Desmond O'Hara wiped the perspiration from his forehead, looked out his window at the green countryside on this warm day of summer and thought how the cold of the northern Quebec winters seemed always to affect his world. Today with the temperature in the high eighties he was worrying about the river freezing over and its effect on planning for his mill at Ste. Josette.

Supplying Wood to the Mill

The paper mill of Confederated Pulp and Paper, located in Ste. Josette, Quebec, was the largest of the company's seven mills. It produced newsprint operating continuously throughout a seven-day week. It had an annual capacity of 250,000 tons.

Wood to supply the mill was cut 120 miles north of the mill in the company's timber holdings. After the trees were felled they were cut into four foot lengths and floated down the Moneskeg River to the mill. During the open season on the river, logs were caught in a boom and moved directly into the mill as needed. The location of the timber lands and the mill made this an extremely efficient form of transportation.

The problems with this form of supplying the mill began when the river froze over in the fall and did not end until the spring thaw. To supply the mill during that freeze period an inventory of wood - The Block Pile - had to be built up before the freeze to last until the regular flow resumed. Every year it seemed there were extended and sometimes heated discussions of how big The Block Pile should be. He sat thinkingthrough what his position would beat tomorrow's meetingwhen this would again be the topic for discussion.

The Meeting June 28, 1988

Desmond, as the mill manager at Ste. Josette, held this year's meeting in his office at the mill. The other participants in the meeting were Jacques Leveque of the Woodlands division and Harvey Wilson an assistant treasurer from the home office in Montreal. Each participant had before him the information contained in Exhibit 1. This indicated the size of The Block Pile at the beginning of the freeze in each of the last six years and the size of the pile, if any, at the time the river opened again in the spring (this automatically became the start of the pile to be built for the following winter). Desmond began the discussion.

You both remember,I am sure, the terribleproblems we had in 1984 when we exhausted The Block Pile and had to buy wood locally to keep the mill operating. The same factors which caused us to run out - high paper demand and a long freeze, affected a number of other mills the same way. With that demand our local farmers were able to charge us an effective price of about twice what it cost to buy and ship logs from the North Country - and we had no alternative but to pay or shut down the mill. In fact, that's no alternative at all because the costs of stopping our operation and then restarting are prohibitive. But the point is this, the increased cost of wood wiped out all of the mill's profit contribution that year and in fact made the mill a drain on the company. I hope we can all agree at the outset that we will build The Block Pile big enough this year that we won't have a repetition of that fiasco.

Harvey Wilson frowned, tugged at his mustache and said,

We all recognize the problem and in fact sympathize with you on it Desmond, but remember there is another side to the coin too. Eighty-four was really bad luck. Not only did we pick up much more newsprint business than we had forecast but it was a devilishly long winter. It's not likely we'll run into that combination again. Certainly we can't do all of our planning protecting against every extreme contingency. Don't forget that The Block Pile really costs big money and we're not the old Cash-Cow we used to be.

Desmond continued: I'm not quite sure what you're driving at Harvey, surely the costs of making the woodpile an adequate one are very small. After all, we will use any left over wood the following winter.

Harvey broke in and said, That's not really the point Desmond. If we put too much wood on The Block Pile, it means that we have paid the loggers to cut that wood a year earlier than we needed to. It may not sound like a big deal to you, but our internal cost of funds is 20% per year, so tying up money in The Block Pile gets expensive. By the way Jacques, what kind of logging costs are we looking at in Woodlands now?

Jacques responded: Well, we feel pretty comfortable with evaluating our full cost for cutting a cunit1 at $47.50, about $23 of which is variable cost. In addition, the variable shipping cost when the log goes directly into the mill runs about $8.00. Of course, when you have to put a log on the top of the pile and then later send it into the mill by conveyorfrom the bottom it adds about $2.00 per cunit to the cost. What kind of demand do you people at Ste. Josette plan to place on us this year?

Desmond: Demand and our backlog are such that we are almost certain we will operate throughthe entire winterat full capacity.That means each week we will use up 4,800 cunits of wood.

The thing that bothers me is that how much wood I will need in The Block Pile depends not only on my rate of consumption of wood but on how long the river will stay frozen. Even the Farmer's Almanac doesn't give me the answer to that one and it really makes a difference.

When I looked back in our files I was able to piece together the length of the freeze in each of the past ten years. For each of the years I was able to get a good fix on the last day in the fall when we moved logs directly from the boom into the mill. From ouroperating records I could also learn the earliest date in each year on which logs from the river were again used in production.

As he passed a sheet to each of the others(see Exhibit 2) he added:

1. A cunit was a unit of measurement corresponding to one hundred solid cubic feet of wood.

2

Here is the record I was able to come up with. As you can see there are tremendous differences from year to year. Harvey, it's all very well for you to come here from headquarters talking about internal cost of funds but come the spring if the river is frozen and we're out of wood we'll be at the mercy of the local farmers again, just like '84. We'll be paying $65 a cunit [delivered to the mill] for sure. And that'll be in real dollars not funny money.

Exhibit1 Size of Block Pile at Beginning and End of Freeze by Year

	Size of Pile in Fall	Size of Pile in Spring
Year	(000 of Cunits)	(000 of Cunits)
198283	100	12
198384	100	a
198485	125	40
198586	113	27
198687	110	5
198788	110	28

a The Pile was exhausted12,000 cunits of wood were purchasedlocally.

Exhibit 2 Length of Freezeof Moneskeg

River by Year 1978-1988
Year	Freeze in Number of Daysa
1978-79	142
1979-80	151
1980-81	120
1981-82	148
1982-83	144
1983-84	170
1984-85	138
1985-86	146
1986-87	159
1987-88	130

a Number of days between last day on which logs could arrive in the fall to the first day on whichlogs arrived in the spring.

Question How large should the block pile be at the start of the coming winter? (Assume that it takes $1 to stack and $1 to un-stack a cunit of wood.)