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.

SupplyingWoodtothe 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 timberholdings.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 Pileshould be.Hesatthinkingthroughwhathispositionwould beattomorrow'smeetingwhenthis would again be the topic for discussion.

TheMeeting-June28,1988

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). Desmondbegan the discussion.

Youbothremember,Iamsure,theterribleproblemswehadin1984whenwe exhaustedTheBlockPileandhadtobuywoodlocallytokeepthemilloperating.Thesame factors which caused us to run out - high paper demand and a long freeze, affected a numberof 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.

HarveyWilsonfrowned,tuggedathismustache andsaid,

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-fourwas 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.

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

Harveybroke 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 cutthat 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?

Jacquesresponded:Well, we feel pretty comfortable with evaluating our full cost for cutting a cunit1at $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 havetoputalogonthetopofthepileandthenlater senditintothemillbyconveyorfromthe 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 operatethroughtheentirewinteratfullcapacity.Thatmeanseachweekwewill useup4,800 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 thefallwhenwemoved logsdirectly from theboom into the mill.From ouroperating records I could also learn the earliest date in each year on which logs from the river were again usedin production.

Ashepassedasheettoeachoftheothers(seeExhibit2)headded:

1.Acunitwasaunitofmeasurementcorrespondingtoonehundredsolidcubicfeetof 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 fromheadquarterstalking aboutinternalcostoffunds butcomethespring iftheriverisfrozenand 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 SizeofBlockPileatBeginningandEndofFreezebyYear

	SizeofPile in Fall	SizeofPile in Spring
Year	(000of Cunits)	(000of Cunits)
1982-83	100	12
1983-84	100	a
1984-85	125	40
1985-86	113	27
1986-87	110	5
1987-88	110	28

a*ThePilewasexhausted12,000cunitsofwoodwerepurchased locally.

Exhibit2 LengthofFreezeofMoneskeg

RiverbyYear1978-1988
Year	Freeze in NumberofDaysa
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 couldarriveinthefalltothefirstdayonwhichlogs arrived in the spring.

Question: 

How large should the block pile be at the start of the coming winter?