utilization and rates of deforestation and depletion. Examples will be given on growth and yields as available from current statistics and research results. Projection of the sustainability. This part will cover both natural forests and plantations.
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3.
INTEGRATED FOREST MANAGEMENT
Presentation of the present developments in the principal components and current needs in the region, sub-region or country. Population growth has profoundly affected forest management. Plans must now more than ever be designed to supply the needs of the people, in particular those living in or close to the forests and foresters must now include community forest management, multiple-use forest management and agroforestry as key activities for satisfying these needs and conserve the productive forests for industrial use. Non-wood forest products also play a more important role than earlier perceived. The accelerating rate of change in technology in all aspects of the modern society has affected forest management. This includes not only harvesting techniques but also inventory and mapping; silviculture; communication and data processing. A review of silvicultural developments will highlight the applicability of various systems to present day conditions in the region or sub-region. In this respect, logging methods will be regarded as an integral part. Brief description of the current knowledge of plantation management for industrial production, both as a sole resource base for the industry; as working circles in an integrated system and as buffer zones to care for the needs of the local population. The relative merits of natural forest management and plantations for industrial production will be discussed by the group. Among the issues to be covered are: sustainability of supply; uniformity of raw material; the use and value of primary and lesser used/known species now and in the future; ecological stability and land use. This part of the lecture may be accompanied by examples of experiences in forest management in the region.
4.
FOREST HARVESTING
This part of the lecture will start with a brief overview of the chain of activities normally included in the concept of forest harvesting. Then follows an overview of the most recent developments: Type of equipment used and its influence on costs, ecological effects, its requirements and anm Cl: er
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FEEDBACK
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COMPETITOR COMPET ITOR SYSTEM
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The client system is integrated by all organizations and/or individuals which purchase and consume the products of the company (its output), such as construction companies, wood brokers, etc. The competitor system is integrated by all organizations and/ or individuals which use the same type of inputs and/or manufacture the same type of products under the area of influence of the industry. The governing system is integrated by all organizations and/or individuals which have legal means to influence the functioning of the company, such as government agencies, industry boards, etc.
4.
FOREST INDUSTRY: STRUCTURE AND PROCESS
One of the most important points to consider is the mission statement of the company. What specific segment of the market is it trying to serve? Is the company structured in such a way that it can serve the needs of this segment better, or at least equally, than its main ·competitors? If this is not the case, the company either has to restructure itself or find another segment whose needs it can serve in a competitive way. way. There has to be a total fit between the needs of the market and the capacity profile of the enterprise. The quality, quantity and price of the goods produced (output) depend on the quality, quantity and cost of the inputs plus the quality, quantity and cost generated in the productive process. This is the process which adds value the inputs. Generally speaking, more value added means both a more sophisticated productive process and a better return on investment. 12
It is important to consider that the quality of the productive process depends directly on the quality of the resources available. Good people with good machines and good technology, along with good input, are needed to produce high added value goods that can properly serve the market needs. The output depends on the process and the process depends on the available resources; so a change in the output demands a change in the resources.
Feedback is the information, coming from the client system, that enables the enterprise to maintain its levels of quality and productivity. Feed forward is the information that the company gives to the client system about its goods and services that enables consumers to buy and use them properly. This interchange of information between the forest industry and its clients is vital to maintain and increase its market share. The mission of the company, the output and inputs, the productive process and the value added, as well as the resources available, are vital points to analyze because the success of the enterprise depends greatly on their nature, quality, qualitY, volume and cost. In the following questions are shown for diagnosis of a forest industry based upon the systems approach.
Q.1.
CLIENT SYSTEM
Q.1.1
Which is the potential demand for each of the main present and projected products in the following three years in the target markets? (Consider volume and price)
Q.1.2
Which is the expected impact of foreign competitors on the domestic market in the next three years?
Q.1.3
How many customers represent 80 percent of the demand?
Q.2.
SUPPLIER SYSTEM
Q.2.1
Which is the potential availability of each vital input (specially roundwood), inside the economical radius of supply, for the following three years? (Consider volume, quality and price)
Q.2.2
How are the perspectives for importing foreign inputs?
Q.2.3
Which is the degree of concentration of the supply of each vital input (specially roundwood) inside the economical radius of supply?
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0.3.
COMPETITOR SYSTEM
0.3.1
Which has been the main competitors behaviours in the target markets and which is the expected behaviour for the next three years?
0.3.2
How many companies are there in the target markets that are strong competitors?
0.3.3
Which is the typical size of the competitors in the target markets? (Consider capital, assets, sales volume, employees, etc.)
0.4.
GOVERNING SYSTEM
0.4.1
Is forest industry highly regulated by Government? In what aspects?
0.4.2
What is the Government's general policy on forest industries?
0.5.
PRODUCTIVE SYSTEM
0.5.1
How is the forest industry located regarding the final goods market and the supply market?
0.5.2
The installed capacity of the company is sufficient to produce profitable volumes of each good?
0.5.3
Can the machinery and equipment produce the goods with the levels of quality and cost needed to compete in the target markets? If not, can this be achieved with a reasonable amount of new investments?
0.5.4
Has the company a sound financial position? If not, is financial restructuring possible?
0 .5.5 0.5.5
The accounting of the company is up-to-date? If not, is it possible to update it in a short time?
0.5.6
Is labour size (direct and clerical) reasonable? If not, can acceptable levels of labour be reached with a reasonable cost?
0.5.7
Is the history of labour-management relations a good one?
0.5.8
The relationships among stockholders are sound?
0.5.9
The relationships of management with key customers, suppliers and Government officers are sound?
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Q.S.lO Q.5.lO
Are all tax obligations covered? Is the tax position of the company backed up with .legal documents?
Q .S.ll Q.5.11
Are there important legal suits pending of resolution?
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COMPANY-WIDE TOTAL QUALITY APPROACH (CWfQ) (CWTQ) by Antonio Hermindez Murrieta
1.
THE CONCEPT OF CWTQ
The CWTQ is a systematic effort undertaken by all units of a company, to attain and maintain high levels of productivity, assuring that the goods and services produced completely satisfy the clients' needs. Under this approach all the company is structured and operated with the clients' needs in mind. It implies not only the quality, volume and price of the goods themselves, but also a great deal of consideration is given to such aspects as time of delivery, customer services, etc. A company involved in a Total Quality programme is recognized because:. because:, A.
The company completely satisfies the needs of its clients regarding: The The The The The
quality specifications of the products itself. opportunity of delivery. volumes supplied. price of the product. associated services to the customer.
B.
The productive processes are maintained under control so there are not costs of not working quality-wise.
C.
All inputs purchased have the quality specifications needed, are delivered on schedule in the volumes agreed and at market prices. The main suppliers are involved in the company success giving it a competitive edge.
D.
The support processes (administrative, ' technological, etc.) are geared to serve the needs of the "internal" clients and are cost competitive in reference to outside services of a similar nature.
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2.
PRODUCTIVITY AND TOTAL QUALITY
Productivity involves the appropriate use of all resources available, as well as the wise use of labour's time, materials and other inputs. The main value in Total Quality is to do things well from the first time. When this is not done, the cost of the goods produced involves a great deal of "poor quality" costs. SO CWTQ and productivity go hand by hand.
3.
QUALITY COSTS
All costs originated by not doing things well the first time are called "quality costs". These are direct and consequential. Direct quality costs are waste of raw materials, labour, energy, etc. Consequential costs are those that result as a consequence of not producing the goods up to standard: sharing of fixed costs, not delivering on time the agreed volumes, loss of confidence among clients, etc.
4.
INPUT AND PROCESS CONTROL
The way to eliminate quality costs is first, by purchasing all inputs in such a way that no defective item is going to the ·productive process. This means that the· company has a quality control procedure operating in the purchasing department. This unit selects the raw materials that should be processed because they have the desired specifications. The other factor in the elimination of quality costs is process control. This means that all operations are carried out by well-trained employees who follow sound operational procedures and practices. Thus there is almost no waste of labour and/or materials and the goods are produced up to standards.
5.
CUSTOMER INVOLVEMENT
Under CWTQ the company has to have a deep knowledge of the client's needs and of the impact of the company products on the customer's way of doing business. In CWTQ quality is defined as "fitness to use". This means that the company will be producing goods that fit the use given by the clients.
6.
CUSTOMER-SUPPLIER AGREEMENTS
Under this approach, all staff services identify their "internal" clients and celebrate agreements with them as to what staff products will be produced and the quality standards involved so that the needs of these clients are well satisfied. These agreements are also made by the different departments in the production process so that each step produces what is fit to the use given in the following step. 18
7.
QUALITY CIRCLES
In forest industries, as in any other type of business, the involvement of all personnel in the success of the company is vital. As quality is produced by people, some of the best ideas as how to improve and maintain it, come from the employees. Quality circles are groups of employees trained and motivated to propose and implement ideas that help to eliminate quality costs and to maintain the productive process stable in their departments.
8.
CWTQ IN FOREST INDUSTRIES
As forest industries meet a more challenging competition, they need to become cost-conscious and customer-oriented. In developing countries there is a long history of producing out-of-standard goods with high waste and low raw material yield, mainly because domestic markets were not demanding. In industrial nations, as competition gets tougher, the forest industries have gone step by step toward quality and productivity. The frame of mind of doing all things well from the beginning is something lacking in developing countries that sometimes impair them to become world-class competitors in many industries where, as it happens in forestry, they are the owners of the resources.
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20
HUMAN RESOURCES AND MANAGEMENT by Antonio Hermindez Murrieta
1.
HUMAN RESOURCES IN FOREST INDUSTRIES
One tends to forget that people not only operate a company, but they are the ones that design it, select the machinery, specify the products, design and implant the systems and procedures and, generally speaking, decide on every aspect which contributes to its success or failure. So in reality, the management of people is the management for success. Forest industries, specially those from developing countries, have not paid much attentjon to this aspect. They tend to make much use of "negative reinforcement" of the misbehaviour of employees and very few of the positive side of motivation. It is not infrequent to find companies where the personnel is badly selected, badly paid, poorly instructed and badly treated. This can only end in a badly functioning industry.
2.
MANPOWER MANAGEMENT
2.1
Manpower requirements: quantitative and qualitative
The first step in manpower management has to do with labour requirements at all levels. The quantity of labour depends on: (a) (b) (c)
The volume of production The degree of mechanization of the process The work methods
The quantity of direct labour expressed in men-hours should always be a constant per unit of production; indirect labour, also expressed in men-hours, should always be a fixed percentage of total labour. Time standards for each operation are required in order to set up the headcount schedules. These are set through motion and time studies that take into account the work methods as well as the mechanization of the process.
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The quality of labour depends on the type of products (quality specifications) as well as the degree of mechanization of the process. As in most forest areas there is a lack of qualified labour, it is necessary to develop good on-the-job training programmes based on well-set procedures for each operation.
2.2
Selection and hiring practices
The company should have well-written job descriptions that specify the knowledge, skills and experience that each occupant must have in order to do the job right. These will be the base of a sound recruiting and selection process. This process should include interviews with candidates, psychometric tests, medical examinations and investigations of previous employment. Any money invested at this point will prove to be profitable because it will prevent labour unrest, production spoilage, rework and waste, as a consequence of not doing a good selection of people hired. If the company is located in an area where there is scarce qualified labour, the screening should emphasize on positive attitudes toward work, ability to work in teams, initiative and general disposition.
2.3
Training programmes
The best training for forest industries personnel is on-the-job training. In order to do this the enterprise needs to have job descriptions and operating procedures for each vital operation. Then a formal instructors training course is needed for all supervisory personnel. A training in quality and productivity concepts will enhance the skills of the supervisors. As middle management is a vital factor in the performance of the company, a good skills management programme will be very profitable. This can be done with outside instructors following a company scheme. A description of a middle management course for forest industries is shown on page 25.
2.4
Compensation policies As much as possible monetary compensation should be tied to individual
performance. Paying low performers equally than high performers is like purchasing a defective item at the same price as a good one; soon everybody will be trying to sell you defective materials. In forest industries this policy has its drawbacks, because it is always difficult to measure individual performance in all jobs. Nonetheless, an attempt should be made to tie part of the workers' remuneration to quality and productivity; maybe group incentives related to the level of output produced according to standards, to reduction of waste, etc. Employees should have a clear and practical vision of how they can profit from the company success. 2.5
Labour relations
Sound labour relations are vital to achieve quality and productivity in a forest industry. One must not confuse labour relations with union relations. Labour relations is a much broader issue than, and includes, union relations. The welfare of
22
employees should not be something the union has to get forcibly from the company. It should be the result of sound personnel policies. Among the important things to do in labour relations are health and safety programmes. Most forest industries in developing countries tend to offer poor health conditions to their workers. With this they are sending a very loud and clear message about the importance they attach to their labour force. Then it is very difficult to ask them for the extra effort and involvement needed to become a highly competitive industry. To most workers the foreman is the company. He is the direct source of motivation and/or punishment; he is the one that has to enforce the company policies. All foremen and supervisors have to be well trained in labour relations and how to deal satisfactorily with the employees' complaints. 2.6
Community relations As has been stated before, a forest industry is heavily dependent on its
working environment. Sound community relations are a must. In most developing countries, the existing forest industries are major employers in rural areas and generate external economies there. But they also tend to be viewed as exploiters of forest owners, forest predators and polluters. Local and central governments tend to overregulate them; ecologists view them with mixed feelings if not with open mistrust. Nowadays all forest industries have to invest clearly in community works and relations if they want to stay in business for a long time. A sound and viable programme should be set in this regard.
3.
ORGANIZATION AND HUMAN RESOURCES DEVELOPMENT
3.1
The organization structure of the company
A great part of the success of a company depends on how it is structured. The organization chart is a graphical representation of both the division of work and the lines of authority and communication. In developing a sound organization structure, the following points should be taken into account: (a)
A structure should be as "flat" as possible with few organizational echelons so decisions can be made fast, specially those related with sales and production.
(b)
A structure should be "svelte" with very few staff services (only those you cannot contract from the outside) and the fewer personnel possible. Developing countries pay low salaries; do not make the mistake of backing up your competitiveness on this condition. It is going to change sooner or later.
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3.2
(c)
A structure should put the most important functions at the first level of the organization; this depends on the environment conditions of each particular company.
(d)
Whenever possible organize the company by "products and markets" instead of by functions. Try to establish "centres of integrated responsibili ty".
(e)
A structure should be designed to grow and reduce, according to shifts in the demand.
Promoting team work and cooperation
Team work is not spontaneous behaviour; it has to be induced and reinforced. People in a department tend to compete instead of cooperate. There are several programmes for organizational development based on tasks and results. Under these schemes, members of a group learn to work jointly toward a common goal and the value of communication and cooperation. A company willing to promote good relationships and coordinated effort among his various teams should pay attention to the following factors: (a)
The division of work and responsibilities, as stated in the organizational chart, should be precise and clear for everybody.
(b)
The way to measure the performance of units which have to work closely should not be incongruent (i.e., measuring sales by sales volume and production by use of plant capacity).
(c)
Get people from various units to share important measurable goals.
(d)
Promote a client-supplier relationship between the various departments of the company.
,
3.3
Organizational climate and productivity
The set of internal conditions that affect the employees' morale, such as compensation, promotion, participation in decisions, working conditions, labour relations, etc., are called the organizational climate of the company. There is a very strong link between productivity and organizational climate. Most competitive companies excel in this aspect. They do an annual survey among employees looking for particular conditions that may be having a negative impact on the personnel. With the results of this survey they conform a plan to improve the morale of employees. 3.4
Development of human resources
One of the best ways to assure the continuous success of a company is developing its human resources. This means preparing them for a successful career within the company. The way to do this is by spotting the "high performers" at all levels,
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MANAGEMENT SKILLS
L
OBJECfIVE OBJECTIVE
To promote the skills needed to manage a department obtaining the products specified in its mission statement with a high level of productivity. 2.
P~TICIP~TS PPURTICIP~TS
Middle managers of a forest industry and/or trainees for those jobs. 3.
CONTENTS
I. 1.
The systems view of a forest industry The work environment of an industry The structure and performance of an industry Vital factors of success of a forest industry
II. Il.
The systems view of a department in a forest industry The mission statement of a department The output of a department How to work with the "internal clients" How to measure the department's performance
Ill.
Leadership and motivation The best way 10 to lead people Styles of leadership and their effect on performance Reinforcing productive behaviour Getting results from people
IV.
The management as entrepreneur Attitudes on responsibility and results Attitudes on productivity and quality Attitudes on team work and cooperation Attitudes on problem solving
V.
Quality and productivity in the. productive process Establishing operational procedures and standards Training people to operate under standards Measuring productivity and quality costs Quality control of the output
4.
DURATION
15 hours (3 hours per working day)
25
including direct labour. These people with big potential should then be trained on the job, taking into account what other jobs in the next echelons they can aspire to. In this way they will be continually developing new skills and knowledge that may help to promote them to new and more challenging jobs. Successful companies only exceptionally bring outsiders to fill the top jobs or middle management posts. They prepare their own people making them grow with the company. 3.5
Promoting managerial skills
It has been said that there are not underdeveloped countries, only undermanaged ones. This is very true of forest industries. For years these companies have put great emphasis on the technical aspects of wood processing tending to dismiss managerial skills. They put the most competent technicians in manager jobs where the use of their expertise is limited. They know the process, they know the equipment, but they do not know how to handle problems, how to get results from people, how to make sound quick decisions and so forth. Competitive companies solve this problem developing in-house obligatory management programmes for executives of all levels. No one can get to a job of middle management without going through these courses and the same goes for top management. 3.6
Promoting a culture of quality and productivity
The values shared among the members of an organization conform a culture. These values are consciously or unconsciously reinforced by management. In order to 'achieve high levels of quality and productivity the company has to make a systematic effort to promote those values that are consistent with these aspects. To do things right at the first intent, to look for results instead of excuses, to find permanent solutions to important problems instead of provisional ones, and other similar values are the foundation of a sound organizational culture.
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SITE SELECTION AND INFRASTRUCTURE by B. Kyrklund
1.
INTRODUCTION
In order to have access to raw material, services and markets, the site of the mill must be selected in such a manner that this access can be provided at minimum cost. The site is accordingly selected where suitable infrastructure exists or can be provided at reasonable cost. As a general rule of thumb, small mills tend to be located near available infrastructure for social services, whereas large mills tend to be sited near the resource.
Although there is a certain overlapping in requirements on infrastructure during the construction phase and during mill operatin, operation, there may also be some differences, and therefore it is necessary to define the requirements separately for these two phases.
2. TION
MILLCONSTR UCINFRASTRUCTURE REQUIREMENTS DURING MILLCONSTRUC-
During the mill construction 'phase, infrastructure is needed for: Transport of equipment to mill site; Availability of services during construction;
Requirements on social and housing facilities and its dependence on labour force (local, domestic, imported).
3.
INFRASTRUCIURE INFRASTRUCTURE REQUIREMENTS DURING MILL OPERATION The services and utilities needed for mill operation are:
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Transport of logs, other raw materials and products (road, water, rail); Availability of telecommunications; Nearness to airport; Availability of process and drinking water; Availability of electrical power, if not generated by mill and even then as possible back-up; Suitability of land area for mill site, soil, taking into account requirements . of buildings, storage facilities, etc., and future expansions; Disposal of waste and/or toxic substances; Security Availability of labour locally; Requirements on social, welfare, educational and housing facilities, provided by mill or neighbouring communities to labour force and their families.
4.
PHYSICAL AND INSTITUTIONAL INFRASTRUCTURE Institutional infrastructure is required just as much as physical infrastruc-
ture.
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PROCESSING TECHNOLOGY by Kari Rinne
1.
INTRODUCTION
There is no universal solution when selecting the level of technology. The proper choice must take several local and project-related aspects into account, such as: type of markets to be served and their quality requirements type and volume of available wood raw material availability, skills and cost of labour flexibility of the facility need of imported production inputs degree of sophistication and complexity environmental issues investment cost versus production costs government policies
2.
SCALE OF OPERATION
The question of scale of operation is ambiguous. A mill which is considered small in industrialized countries may be a large one in developing countries, e.g. a sawmill with an output of 20 000 m3la. There is neither any universally optimal mill size but each case must be investigated separately considering the local specific conditions, such as: raw material availability market size type of equipment and processes available local managerial skills to handle various sizes of operations The effect of the economies of scale is dualistic. In good conditions a large mill normally enjoys lower fixed costs and capital charges than a small mill but it is more vulnerable to a low capacity utilization rate. A small mill may overcome poor times better than a large mill.
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3.
INTEGRA INTEGRATION nON
Horizontal integration, e.g. sawmill + plywood + particle board, has the following advantages: better utilization of wood raw material so that good logs go to plywood, poorer logs to sawing and residues to particle board lower fixed costs when several mills utilize the same general services, such as maintenance, power generation, administration and social services Vertical integration, e.g. sawmill + planing + joinery, has the following advantages: higher value added, e.g. sawnwood versus windows growth of the operation without additional wood input lower fixed costs as above Integration may also bring in some constraints, such as: differentiated markets; e.g., sawnwood and Jomery joinery products normally have different marketing channels
a multi-mill operation is more complex to manage than a single mill integration brings in interlinkages between the mills which may adversely affect the operation; e.g., if the sawmill is stopped because of machine failure, the particle board mill or the joinery plant cannot obtain raw material and are forced to curtail or stop their production, too.
4.
PROCESSING FACILITY
Well-planned is half done also in industrial projects. imperative to check that all the aspects have been considered as to: the mill site buildings process equipment auxiliary equipment service equipment There are check-lists available which can be consulted.
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Therefore, it IS is
In modernization projects an overall plan should first be worked out even if the project will be implemented step-wise. This way one step will not prevent or impede later phases of the modernization.
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32
FINANCIAL EVALUATION by Kari Rinne
1.
INTRODUCTION
A project may be technically and environmentally well planned but, if it is not financially sound, it is doomed to be a failure. Therefore a proper financial evaluation must always be an integral part of a project plan.
2.
CAPITAL COSTS Capital costs can be classified as follows: pre-operational costs plant capital costs interest during construction working capital infrastructure outside the mill gate
It is noteworthy that pure f.o.b. cost of the machinery is only a fraction of the total capital requirement. Items often wrongly omitted in cost calculations are: pre-operational costs, such as planning, temporary facilities, personnel costs before start-up and legal fees project administration, and construction supervision interest during construction working capital Many projects have faced serious problems due to inadequate funds for the working capital which is required to finance inventories and accounts receivable.
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3.
PRODUCTION COSTS
The production cost calculation of a project differs from that used in the cost accounting of a running mill operation, the main difference being the subdivision of costs into variable and fixed costs and omission of capital charges and taxes in project calculations.
are:
In project evaluation variable costs which depend on the production volume I I
wood raw material other raw materials, e.g. chemicals energy operating supplies other variables The fixed costs, which are dependent on time only, include: all personnel costs maintenance costs administration and overheads This subdivision facilitates a relatively easy profitability and sensitivity analysis. It is worthwhile spending some time in getting as reliable cost figures as possible because the accuracy of the calculation depends on that.
4.
PROFITABILITY ANALYSIS There are many ways of analyzing the profitability of a project, such as: return on investment, ROI internal rate of return, IRR net present value, NPV pay-back time break-even analysis There are several publications explaining the way of calculating these
indicators. IRR is the most widely used indicator and required, e.g., by the international financing institutions. IRR and NPV utilize the discounting method which takes into account the fact that money to be earned, e.g. ten years later, is not as valuable as the same amount of money earned today.
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IRR and NPV require a cash-flow statement over the project period (say 8-15 years) to be made. The cash-flow must be worked out using constant prices and costs. The inclusion of inflation in the cash-flow will distort the profitability analysis and give too optimistic results. Sensitivity analysis is a valuable tool in analyzing the risks involved in the project. It will tell what happens if some of the key assumptions are changing, such as sales price, production volume, production costs and investment. Finally, be honest when analyzing the profitability of your project because the truth will come out anyway but at a later stage when all the money has been spent without a successful project.
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36
FINANCIAL MANAGEMENT by Antonio Hermindez Hermlndez Murrieta
1.
FINANCIAL MARKETS IN THE FIELD OF FORESTRY
In most developing countries, due to high rates of inflation among other factors, money is a costly input and normal credit conditions are not very favourable for companies that need important amounts of working capital. There are not well developed markets in the field of forest activities. Most financial institutions do not have special credit programmes for forestry development. As a result, most commercial bankers view these activities with certain mistrust. Exchange markets are very limited, so public financing is not an alternative to most forest industries. To make matters worse, development banks have been under pressure by political and ecology activists to restrict loans addressed to forest production and industrialization.
2.
THE FINANCIAL FUNCTION IN FOREST INDUSTRY
Most forest industries have to pay cash for their wood supply and frequently even to hand out advance payments to forest owners. When forest roads are not transitable in certain season, a huge inventory of raw material is needed to sustain production. Some of them, located in remote areas, have to build up unusually high stocks of parts and maintenance materials. On the other hand, the finished goods markets mostly demand a certain type of credit to clients. All this means that the management of financial resources is a major task for managers of forest industry.
3.
MANAGEMENT OF CASH
3.1
Equity vs. credit
There is of course a direct relationship between equity capital and the potential of getting credit. Many of the financial crisis that forest industries confront have their origin in poor planning. Many projects for new investment in this field tend to be very optimistic in regard with the type of "start-up curve" of the industry, as well as with the expected cash flow. The equity does not include sufficient funds for working capital. Once in full operation, the company may need an increase in venture capital in
37
order to help finance its activity. But venture capital is the most expensive of all capitals, mainly in countries with high degree of inflation. And nowadays in many countries forest industry, with its problems of lack of sufficient wood supply and pressures by ecologists and government regulators, is not an attractive area of investment. 3.2
Financing purchases
As was stated before, the main input which is roundwood is practically nonfinanciable. So attention should be put on inventory levels. The decisions involved are not easy to take because most industries work below capacity, among other things for lack of raw material; in this case the capital cost of inventory is competing with the marginal contribution lost by not producing all the volume that the market accepts. So generally speaking there are few things to be done on this aspect. In some instances these inventories can be financed by foreign commercial banks if the production is exported. 3.3
Opportunity costs in financial decisions
One occurs in an opportunity cost when one puts money and/or resources for a use which gives a return that is lower than the return of other possible alternative use. For instance, if banks are paying an interest rate of 10 percent and your company's return on investment is 8 percent, the stockholders are incurring in an opportunity cost with the money they have invested in your firm. An entrepreneur knows that opportunity costs are real costs and should be treated like that. Sometimes a client asks the company to build up an inventory of finished goods so that he may be supplied with the desired volume at a short notice; maybe he is a very good client but, if the company agrees with him on that, it should deduct the capital cost of such inventory from the sales profit to know if it still seems like a good deal. 3.4
Financial product in times of inflation
Some forest industries that sell to markets where clients pay cash or through a letter of credit, like those who export most of their output, may have surplus cash flows. This surplus must be invested in any short-term instrument in the money market that has an adequate yield. The gains involved integrate the financial products of the company. Of course, the net financial product must deduct the financial cost incurred by taking up credits. In many developing countries with big rates of inflation banks have to pay bigger interest rates or they will lose the deposits. It is very probable that many good clients of forest industry, as the construction companies, may be in a recession thus affecting the sales volume of forest industry. In such cases a paradox may emerge: the bigger chunk of profits comes from the net financial product, that is, from a sound cash flow management.
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3.5
Foreign exchange
In some developing countries the probability of devaluation puts the treasuries of the company in a dangerous position. This is especially true of those industries that are involved in important foreign operations - either selling or purchasing abroad. If this is the case, treasury departments should be very careful in converting foreign currency to local currency . . They should maintain a very low level of exposure to minimize the probable impact of devaluation. In those countries with a stable economy or a planned policy of gradual devaluations, the level of exposure may be increased in order to take advantage of the difference between interest rates paid by banks to local currency deposits and international dollar rates.
4. 4.
TOOLS FOR FINANCIAL MANAGEMENT
Forest industries, like most types of companies, need some basic tools for a sound financial management: investment budget, operational budget and cash flow report.
4.1
Investment budgets
One of the most important outflows of money are the investments for expansion, for productivity and/or for replacement of equipment and machinery. All these investments should be carefully planned in advance and integrated into a budget. Investment proposals must be analyzed thoroughly to see if they are profitable in such a way that they have a positive impact on the overall return on assets level of the company. The assumptions of this investment budget will affect the cash flow planning of the company so the timing of outflows should be carefully considered 1TI in a very realistic way.
4.2
Operational budget
This is one of the most important tools for management in any industry. It states the budgeted sales for the year as well as the expected costs - both variable and fixed. Based on this information the company may know in advance what will be the cash flow in the year and can plan the overall management of financial resources. 4.3
Cash flow report
Cash flow planning is made not only on a yearly basis but also on a monthby-month basis. The expected inflows of money - mainly from sales - and the many outflows are programmed and a net cash flow is calculated for each week. This enables the treasury department to control payments to suppliers, to invest surplus or take up credits if there is a deficitiary net cash flow.
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5.
RETURN ON ASSETS PROGRAMMES
Many forest industries may profit by carrying out a ROA programme. This consist, mainly, in assigning every asset of the company - fixed as well as current - to a particular area of the firm, making the executives responsible for the profitability of such assets. In this way managers will try to make the most wise use of the assets under their control.
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INSTITUTIONS by
B. Kyrklund 1.
INTRODUCTION
Industrialized countries have well-developed institutions and a strong private sector, whereas developing countries, almost by definition, have deficient institutions and a weak or badly organized private sector. The types of institutions required for industrial development relate to: Legislation; Government bodies; Education and training; Resear~h and extension; Private sector; Financing.
2.
LEGISLATION
In the case of forest industries, laws regulate not only the industrial activity itself by setting societal, financial and business norms, but also the activities which relate to land-use and access to land, forest management and concessions and may even be introduced on an international level like in the case of the International Tropical Timber Agreement. Legislative actions also require institutions to monitor and enforce the obeyance of the laws and therefore legislation needs to establish the necessary administrative structure (institutions) to support the actions and to provide funding for the institutions. Legislation can also be counter-productive if it makes unrealistic assumptions regarding the practicality and the obeyance of the laws established and this may sometimes lead to unethical behaviour, which over time may become accepted practice.
41
Some issues which need to be addressed in legislation in support of forest industrial development are also presented. 3.
GOVERNMENT BODIES , The government bodies which have a direCt bearing on forest industries are
basically: Legislative bodies; Administrative and regulatory bodies; Service agencies.
4.
EDUCATION AND TRAINING
Adequately trained staff and managers are essential for successful operation of an industry or business. There is, however, a general lack of education and training facilities for forest industries in most developing countries. Training is needed at all levels for operations both in the forest and in the mill and must especially include training in how to reach the market and stay on it. In very small-scale operations the training may take a less formal form in order to reach the owner/manager/worker. Otherwise formal training needs to be introduced, either as institutions if the size of the industry warrants it, or by the industry itself.
5.
RESEARCH AND EXTENSION
The industry needs the support of research, which in the . developing countries may concern itself with adaptation of the existing raw materials for manufacture of new or conventional products. It is not enough, however, to have research carried out in various countries independently. Cooperation between research institutes is important to achieve cost effectiveness. Research networks are therefore increasingly established. Extension serves to transfer the result of the research to the user. The extension service can provide information on plantation establishment, information on lesser used species, on silvicultural systems and the latest sawmill technology, as well as improved methods of management of small sawmills.
The extension service can also highlight social problems which may arise from establishment of a forest industry in a certain area and help avoiding such problems by informing the local population of the possible bendits of such establishment.
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6. 6.
PRIVATE SECTOR
If the private sector is unorganized, it means that all results of negotiations with the government are based on individual successes or failures. Similarly, in dealing with external entities for market information, export or trade promotion, it is 'every man himself'. for himself. -
Obviously, by organizing itself into associations, the position of the private sector is greatly improved.
7.
FINANCING INSTITUTIONS
Large-scale forest industry projects usually require considerable international financing, which often is handled locally by the national bank. Thus, even when the financing to a great part is international, there is a need for a well-developed national funding institute. In addition, the national bank very often distributes the funds through other banks in the country. This of course requires a well-developed banking network which also serves smaller investment projects. Rural credit is usually required for very small projects where the owner/manager/worker cannot provide collateral. There are several successful examples of such rural credit organizations and an example of how such an institution works is provided.
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44
MANAGERIAL ENTREPRENEURSHIP by
Antonio Hermindez Murrieta
1.
MANAGERS OR ENTREPRENEURS?
Management is largely associated with the administrative process: a manager plans, organizes, supervises and controls the work of others. A manager seems to be a person concerned with the wise use of the resources he controls; he or she is someone who is able to "keep the business going". On the other hand a leader is more associated with motivation and drive: he likes to shoot at problems, to look for new business, to get people moving in the right direction and so forth. What a company in a highly competitive environment needs is a mixture of both types of executives. This person is the entrepreneur.
2.
THE PROFILE OF THE ENTREPRENEUR
An entrepreneur is someone with initiative who is willing to take calculated risks in order to get results. He does not like to explain why the desired goals were not met; he prefers to spend time looking for ways to reach them. He is not an activist who works long hours; he concentrates on the "vital few" things that are needed to assure the results, instead of occupying himself with the "many trivial" things. He does not work harder, he works wiser. A manager who is an entrepreneur tends to view his department as an enterprise, that produces goods or services which are necessary for other departments within his company; these are his clients. He is a very proactive, very the. total system where his results-oriented type of person. He thinks in terms of the department belongs; he always acts and decides putting himself in the shoes of the chief executive officer (C.E.O.).
3.
TYPICAL ENTREPRENEUR BEHAVIOURS
Most entrepreneurs show similar ways of approaching the working situation and similar reactions toward the vital events they confront daily. Some of their most typical attitudes are shown below.
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3.1
Attitudes toward responsibilities and results
The value added by executives to their organizations is to assure results. Their job is to take preventive and corrective actions to handle the many situations arising in the work environment that threaten the attainment of results. When a manager says that he cannot assume responsibility for the results of his area, because these depend on factors "out of his control" he is denying the very purpose of his job. An executive must always be results-oriented. Before acting, a manager
must always state clearly what is the desired result and whether the planned actions are really necessary. The means, paying due respect to law and ethics, are secondary. "It is not important if the cat is black or white, as long as it is able to catch mice." Propose how to get things done instead of losing time explaining all the possible reasons why those things cannot be done. Feel responsible for the results of the whole company, not only for those of your department. Think in terms of the total system and do not get "tunnel vision". 3.2
Attitudes on quality and productivity
Turn your products into satisfactors. "People do not buy goods or services, they buy satisfaction of their needs." Be sure that the goods or services that your unit produces are "fit for the use" given to them by your "internal clients". Be proactive not reactive. If you take preventive actions you avoid the costs of not doing things well at the first intent. When you react to the problem you have already lost time and money. 3.3
Attitudes on team work and cooperation
Conciliate differences and harmonize interests. In any company there are a wide variety of interests, points of view, approaches, etc. You should be able to get agreements on the tasks to do and cooperation and involvement from your partners if you follow a win-win strategy. Some "good bargainers" still think that they may be able to obtain long-sustained agreements with the policy of "if it's tails I win, if it's heads you lose". Not the entrepreneurs. Act on facts and verify your assumptions. Your behaviour is influenced by your assumptions, should you not verify them before acting -and regretting? When you assume that your partners want to take advantage of you, or that the people in the corporative are "bluffs", you may act and decide the wrong way. If you do not act upon facts you are building on quick sands.
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10 APPROACHES TO CRISIS MANAGEMENT
3.4
1.
Try to optimize the short term continuously.
2.
Maximize all activities with "high pay-back rate". rate".
3.
Give priority to actions that have positive synergy with available resources and present operations.
4.
Convert fIxed costs into variable costs wherever possible.
5.
Try to use idle capacity to produce other goods and services for other markets at a marginal cost.
6.
Organize the company by profIt centres.
7.
Put the staff to work closely with the line units in activities that will contribute in the short term.
8.
Measure and control vital results constantly.
9.
Promote the participation of personnel in key decisions tied with coresponsibility in cost matters.
10.
Get out of all activities that are not part of your "core business" (Le. transportation) and contract them outside the company.
Attitudes to problem solving
Turn problems into opportunities. Generally speaking, a problem presents also opportunities for improvement of many related things. When solving a problem the entrepreneur asks himself: what additional changes can be introduced while applying the solution? He comes out of problematic situations with a more effective organization, taking advantage to introduce additional measures that, if the problem had not arisen, would be difficult to apply. Accept risks and decide promptly. To cross a street with heavy traffic with your eyes closed, is not taking a risk, is committing suicide. To ponder the possible consequences of a decision and bypass the policies in order to take advantage of a clear opportunity is knowing how to accept and handle risk. Entrepreneurs know that they are paid for taking risks and jumping over policies in a selective manner, so as to assure the needed results.
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Apply definite solutions to key problems and avoid palliative. Frequently managers postpone what are the definite solutions to the problems they are confronting. They prefer to mitigate them with provisional measures hoping that the problem somehow will go away, or that they will be somewhere else when it reappears. Postponing the true solution makes it more costly and generally involves bad risks of a major breakdown.
4.
CRISIS MANAGEMENT
Entrepreneurs do not spend time complaining about high inflation, low economic growth, lack of foreign exchange or the high cost of money; to him the "times of crisis" bring new conditions in the environment and, along with them, new opportunities that he must try to identify and profit from them. Some of the approaches that entrepreneurs apply in times of crisis are shown on the previous page.
5.
THE PROFESSIONAL MANAGER IN FOREST INDUSTRY
Forest industries are in much need of managers with entrepreneurship behaviour who are professional administrators. These people should have a great deal of experience in dealing with very different kinds of people: forest owners, government officers, ecology activists, union leaders, development bankers, etc. They should be able to manage people with a rural culture and little previous experience working with strict standards of quality and cost. And most of all, they should be shrewd operators constantly looking for and taking advantage of all opportunities in the end-product market, as well as in the wood supply market. They should also be aware that sooner or later their companies will have to be highly competitive in quality, price and service if they are to survive with profitability.
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ENVIRONMENTAL ASPECTS OF FORESTRY AND FOREST INDUSTRY PROJECTS by Paul Driver
1.
INTRODUCTION
The old image of forestry and its associated industries as a benign enterprise like farming is changing. The ability of powerful machinery to rapidly open haul roads and clear timber exposes forests to numerous risks of physical and ecological degradation. At the same time, the chemical agents used to preserve timber and manufacture wood products, and the wastes arising therefrom, represent important potential sources of pollution. On the other hand, the world community has come to appreciate the many broader uses and values of tropical forests, from medicinal products through to watershed protection. This has resulted in demands from government, development aid agencies and NGO's for strict controls on the further development of forest industries based on the exploitation of tropical forests. However, for many states, forestry represents one of their few sources of foreign exchange. The environmental challenge, therefore, is to obtain the economic benefits of forestry and its associated industries, whilst maintaining the wider benefits of forests and preventing the degradation of the natural environment and its dependent communities. The key to this challenge is the application of environmental planning prior to project development, and environmental management during implementation.
2.
ENVIRONMENTAL PLANNING
The objective of environmental planning is to avoid or ITlllllmlZe ITllmmlZe environmental problems by design. Environmental planning activities are necessary at various points during the planning of a new project, beginning with resource assessment. This is a more detailed and analytical form of forest inventory which, for example, takes into account the function of the forest in providing habitat for wildlife and ethnic communities, and its regional importance in moderating both climate and run-off. Development of the forest management plan also needs to take account of environmental issues and build them into, for example, the design of the logging and transport systems. Environmental issues will also need to be considered in the siting and the design of industrial processes. At the planning stage there is the opportunity to design for the minimization of waste production, the recycling of water and wastes, and the inclusion of adequate pollution control measures. Inclusion of pollution control from the
49
outset is both economically and technically better than retro-fitting at a later stage when pollution problems start to manifest themselves. For solid wastes that cannot be recycled, used as fuel or sold as a by-product, a disposal site will be necessary. This must also be planned well in advance with adequate provision for the isolation of toxic materials and the protection of ground water. Apart from the individual elements of environmental planning referred to above, there will, in most cases, be the need for an environmental assessment of the proposed development.
3.
ENVIRONMENTAL IMP ACT ASSESSMENT (EIA) IMPACT
Proposed projects should first be screened to determine whether an EIA is necessary. A preliminary assessment should then be conducted and, if this indicates that detailed assessment is warranted, the "scoping" should be undertaken to determine the major issues that the EIA should be focused on. EIA is the comprehensive and detailed study of the proposed project and the environment within which it is to be developed. Alternatives of both design and location are included. Baseline studies are conducted to record existing environmental quality. Likely interactions between the development and the environment are identified and, as far as is possible, quantified. Ameliorative measures are then developed to avoid or minimize potential adverse impacts and to enhance any environmental benefits of the project. Finally, a monitoring programme should be developed to assess the actual impacts of the project following implementation and to follow the course of long-term impacts. The EIA process should not be conducted in isolation, but should form an integral part of the project development cycle. This enhances liaison between all interested parties and results in the design of a better project. Those conducting the EIA will need to be well informed about the likely impacts arising from wood supply and from mill operation. Check-lists and other background information on the likely environmental issues are available.
4.
IMPACTS ARISING FROM WOOD SUPPLY
The utilization of natural forest for wood supply can result in a range of impacts on landform, soils, water resources, vegetation and wildlife. The nature and severity of these impacts will depend upon the fragility of the resource base and the method of logging/transport. The latter must be matched to the former, but there are various types of good practice that should be used in all circumstances, e.g. the proper construction and drainage of roads to avoid erosion, and use of the lightest possible machinery in the forest. Wildlife and vegetation need to be assessed at the planning stage and provision made for protection as necessary, e.g. by the designation of reserve areas or specialized seasonal practices. Whilst the utilization of plantation wood is generally preferable to natural forest, the establishment of plantations can also have adverse effects on the environment in terms of soil chemistry, water balance and wildlife potential. As part of the environment, human communities can be affected by wood extraction particularly if it removes resources of importance for the provision of food, shelter, materials, medicines, etc. On the other hand, the appropriate involvement of local communities can assist with conservation of the resource base and its protection from encroachment and poaching.
50
5.
nON IMPACTS ARISING FROM MILL OPERA OPERATION
Losses or discharges to the environment during the operation of mills can result in pollution of the air, water and soils. Controlled emissions to the air through a stack may contain oxides of sulphur, nitrogen and carbon. Dusts and smoke sufficient to be of nuisance to local communities usually arise from uncontrolled sources such as smouldering tips. Wood industry processes may lose significant quantities of volatiles such as formaldehyde, pentachlorophenol and toxic solvents which are usually of greatest hazard to the mill work-force. Effluent discharges may contain suspended solids, salts, alkalis and acids which physically or chemically affect the quality of the receiving water. Of greater concern are the phenols and organics derived from plant washing which may result in the tainting of potable water supplies, and organic or metal wood preservatives which may be biomagnified as they pass through aquatic food chains. The loss of oils, fuels,and greases to the aquatic environment due to intentional or negligent discharge can also be very damaging. Most wood industry processes produce quantities of solid waste either as sawdust, bark, ash or sludge. If not formally disposed of to a secure landfill, these can cause a considerable environmental nuisance. Where materials treated with preservatives are concerned, the nuisance becomes a hazard.
6.
ENVIRONMENTAL MANAGEMENT
Even when well planned, forestry and forest industries need careful management to avoid environmental problems. The link between planning and management is the design of standards for waste emissions and working practices, and their subsequent monitoring and enforcement. A major factor ensuring adherence to environmental standards is good maintenance of mill plant. Poorly maintained pollution control plant, such as effluent treatment systems, which eventually become inoperative, are often simply bypassed. Health and safety in the work-place also relies on the maintenance of protection equipment and the strict enforcement of its use. Water resources require particular vigilance if they are to be protected from pollution due to either controlled discharges or negligence. Of major importance is the management of solid waste disposal operations to ensure that any materials contaminated with toxic agents are totally contained. Stored chemicals and oils similarly need to be fully contained in bunded storage areas with facilities for the collection of any run-off.
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52
SOCIO-ECONOMIC ASPECTS by Bo Ohlsson
1.
WHY SOCIO-ECONOMIC ASPECTS?
Socio-economic issues are basically general aspects of people and their activities and in this instance, how these aspects potentially could relate to forestry and the forest industry. Generally, we include people and their relations to the means of production (e.g., forest land use ) their activities, what they do for a living, their institutions, culture and traditions and how this would be affected by the intervention being planned. An analysis of needs and resources among the local population is also part of a socio economic perspective. The underlying assumption is that the local population is a potential resource. If not considered, the planned intervention could be detrimental to them and problems generated.
Socio-economic considerations require a holistic approach. That is, piecemeal interventions do not work. For instance, attempts to train workers are futile if the employment system is based upon casual labour. Likewise, measures to increase comniensurate incentives. productivity do not work unless this is associated with commensurate In spite of the general terms, the issues are usually very locality specific the problems and opportunities in two areas could have the same generality but express localities.. . themselves very differently in the two localities Lack of considering socio-economic issues frequently prevents production as well as productivity. Thus, the major rationale for considering socio-economic issues relates to production, productivity and protection (e.g., for plantation establishment). It is not a social welfare approach. Rather, by considering socio-economic issues, production, protection and productivity would be enhanced which in turn could, through proper planning, support welfare.
53
2.
SOME BASIC CHARACTERISTICS OF FORESTRY Al\lD Al"fD FOREST INDUSTRY
Forestry and forest industry are an integrated operation with the forestry, forestry, the industry and the market constituting major components, affecting each others and the actors involved. Forestry and forest industry is a land-based, spatial and an~ areal operation with a long time perspective. It frequently operates in remote areas. Often, forestry operations are the first government or private enterprise entering an area and introducing new concepts and practices such as employment and technology as well as roads and other infrastructure. Forestry operations are frequently perceived as mono cultural operations. Reality often contests this assumption, e.g. in densely populated monocultural areas. That is, forestry in many instances cannot monopolize land use. Multiple use of forest land is not per se incompatible with forestry. forestry. I
Forestry and forest industry contain a number of options which are available for planners: the balance between labour and capital/mechanization, seasonality and accommodation to seasonal availability of labour, scale of operations, level of technology and, finally, the flexibility in end-use of the raw material.
3.
FORESTRY IN THE CONTEXT OF REGIONAL DEVELOPMENT
In a historical perspective, forestry and processing of forest raw material have always been an important component of rural life. During the nineteenth century, these activities increasingly became looked upon as the responsibility and prerogative of central governments and forest departments were created to protect, manage and exploit the forests. Local needs and opportunities were disregarded. An isolationistic view prevailed. The outcome of this - and also other processes - was deforestation and soil eroSIOn. During the early seventies, there was a growing realization that forestry and . forest industry could be a force in regional development. Emphasis was initially put upon employment but, eventually, other aspects were included as mentioned in (2) above. It was also realized that forestry cannot survive without the cooperation ofthe local people. People's potential and also actual management and production of trees and forest was also recognized. In general, the lessons learned were: 1.
Forestry and forest industries can, with reasonable accommodations, be a force in regional development
2.
It is difficult for forestry to survive alone without considering socioeconomic problems and opportunities - forestry and society are mutually dependent and isolationistic trends in forestry are counterproductive
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4.
3.
There are many different ways of managing and producing trees and forests, including that done by the farmers
4.
There are a number of options available in forestry and forest and' industry to satisfy both economic and socio-economic needs and opportuni ties
SELECTED ISSUES 4.1 4.2 4.3 4.4
5.
Land use Labour and employment Social services and institutions Planning options for regional development
PROPOSED ACTION
The question to be addressed is what to do in a planning process in order to productively consider, consider socio-economic aspects. In general, when planning, biological (e.g., silviculture in plantation work) and economic issues (is it profitable) are considered. In a similar manner, it is necessary to consider socio-economic issues. Thus, we would operate with three criteria: biological, economic and socio economic. Socio-economic issues are frequently associated with lengthy research, ending up with detailed reports about the social structure of the local population, their traditions, land use etc. The problems with these reports - usually written by social anthropologists or sociologists - are that they are written in an alien language for nonprofessionals (the foresters or industrialists doing the planning) and not easy to understand and that they lack information about what to do! The first and most important step in a planning process is to accept the need for socio-economic aspects. Next is to consider the operations being planned and how they possibly could affect the people concerned and in which way it is desired that they are affected. In order to facilitate this, it is necessary to involve the local people in the planning process. There are presently a number of techniques available (e.g., rapid rural appraisal, RRA ) which could be used in this context, some of which will be discussed during the seminar.
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56
PROJECT IMPLEMENTATION by B. Kyrklund
1.
INTRODUCTION The various phases of project implementation are: (a)
Financing: investment decision; identification of partners (especially in new projects); financing.
(b)
Construction: selection of consultants and contractors; scheduling of the project; purchasing of equipment; engineering and layout; construction and installation of equipment.
(c)
Getting started: pre-operational training; start-up; testing performance guarantees.
2.
FINANCING
There are various types of partnership and financing available, both loan and equity, as well as sources of financing. The debt to equity ratio is very important in the context of the capability of the enterprise to service its debts.
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3.
CONSTRUCTION
There are some important considerations in the selection of consultants and contractors, as well as some pitfalls which may appear in contracts. It is important to prepare a realistic project schedule and to adhere to it. Selection of appropriate technology and equipment is essential and sufficient space must be allocated in layouts, which must allow undisturbed flow of the process. Supervision of the work of the contractors may be different in new installations and in expansions or modifications.
4.
GE1TING STARTED GETITNG
The work-force must be selected and trained well before start-up and this needs to be taken into account already at the planning stage. Organization of preoperational training in various cases and at different levels of skills is essential. Funds must be set aside for start-up and working capital. Start-up assistance and assistance during the initial stages of operation may be required.
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PART 11
CASES FOR GROUP WORK
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60
PREAMBLE TO GROUP WORK CASES
1.
INTRODUCTION
The purpose of the exercise is for you as a group to prepare jointly a plan for construction or rehabilitation of a mill, depending on the case that is allocated to your group. The conceptual solution is most important. This requires that you clearly identify problems that may arise under the specific conditions described in the case descriptions and the solutions that may need to be found. Once your group has prepared its plan, you will need to write a brief joint report and one of you will make a brief presentation (about 15 minutes) with overheads at the end of the workshop when your plan will be discussed. Please note that there is no single' correct' solution to this exercise. You are therefore free to solve the problems as perceived within the fixed set of conditions given in this description of the case.
2.
APPROACH AND DETAIL
The first step is to identify constraints and opportunities in the various systems, for instance in wood supply, markets, processing, financing, etc. Following that you can identify options for further consideration. Please note that many of the constraints can be removed through appropriate action and, sometimes, what seems a constraint may be an opportunity under a certain option. The plan must address all the constraints mentioned --in in the case description, in so far as they might have an effect on the successful implementation of the plan. Too much detail should be avoided, for instance, there is no need to specify how many chainsaws, skidders or trucks are required for the harvesting and transport operations, but the method of harvesting, training activities or organization of harvesting should be presented, if it addresses some of the constraints or opportunities. A plan should be drawn up for the supply of logs from the resource in the long term. The time needed for project implementation should be stated as well as the schedule of initial production, after start-up, and linked to market development. Similarly, the target market should be stated with a plan for how it would be reached. In the processing facility, it is sufficient to state the main technological solutions that address the constraints and opportunities that have been identified.
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Social and environmental issues must be addressed as they are given in the cases or as they arise from the solutions offered. The case descriptions give no cost of price figures and you are not expected to make a financial evaluation of the project. Accordingly, no cash flow statements need to be prepared. Instead, the plan should put the main emphasis on the strategic solution, assuming that the financial evaluation will be made at a subsequent stage, not included in the tasks of the workshop. Please note that if you so wish, you may propose plan alternatives for the same case.
3.
REPORT
The report should highlight the inter-relationship between various aspects of the project. The following general outline should be used in the report, with modifications as required by the case studied or by the solutions offered: 1.
Objective State briefly the purpose of the plan;
2.
Constraints and opportunities Review constraints and opportunities suggested by the case description; Review briefly the strategy you have selected for the preparation of plan (as it relates to financing, choice of partners, -import/ i mport/export export markets, management, training, etc., depending on the case under consideration) ;
3.
Market
Describe why you have selected the market chosen, the quantities it can absorb, how you are going to reach it and stay on it, your competitive advantages, how marketing will be organized and the position of the marketing unit in the company hierarchy; hierarchy;
4.
Resource management and wood supply
Show your plan for development and utilization of the resource in the long term, on a sustained yield basis, considering the marketable volume; Describe the harvesting system and method you are going to use, taking into account social and environmental issues that need to be addressed; The type of labour that will be employed in the harvesting operation (locals, migrants, contractors);
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5.
Processing facility Describe briefly the salient features of the technological solutions you suggest for solving the problems that may arise from the case; State the capacity or expected full rate of production for the plant; Describe how pollution abatement will be organized;
6.
Development of infrastructure
Review any improvements in infrastructure and how the existing infrastructure will be utilized;
7.
Project implementation plan
Show time required for implementation of the plan and prepare a phased plan for production during the initial years of operation after start-up; Describe how human resources development will be organized during the implementation phase and any other factor that will have a bearing on the success of the enterprise, addressing both managerial, technical and labour issues; 8.
Financing State equity Iloan IIoan ratio to be applied, sources of financing and rates of interest; Review how equity will be raised and the prospective partners;
9.
Management Draw a chart for how you see that the management should be organized;
Note:
Explain under each heading why you considered a certain solution favourable, pointing out possible inter-relationships between the different factors that affect the success of the enterprise. Also include institutional, environmental and socio-economic socio-econornic considerations.
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GROUP WORK CASE 1
CONSTRUCTION OF NEW, MEDIUM-SIZED SAWMILL 1.
INTRODUCTION
The purpose of the exercise is for you as a group to prepare jointly a plan for construction of a new sawmill; sawmill, processing the raw material from a nearby natural forest and plantations. The conceptual solution is most important. This requires that you clearly identify problems that may arise under the specific conditions described below and specific solutions that may need to be found. Please note that there is no single' correct' solution to this exercise. You are therefore free to solve the problems as perceived within the fixed set of conditions given in this description of the case.
2.
FOREST RESOURCES AND WOOD SUPPLY
2.1
The Natural Forest
The natural (moist) forest assigned to the mill by the Forest Service according to a 15 year, renewable, contract has been partly logged over in the past but the least accessible areas are still untouched. The total area of the forest is 50 000 ha. An inventory carried out by the Forest Service shows the following main forest types: a)
Degraded High Forest - 20 000 ha 5 000 ha of highly degraded forest with little commercial volume that has been set aside for natural regeneration/recuperation. It is expected to be ready for commercial logging in 50 years. 5 000 ha has been allocated as a special working circle where the local population is allowed to supply themselves with firewood and other forest produce and the mill with commercial logs. The average commercial volume per ha is estimated at 10 m3/ha. 10 000 ha with an average of 15 m3/ha of commercial logs is available for conversion to industrial plantations. The total volume down to 10 cm diameter is estimated to be 70 m3/ha.
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b)
Second Generation High Forest - 10 000 ha This part of the forest was successfully regenerated in the past and is estimated to have an average volume of good quality logs of 35 m3 /ha. The concession requires the cutting cycle to be at least 30 years.
c)
Unlogged High Forest - 10 000 ha This area was left intact by loggers in the past because of difficulty of access and broken terrain. Although the inventory shows a commercial volume of 60 m3 /ha the enterprise considers that only 20 percent can be economically accessible, using cable logging. The concession requires that the cutting cycle is at least 30 years.
d)
Protection Forest - 10 000 ha This area comprises 5 separate blocks where special soil conservation measures are needed or where the concession calls for protection of the endemic flora and fauna. These blocks are not open for logging.
The concessionaire is required to draw up a management plan for the forest and have it approved by the Forest Service. This includes separate plans for conversion of the degraded high forest and for the management of 5 000 ha by the local community. 2.2
The Plantation
In view of the dwindling natural forest in the region, the enterprise started a plantation program 15 years ago. 15 000 ha of Gmelina have so far been established but because of inadequate financial planning and disappointing growth, the expected results have not been achieved. Of the Gmelina planted 15 years ago and considered mature, only 500 ha have commercial densities, but yields are only 2/3 of those predicted - 15 m3/ha/year. No planting took place in the following two years, but since then, 100 ha were planted every year. This continued until three years ago when no more land could be obtained for planting. Gmelina should be thinned twice before maturity. An area of 500 ha of teak plantation have been purchased, Two thirds are now between 40 and 60 years of age, while the remainder is between 20 and 30 years old. The stands are mature at 65 years; · average yields are estimated at 7 m 3 /ha/year.
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3.
MARKET
The market survey prepared by the consulting company took into account the expected product mix in terms of species and sizes, the expected quality profile and flexibility of production. According to their conclusions, there was good potential for marketing pressure impregnated sawnwood (CCA) at a rate of about 5000 m3 per year on the domestic market. Impregnated sawnwood also has the advantage of a price which, on that market is twice as high as for untreated timber. Regarding exports, the consultants identified certain problems that would need to be addressed if a decision is made to enter that market. Since the company is new in the business, there may be initially some suspicion by potential buyers that are wary of quality, reliability and credibility of new, unknown entity. Entering the market would therefore require some careful planning and the approach to marketing would need to be clearly defined. Export of impregnated sawn timber is expected to yield about 75 percent of the domestic market price. Yet, if storage costs for export shipments could be reduced, the return may increase to 85 percent of the domestic price. Shipping rates to potential export destinations are presently about double those of export from neighbouring competitor countries. Negotiations for lower rates could much improve the net FOB price. Markets are also required for the residues from both the harvesting and mill operations. /
The Government intends to impose export taxes of 15 percent on sawn timber.
4.
PROCESSING
The sawn timber from the plantation hardwood has in preliminary test shown some tendency to warping on drying due to tensions in the wood. Special precautions will therefore be required to obtain sawnwood acceptable to even the domestic market that in the past has been used to timber from natural forests. It is also important to select a technology that gives a good rate of recovery, in view of the problem of residues mentioned under marketing.
5.
SOCIO-ECONOMIC SITUATION
The sparse original population in the area is living in separate small hamlets with 3-5 families in each. The population density is below 5 personjkm person/km2.2• The prevailing land use and techniques - grazing and hoe agriculture with fallow - is very extensive and with present techniques, the land cannot really sustain the population.
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The population consisted originally of nomadic pastoralists, but due to circumstances beyond their control, they migrated to the project area and complemented their cattle rearing with agriculture. It is ethnically heterogeneous, with people who originate from different parts of the country and retained their culture and identity. Grazing and agriculture are practised mainly for subsistence and charcoal production is increasingly becoming a major source of cash. The charcoal is sold along the main road of the area to middlemen who collect the charcoal in trucks. Ownership and control of land as regarded as communal but it is not recognized by the law. Still, the local perceptions of land use rights and practises are not well known. Due to the heterogeneous ethnic background of the population, the indigenous and social institutional infrastructure is weak. There are no health facilities or schools, except for the employees of the plantation operation. The area is considered a backwater of national development.
6.
HUMAN RESOURCES
The area lacks a tradition of forestry or tree husbandry and there are no traditions of employment. Those who have from time to time been employed as labour, have only been hired as migratory, temporary workers and they are a clear minority of the population. The workforce that has been involved in the plantation work has been brought from other areas of the country, although some temporary labour has been employed among the local population. That part of the labour force is unused to continuous, daily employment as labour. Therefore, it has constituted only about 5 percent of the total annual labour force, used mainly during peak seasons of labour requirement. Nearby areas have an abundance of non-qualified labour with agricultural background but without traditions of work in forestry. This type of labour is protected by strict legislation that demands several fringe benefits to be included in the pay, such as social security and profit sharing. The salaries as such are, however, low - only about 25 percent of those in countries that would compete on the sawn timber market. The cost of dismissing an employee is 5 months' pay. There is almost no specialized labour available near the project area. Managers, supervisors, technicians and qualified labour must be brought from urban centres, as far away as 200 km from the mill site. Provided adequate facilities are established, labour and staff turnover is expected to be low, except for managers. 7.
ENVIRONMENT
The natural forest is degraded by migratory agriculture, cattle raising and fuelwood collection and past logging activities. The government has therefore declared
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the area protection forest and no extraction of timber from this part of the stands is allowed. Due to the somewhat large tracts of degraded land available in the area, the government provided tax incentives for establishment of industrial plantations in the area. The rivers of the area are tributaries of the largest river of the country with considerable fishing activities. The high forest includes endemic plant species and rare species of birds that are dependent upon them. The Government has therefore accepted international advice that five blocks of land should be designated as protection forest. The Forest Service has also decided that skidder logging will be banned on slopes greater than 30 percent. There is no local experience of modern processing technology and, in particular, no familiarity with storage, use or disposal of impregnation agents. There are presently no Government regulations on effluent discharge or solid waste disposal.
8.
INSTITUTIONAL ASPECTS
The plantations to be used by the project are situated in two different administrative districts with no cooperation between the administrative bodies. Very Resources'. One of strict labour laws apply in the country as mentioned under 'Human Resources'. the reasons for low availability of qualified labour is the lack of official training facilities in the area and its surroundings. As mentioned under 'Socio-Economic Aspects', the local rural population is not very strongly organized, which complicates communication with the people in the area of the project. A 15 year contract for the management and utilization of a 50 000 ha natural forest has been drawn up between the Forest Service and the enterprise.
9.
FINANCING ASPECTS
The country has strict regulation on foreign exchange that can only be obtained if adequate justification can be supplied for the investment project. Export earnings in hard currency, for existing and new production units, can be reserved at the rate of 15 percent of the annual export earnings. This can be used for purchasing of spare parts and raw materials not available in the country. Foreign partners can export 50 percent of the return on their equity investment. The remainder must be reinvested in the country. Credit is available from commercial banks at a rate of interest, which now is 18 percent, with repayment in maximum 10 years.
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10.
INFRASTRUCTURE
The plantation work carried out in the area has resulted in some infrastructural development; there is a small township with a primary school and some medical facilities (one doctor visiting twice a week, two nurses and ten beds), besides social facilities ( a club, a library and a swimming pool). A company store is also available that provides the day-to-day supplies of food, needed to supplement the supplies available from domestic gardens and from the nearby rural hamlets which essentially have only enough to cover their own needs. The social and medical facilities are available to employees only. Although the rivers in the area are tributaries to the main river of the country, most of them are not suitable for transport, except for local supplies and goods used by the population, using dugouts with engines. The nearest railroad connection is at the nearest town (population 10 000), 50 km away by a good all-weather road. The town has a secondary school, a pharmacy and a hospital with 200 beds. Continuous radio contact is maintained with that town and older children of the employees of the plantation operation go to school there as boarders, returning home for weekends. At the same place, the road connects to the main highway of the country that leads to the nearest port suitable for export/import, 250 km from the project area. One of the main national power lines passes the mill location at a distance km: of about 20 km: All power in the country is generated in thermal power plants, using off-shore oil as fuel. Since the Government favours export of oil, the power rates are artificially high, equivalent to US$ 75/MWh. The national grid also accepts to purchase surplus power from the industry, at a rate equivalent to US$ 30/Mwh.
11.
ECONOMIC CLIMATE
Although the country some years ago was in considerable economic difficulties with an annual rate of inflation over 400 percent, there has been noticeable improvements in the economy since the new government was installed 12 years ago. The rate of inflation has now been reduced to 18 percent and the outlook for growth in GNP is very favourable.
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GROUP WORK CASE 2
CONSTRUCTION OF NEW, MEDIUMMEDIUM· SIZED PLYWOOD MILL 1.
INTRODUCTION
The purpose of the exercise is for you as a group to jointly prepare a plan for construction of a new plywood mill, with a suggested capacity of about 20 000 m3/year. Please note that you are llQ1 expected to provide drawings of layouts. The conceptual plan is most important and requires that you clearly identify problems which may arise under the specific conditions described below and specific solutions which may need to be found. Please note that there is no single' correct' solution to this exercise. You are therefore free to solve the problems as perceived within the fixed set of conditions given in the case description.
2.
FOREST RESOURCES AND WOOD SUPPLY
The privately owned plywood mill company will establish the mill inside a 150 000 ha forest reserve for which they have obtained a 20 year renewable concession. Of the area under concession, 10 percent is considered difficult to access (mainly swampy areas) and 5 percent is classified as protection forest. Although the forest was partially logged in the past, utilization was highly selective and concentrated on the most easily accessible sites along the main river flowing through the area. The local population has traditionally extracted firewood, small quantities of timber and non-wood forest products . . Deforestation has occurred on sites most suitable for agriculture. It is foreseen that some parts of the forest may have to be managed by the local communities and that traditional rights to extract non-wood products must be honoured. A recent inventory carried out by the Forest Service 'Service showed that the 3 average net volume of all species was 86 and 110 m /ha for trees with a diameter at breast height (DBH) (DB H) larger than 60 and 40 cm, respectively. The six most desirable plylog species comprises 20 percent of these volumes. The inventory also shows that the volume is highly variable, in some places reaching values as high as 260 m3/ha total volume over DBH 40 cm, while commercial logs are virtually absent in others. The inventory gives no account of trees smaller than DBH 40 cm or on the ongoing natural regeneration.
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Research carried out in the area shows that the average periodic annual increment of the desirable species is between 0.30 and 0.50 cm in the 25-60 cm diameter class. These increments are expected to increase by 60 percent after harvest and by 100 percent if improvement thinning is carried out. Ingrowth is estimated to be between 4 and 10 percent and 50 percent higher after improvement thinning. The concession requires the felling cycle to be not less than 40 years. The enterprise is requested to draw up a forest management plan that will pay due respect to the principle of sustained yield and include appropriate measures for regeneration of the desirable species. They are further required to utilize as many of the species as possible, not only those which at present are classified as category 1 species. The annual rainfall is approximately 2 300 mm and logging can only take place during 8 months of the year. Road construction is made difficult by the heavy clay soil conditions. However, good quality gravel is available close to the hydroelectric dam site. Soils are easily compacted with negative effects on regeneration and the concession agreement requires that the logging system is designed to minimize such damages to the ecosystem. Arsenic has been banned for poison-girdling.
3.
MARKETS AND MARKETING
Because of high population pressure the domestic market potential appears good, particularly for lower-grade export rejects, but at low prices. There is likely to be resistance to the new product from the established wholesale/retail building products network which is selling imported plywood. Export potential for the better qualities is constrained by poor storage facilities at the port and lack of regular call by vessels. This has resulted in high freight charges. Introduction of new production on the export market is difficult, with considerable price competition from production exported from neighbouring countries. There is currently no GSP quota for Europe and the USA. 4.
PROCESSING
Two of the desirable species are hard to peel. The same applies to some of the less desirable species. High quality, imported peeler knives need therefore to be used. Residue disposal is expected to be a problem as there is no present industrial use for them.
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5.
SOCIO-ECONOMIC ASPECTS
Two different population patterns are observable in the project area. Around the forest, from the immediate vicinity outwards, there is a high population density (300-700 person/km person/krn2). Agriculture, based upon ploughing, animal husbandry (mainly stable feeding) and tree husbandry in combination with employment or selfemployment in the local agro-industry are major means of income generation. The production is market oriented and land is privately owned. In general, this population is well integrated in tile local economy. Even during the present state of economic stagnation, the people of this category still manage to live fairly well, consuming their own products. In the forest, on the other hand, there are two different indigenous groups, both of which live entirely off the forest by collection of non-wood forest products, hunting, collecting medicinal plants, etc. Most of this is sold at the markets in the nearby villages and towns, reached by using the local 'river buses' - powered dugouts. Shifting cultivation also forms an important part of their production, mainly for subsistence. Each family uses about 1 ha of forest for three years before moving on to new land. One of the groups prefers to use secondary forest land, whereas the other by tradition uses mature forest. Part of the economy is also based on the selling of logs. It is estimated that the total number of forest dwellers in the area is about 20 000. They have limited contact with the society outside the forest, except when going to the market to sell their produce. Due to high population growth in the country there is pressure on the forest land from the people living outside the forest. This is caused not only by individual farmers expanding their activities into the forest, but also by urban commercial groups, clearing the forest land for commercial crops, often employing shifting cultivating farmers on a contract basis, with some mechanization involved. There is very limited control exercised by the district authorities of these activities.
6.
HUMAN RESOURCES
An abundance of qualified and unskilled labour is available locally with . experience offorest and· and'related related operations. Because of the local agro-industries, the cost of labour has increased so that it is now quite high in comparison to over-all domestic labour costs. Fringe benefits form an important part of the cost - about 40 percent. The average annual turnover of labour and staff in the area is about 33 percent.
7.
ENVIRONMENT
As men~ioned under Section 5, the environment is of considerable value to the local people. There is a river flowing through the forest with a dam/reservoir, which provides the provincial capital city with power and water.
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The fig trees which grow along the river provide a locally unique habitat for the endangered black and white colour monkey. 'Dieback' disease in adjacent areas requires that quarantine regulations be applied to transport activities to prevent the spread of the causative fungus.
8.
INSTITUTIONS
Very good educational facilities (primary and secondary schools) as well as excellent specialized training facilities, with technical as well as managerial programs are available in the area. A 20 year concession agreement has been negotiated with the district forest administration which is well staffed and is well known for its efficiency in monitoring the activities of the concessionaires. No log export is permitted. FINANCING Soft international loans (in foreign exchange) are available at a rate of interest of 12 percent through government banks, on the condition that the project is ecologically or socially oriented. Foreign partners are allowed to re-patriate 70 percent of their return on equity, whereas the remainder must be re-invested in the country. Credit in domestic currency is available for a maximum of 10 years at a rate of interest of 30 percent per year.
10.
INFRASTRUCTURE
The area around the forest has a well developed social infrastructure with schools, clinics, markets, etc. The local economy is reasonably well diversified with agroindustry, workshops, a few sawmills, shops and other service facilities. There are a number of fair-sized villages and townships in the area which provide a market for local produce and the social infrastructure, including educational facilities facilities.. The telephone network is well developed with fax and telex easily installed. The nearest larger town (population 40 000) with a railway station is 20 km away from the project area by a well maintained highway which starts at the hydroelectric dam, darn, 5 km from the project area. The nearest port suitable for export/import is about 90 km away. Access to the forest is at present provided by one all-weather road an a few older logging trails. All other roads will have to be constructed by the company. Electrical power from the hydro-power station is obtainable at a cost equivalent to US$ 30/Mwh. The industry is allowed to generate its own electricity, but in that case connection to the national grid is not allowed, not even for back-up.
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There is a medium-sized sawmill close to the nearby town and several sawmills near the port. These have shown interest in purchasing logs not suitable for plywood from the area.
11.
ECONOMIC CLIMATE
The economy of the country has stagnated due to original emphasis of the economy on commodity crops, the prices of which have dropped alarmingly. The rate of inflation has been constantly around 25 percent over the past 15 years.
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GROUP WORK CASE 3 REHABILITATION OF MEDIUM-SIZED SAWMILL 1.
INTRODUCTION
The purpose of the exercise is for you as a group to jointly prepare a plan for rehabilitation of a sawmill. Please note that you are !1Q1 IlQ1 expected to provide drawings of layouts. The conceptual plan is most important and requires that you clearly identify problems which may arise under the specific conditions described below and specific solutions which may need to be found. Please note that there is no single' correct' solution to this exercise. You are therefore free to solve the problems as perceived within the fixed set of conditions given in the case description.
2.
FOREST RESOURCES AND WOOD SUPPLY
- The medium-sized sawmill was set up some years ago at the limit between a large plain and an extensive mountain range. Due to dwindling resources and the extension of agriculture the management now has to face the fact that the timber from the easily accessible plain area will be exhausted within the next ten years. The alternative resources which are considered are those of the hill area, where accessibility will become increasingly difficult and where the government has banned logging on slopes exceeding 35 percent. Furthermore, the nearest hill forest is located between a game reserve and a national park. The Government is therefore certain to introduce a series of restrictions on management of this area, if the concession for its utilization is sought. The installed input capacity of the mill is 30 000 m3/year, but due to diminishing resources and badly maintained equipment, the present consumption has not in recent years exceeded 12 000 m3 /year. The mill only logs 8 out of the 20 species which grow to commercial sizes and only uses logs of a diameter above 60 cm, since the equipment was designed for large logs. The deciduous forest available to the mill on the plains covers about 10 000 ha. It was high-graded in the past and now contains an average volume of 15 m3 /ha of logs of the desired species, larger than 40 cm in diameter, but an additional 10 rn m3/ha could be obtained if species not utilized at present were included. There is no recent inventory, however, to confirm the reliability of this estimate, and there are no estimates
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of the smaller diameter classes. Because of the need for agricultural land the Government has indicated that most of the remaining forest on the plain may be eventually converted to agriculture. It has also implied that part of the remaining forest may be converted to industrial tree plantations, on the condition that agro-forestry concepts are applied in their establishment and that the non-industrial volume be converted to fuelwood and/or charcoal. The prices for these products have increased year, but water from mm/year, sharply in recent years. The precipitation on the plain is 1 200 mm/ the hills is available for irrigation. The hill forest is basically inferior to the original plain forest, from an industrial point of view, although it today contains higher volumes of wood. The forest areas for which a concession may be sought (with the restrictions mentioned above) covers about 5 000 ha. The average commercial and economically accessible volume is 15 m3/ha of logs of a diameter above 60 cm and 30 m3/ha of logs of a diameter above 40 cm. Half of these volumes consists of the traditionally desirable species. Only 50 percent of the volume available is accessible with the equipment used by the mill at present. The remainder can only be extracted with cable systems.
3.
MARKET
As a result of poor product accuracy, customer acceptance and the prices are very low in domestic markets. On the other hand, production volumes and quality are too low to support any export initiative.
Residue volumes are high and their disposal is an added cost, despite a relatively high population in the area and in the country as a whole. There is an overall undersupply of sawn goods in the country, but the long distance to the nearest large town, unreliable and uneven deliveries and distribution coupled with poor product image have caused loss of market share and price reductions. Poor liaison on production planning causes build-up of stocks of unsaleable size. The Forest Research Centre has excellent data on properties and uses of a large range of presently 'non-commercial' species. However, no investigations or promotional efforts have been made in either domestic or potential export markets.
4.
PROCESSING
The sawmill has an imported band saw head-rig which suffers from spare part problems as the original stock of spare parts has been exhausted. Unfortunately the mill management was not informed about this until it was too late to order imported spares in time. Local substitutes have been used as a temporary measure which has resulted in poor cutting accuracy and frequent stops of operation. This has aggravated the production problems caused by insufficient log supply.
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Two band re-saws are used, not only for splitting slabs and squares but also for edging. There are no feeding devices and the line-bar is a bad shape. As a result, the re-saws are inefficient and give poor cutting accuracy and poor results of edging.
The mill has no preventive maintenance scheme - maintenance consist only of repairing broken-down equipment as the need arises. The mill has residue disposal problems since only a fraction of the residues is used as fuelwood by the local people.
5.
SOCIO-ECONOMIC ASPECTS
The sawmill was built about 18 years ago and it is the major employer in the area. The technical staff and all supervisors are all from outside the area and moved in from the second largest town in the country. The labour force, on the other hand, consists entirely of local people which are first generation employees. They have received a minimum of training and bottlenecks in production in the past have been 'removed' through employment of more unskilled labour, which has been considered 'cheap'. As a result, the mill is heavily over-manned. The rate of accidents is high, and drinking on the job is a common problem, maybe due to lax organization and supervision. Women are employed, mainly for sorting and packing parquet wood, but since the production of this is erratic due to unreliable supply of raw material, they are employed as temporary labour only. As they are paid piece rates, their actual pay is very low and there are very few incentives for work. Most of the families of labour have other sources of income, farming, cattle raising, petty trade, to supplement the low and fluctuating income from the mill. The forest area from which the mill gets its raw material is heavily encroached by settlers who enter by means of the roads established in the forest. Encroachment is not a new phenomenon in the area, but it has increased since the mill was established. This is partly due to the increased access to markets through the improved road network created for the mill. Shifting cultivation also appears to give a higher income per man-day of work than working in the mill. The raw material supply is based on the use of contractors who have their own labour from the coastal area, camping in the forest during the logging season. The loggers grow food crops in the forest area to supplement their income. The supply of logs is uneven and the adherence to dimensional standards is lax. The relationship between the migrants - the technical staff and supervisors - and the local labour has never been good. The local people feel they receive very little benefit from the activities of the mill. In particular they perceive the logging operation as a disturbance and a violation of their traditional rights of use of the forests.
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6.
HUMAl'I HUMAl'J" RESOURCES
Most of the workers in the mill have learned their trade by word-of-mouth methods. Accordingly they know how to operate the equipment in general but have no consciousness of quality or cost~ The organizational climate is very poor and the workers tend to work in an atmosphere of passiveness. In some instances supervisors have been selected among the ranks of workers, trying to appoint those with initiative and operational skills. Their knowledge of management techniques is, however, very poor. Although there is a low turnover in the labour force, absenteeism is high due to chest problems and drinking. The company has no training facilities; new employees are merely trained on the job in a very deficient way.
7.
ENVIRONMENT
The new concession area is located between a national park and a game reserve. During the wet season (two months a year) there is considerable migration of large mammals through the forest between the protected areas. The existing operation is generally wasteful; in addition to the generation of process waste mentioned in Section 4, there is the waste of large quantities of branch wood left on the forest floor. Fire has been a frequent problem in the plain forest area. Encroachment from various groups is growing and the encroachers supplement their cash income by hunting and producing biltong.
8.
INSTITUTIONS
Although concession contracts stipulate preparation of a forest management plan, very little is done by the forest adminstration to monitor that it actually is implemented. This is due to very low royalties on timber which have not been changed since 1965. The reason for this is that new royalties have to be approved by the parliament and, although increases have been proposed on several occasions, no approval has been obtained. Fiscal incentives have been established for use of lesser-used species - sales of such species are exempt from excise duty. The labour legislation is very strict, but the workers are not very well organized, except the skilled ones, which are in minority and prefer to be so in order to safe-guard their own interests. Unskilled workers are usually paid below the official ffilillmum ITIlll1mum wages. There are no specialized training facilities for forest industries in the country. 80
The sawmills or forest industries are not organized into an association and often the entrepreneurs prefer to have it that way, if they have their own good, personal contacts with the government officials relevant to their activities. Foreign exchange is available, but for commerce there is a preferential rate of exchange, compared with the tourist rate, which can only be granted on application. Due to under-staffing in the Ministry of Finance, approval of an import license for, for instance spare parts, may take up to one year.
9.
FINANCING
The company has had cash flow problems mainly due to the low level of capacity utilization. They also have poor relations with suppliers of raw material due to delays in payments. Commercial loans are available in local currency from local banks at a rate of interest of 12 percent. Foreign currency, if approved by the Ministry of Finance, is available as well. The rate of interest depends on the source, but is usually between 11 and 14 percent. However, the company has very little margin for repayment of loans and for this reason suffers from lack of short-term credits in the form of over-drafts. It is also operating near the break-even point, so new venture capital is not available internally. Foreign partners may re-patriate all their return on equity.
10.
INFRASTR UCTURE
The transport infrastructure was adequately developed for the mill when it was established, but is now in need of maintenance. This has aggravated the wood supply situation, caused by shortage. An adequate township with social and medical facilities was established for the mill management, technicians and supervisors and telecommunications are fully appropriate for the mill. Schools are available at a distance of 20 km from the mill, with a company school bus transporting the children from the township and back every day. The nearest large town, with railway connection, is at a distance of 120 km from the mill.
The mill is connected to the national power grid from which it gets all its power requirement at a cost equivalent to US$ 48/Mwh. 11.
ECONOMY
The economy of the country is growing very fast. The rate of inflation has been steadily at 6 percent for the past 4 years.
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12.
PRESENT PRODUCTION CAPACITY
The mill has an input production capacity of 30 000 m3, with an expected output of 15 000 m3 , but due to the present problems, the output has for some time not exceeded 6 000 m3 /year.
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GROUP WORK CASE 4 REHABILITATION OF LARGE PLYWOOD MILL 1.
INTRODUCTION
The purpose of the exercise is for you as a group to jointly prepare a plan for rehabilitation of a large plywood mill. Please note that you are !1Q1 llQ1 expected to provide drawings of layouts. The conceptual plan is most important and requires that you clearly identify problems which may arise under the specific conditions described below and specific solutions which may need to be found. Please note that there is no single' correct' solution to this exercise. Your are therefore free to solve the problems as perceived within the fixed set of conditions given in the case description.
2.
FOREST RESOURCES AND WOOD SUPPLY
The large plywood mill was established about five years ago inside the large virgin tropical mountain forest reserve. A pre-investment survey indicated that the 130 000 ha reserve could provide 40 000 m3/year of high quality veneer logs under sustained yield management. Only trees larger than 60 cm DBH would be logged. A more detailed inventory carried out by a foreign firm, who had shown interest in buying the veneer and/or plywood seemed to confirm the results of the pre-investment survey. The mill was accordingly built by the Government with a design input capacity of 40000 m3/year. When logging had been going on for a year it was discovered that practically all the logs of the main species (accounting for 30 percent of the log volume) were severely damaged by a wood borer and the logs were declared unsuitable for peeling. At the same time, the logging section was unable to provide the required log volume on time. Since no adequate topographic map was available, road construction was carried out on an ad hoc basis by the Government's Roads Department which did not coordinate their activities with the logging section. The result was that logs piled up in the harvesting unit and many of them were severely damaged before they could be transported to t,t.he mill. All logging was carried out by conventional systems which have cause excessive damage to the residual trees and heavy erosion.
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A post-harvest regeneration survey revealed that the prescribed silvicultural system of cutting only very large and mainly over-mature trees did not provide enough light for the desirable species to establish themselves in sufficient quantity, but enough to attract browsing animals that by and large eliminated the established desirable plants. About 65 percent of the area is considered accessible with cable systems. The remaining 35 percent are steeper than 120 percent or too isolated to be logged. The inventories carried out showed the following volumes of desirable species: Forest Type I Il 11 III IV
Area, ha
30000 40000 15000 45 000
Trees> 60 cm DBH 1 000 m3 900 900 300
Trees> 40 cm DBH 1000 m3 30 000 32 000 ~O
------- Inaccessible -------
Approximately 80 percent of the larger than 60 cm DBH volume was originally considered suitable for peeling. However, the discovery of the borer damages has changed this estimate. Furthermore, the logs were found to be generally to bent/ crooked for peeling, added to which the erratic bucking by the loggers reduced the peelable volume even further. The Government is now faced with a dilemma: It can either close down the operation with the consequence of loosing a major part of its investment and a lot of prestige, or change the mill and/or forest management system. A change of ownership may also be considered.
3.
MARKETS
Morale in the marketing department is very low. Having been geared up for the expected sales of up to 20 000 m3/year, the current 4 500 m3/year production gives little incentive or need for marketing activities. Because the present production volume is so low and unreliable, previous export market contacts have been allowed to lapse and a 'take it or leave it' attitude towards markets within easy reach has resulted in a bad corporate image both at home and in the neighbouring country, which otherwise would constitute a major market. As the mill is to be rehabilitated there is now a requirement on contingency planning for marketing possibly both an increased volume of plywood an sawnwood from small sized and non-ply species.
There is a Government export levy on sawn timber export of the major species. This amounts to the equivalent of US$ 50/m3• Consequently the domestic market is already well supplied by other sawmills in the country.
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The plywood market is undersupplied and supplemented by import of particle board for the neighbouring country at low prices. The country has lost is previous GSP quota as low production has led to no export availability.
4.
PROCESSING
The mill is 5 years old and in good condition, although some signs of inadequate maintenance is beginning to show. The mill was design for large diameter logs from the natural forest and is equipped with 8 feet lathes which can peel down to a 7 inch core. There is no sawmill in the area, or within reasonable distance, which could use logs from the same resource.
5.
SOCIO-ECONOMIC ASPECTS
The entire labour force consists of migrants with previous experience who came to the site to seek employment. They live in a township near the mill, separately from the indigenous population, with a school and a clinic, exclusively for company employees. There is a substantial area inhabited by squatters, looking for temporary employment with the mill. The loggers are employed by the mill. They have had very little training and in the process of logging, substantial quantities of waste are being generated. Some of the loggers are local people, other from the area outside or squatters. They are employed on a daily basis. The original population consists of small farmers with livestock, with a substantial part of their cash income derived from shifting cultivation of cash crops. This is continuously increasing and a threat to the wood supply. The army also has some logging activities in the same area. Since the mill started, the cash economy has increased steadily which has made available items such as radios, consumer goods and bicycles. New bars have also been established and increased the demand for cash income. The traditional agriculture is mainly for subsistence only. In general there has not been and is no industrial tradition in the area. The local people are adverse to work in the mill, since it would force them to give up . farming and shifting cultivation. Employment is also an alien concept to them. The need for migrant labour for the mill and logging activities pose a serious problem. The different lifestyles of the two population groups coupled with differences in cultural values, economic differentiation and perceived (and real) future prospects as well as unequal access to social services and consumer goods probably
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contribute to this. It is difficult to foresee a change in this conflict, unless positive action is taken. When the mill was planned, there was no dialogue with the local authorities or the local population. No consideration was given to the prevailing socioeconomic conditions in the area. 6.
HUMAN RESOURCES
The mill workers have been reasonably well trained by expatriates in the operation and maintenance of the equipment and used to working with quality standards. Due to the fact that this is a subsidized, government-owned mill, most employees have little motivation and incentive to work at a productive pace. Supervisors show little initiative. The managers, with certain exceptions, are politically appointed people with few managerial and technical skills. Turnover is low and there is a high rate of absenteeism, especially on Mondays. The people employed in the logging operations is predominantly insufficiently trained which has resulted in somewhat erratic bucking of the logs to lengths of great variety, with a tendency towards lengths of sub-standard dimensions. The logging crews also have difficulties in adapting to the harsh climatic conditions of the logging areas. Labour costs are high, due to the many fringe benefits (65 percent of pay).
7.
ENVIRONMENT
The forest is on very steep land. Soil is being lost due to inappropriate logging operations and regeneration has consequently been very poor. Owing to badly constructed haul roads, landslides are beginning to occur during the wet season. The forest is in a watershed which provides water for irrigation agriculture downstream. Deterioration of water quality is now a problem and silt deposition is affecting the water control and distribution structures. Many of the mill workers suffer from chronic industrial eczema.
8.
INSTITUTIONS
The mill is owned by the government and under the adminstration of the Ministry of Industry, whereas the forest operations in theory fall under the responsibility of the Ministry of Agriculture. However, since the forest adminstration in that ministry is very weak, there has been very little monitoring of field operations. 86
The lack of training of workers for logging and in forestry operations is well manifested. There is small local training centre which operates more like traditional school with much theory and very little practical instruction. Most of the qualified mill labour has had to be brought from elsewhere and housing and a school provided by the enterprise,. 9.
FINANCIAL
The operational margin of the company (net sales - direct costs) is insufficient to cover fixed cost. Therefore, the government is covering the deficit through budget allocations. If the company could operate at full capacity, the return on the assets would be extremely good (up to three times the average interest rate on the financial market). The company has access to long term loans at very good rates of interest (12 percent) from the government development bank. 10.
INFRASTRUCTURE INFRASTRUCfURE
Although what was considered adequate logging and transport infrastructure was established at the time of the construction of the mill, experience has shown that, due to the terrain and soil characteristics, the logging infrastructure is deficient. Otherwise there are good telecommunications and transport facilities to and from the area consist of one major metallized road. The mill is, however, located in a remote area of the country. The distance to the nearest town, bordering the neighbouring country is 50 km. There is a power line going past the mill, providing power at a cost equivalent to US$ 35/MWh. Because of the harsh weather conditions due to the high altitude, the area is closed to all forest operations during four months a year. 11.
ECONOMIC CLIMATE
The economy of the country has somewhat stagnated but there are good prospects for improvements. The rate of inflation is going down and is now at 15 percent. 12.
PRODUCTION CAPACITY
The design capacity of the mill is 20 000 m3 of plywood, assuming a raw 4 500 m3/year. material input of 40 000 m3/year. The actual production has been only 4500
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