Lessons from the South Pacific
Performance-based long-term contracts can work to everyone’s mutual benefit, proposes the director of an Australian harvesting company to a New Zealand industry group
Wherever loggers work – from North America to the South Pacific – they face the same challenges, including high capital investment in the latest machines and technology, training and retaining employees, filling mill quotas, and meeting landowner expectations. Ian Reid, director and general manager of Austimber Harvesting Gippsland, Victoria, Australia, proposes performance-based long-term contracts may be an effective solution.
THE BENEFITS OF LONG-TERM CONTRACTS
Mechanization and rapid technological advances have changed the dynamics of the forestry industry around the globe. Although these advances have made loggers more productive and efficient, long-term contracts help everyone within the supply chain reap the maximum benefits of technology, according to a presentation Reid made to the New Zealand Institute of Forestry.
Loggers in both Australia and New Zealand harvest mostly pine on large plantations, although most Australian contractors use primarily cut-to-length systems while New Zealanders employ full-tree methods. Logging in both countries is almost entirely mechanized. In fact, in New Zealand, the country’s largest landowners mandate that all ground-based harvesting and 80 percent of steep-slope harvesting must be mechanized.
Most plantations are owned either by the government or large corporations, which have long-term contracts with sawmills and processing industries but short-term contracts with contractors. When contractors have short-term contracts, equipment and technology investments and employee training commitments may suffer.
Currently most contractors are required to regularly rebid for work. On paper, accepting the lowest harvesting rate would seem to achieve the best return for the landowner. But Reid proposes that long-term contracts would actually be more efficient and cost effective.
The bidding process causes delays and disruptions in work, which come at a cost. Long-term planning is put on hold or abandoned. Contractors put off buying newer, more productive equipment, relying instead on older, less reliable machines. Operator training is postponed. Landowners meanwhile bear the cost of lost opportunities, inconsistent quality and production, and environmental damage due to poorly trained operators.
Contract renewal based on meeting reasonable key performance indicators (KPIs). Simply put, if a logger meets KPIs related to production goals and other quality standards, the contract is renewed.
This approach allows loggers to implement planned equipment-replacement programs, giving them more immediate access to the latest technology. Negotiated performance-based contracts also create a stable work environment, which encourages regular training programs. Trained operators will enable contractors to exploit new technology to the fullest. The cumulative effect of higher-quality equipment and well-trained operators is more efficient, productive logging.
These benefits flow straight through to the landowner’s bottom line, as the cost of harvesting and hauling wood is the single most costly process in the plantation cycle. There will still be a use for the bidding process, for example, for new work or for contractors who fail to meet KPI benchmarks. But through long-term performance-based contracts, landowners have more opportunity to clearly communicate their vision and future requirements. Contractors in turn can develop long-term plans for their equipment, training, management, and financial needs.
Data is key to making such an approach work. Today’s machines are capable of collecting a vast amount of data about the wood being harvested. Data is very beneficial to harvest planning and tracking production, but it can also be used by landowners to monitor and audit contractor performance. Renewable contracts should clearly spell out KPIs, time frames, and the review method. They should also be explicit about data exchange, for example, whereby landowners receive data about production, but data about machines would only be available to the contractor.
Ultimately, long-term performance-based contracts benefit all parties involved. Landowners maximize the value recovered from their forests. Contractors have the advantage of the latest equipment and trained operators. And mills, exporters, and other wood products producers benefit from more bountiful, higher-quality product.
Source: Ian Reid. “The power of collaboration in the forestry industry — a harvesting contractor’s perspective.” New Zealand Journal of Forestry, 63(4), 3–6.