MSR Grade Yields: Commentary  1.0
 by
 James D. Logan, P.E.  
President, Metriguard Inc.  
www.metriguard.com
8 Oct 98

Profit is the only reason for establishing a business in the private sector free market system. So let's look first at your company's money-making equation.  Even the most complex financial report boils down to:

 Profit = Revenue - Cost

Revenue
We will focus on revenue from operations derived from the sale of goods.  Operations revenue can be increased by increasing the volume or the selling price, or both.  For a company that makes a number of products, the revenue is the sum of all the extended invoice prices.  If the average of the unit prices can be improved, then the extended prices and revenue are improved.

Most sawmills are limited in one way or another in respect of the volume that can be produced.  These limitations result from bottlenecks that limit mill capacity, market acceptance volume or from resource limitations.  Resource limitations are trending downward in many areas, and in some cases have virtually disappeared causing closure of sawmill operations.

The bottom line is that you generally have to make the best of the resources you have available.  At this time most sawmills have squeezed all the volume they can get from reduced kerf widths and target sizes.  This leaves improvement in average unit prices as the only remaining avenue for revenue improvement.  If you manufacture lumber products, then improving grade yield is the best opportunity you have to improve revenue.

Here we will define a higher grade as a grade that sells for a higher price.  For purposes of this discussion, the properties of the material in the grade are not important.  If we can effectively move material from a lower grade to a higher grade, and then sell the product at the market price of the higher grade, we can improve revenue.  The more material we can move to a higher grade, the more we can improve revenue.

Shifting volume from a lower grade to a higher grade can reduce the unit value of the lower grade, so we need to consider the total value of both the lower grade and the higher grade as we as we seek to maximize the revenue.  The value left in the lower grade must be offset by a larger improvement in the higher grade value.

MSR grade yields are affected by equipment type and condition.  Higher accuracy and repeatability allow the user to select a higher grade yield.  Metriguard provides the most accurate MSR equipment in the market, and therefor the highest grade yields.  Our repeatability testing and maintenance assistance programs help assure that the accuracy is maintained.  One can always reduce the grade yields by increasing the grade threshold settings, but the optimum profits and grade yields are available only from the most accurate equipment.

Marketability of the lower grades is seldom harmed by extraction of material to higher grades.  There are a couple of reasons for this.  One of these reasons is that the lower grade will contain material with sufficient mechanical properties to make the higher grade, but was placed in the lower grade because of visual characteristics.  Each of these pieces improves the mechanical properties of the lower grade.  Assuming the visual graders are doing their job correctly, the lower grade will contain only pieces which are visually acceptable for that grade.  Numerous tests have confirmed that the mechanical properties of the visual "downfall" grade, either Standard & Better or #2, is acceptable and meets the design requirements.

Cost
Cost includes all money spent in the operation.  Improvements in revenue are seldom obtained without some attendant increases in cost.  These cost increases are in the form of capital investment in equipment and added personnel or training which increases cost of operations.  Capital purchases are usually handled separate from other costs.  Most every company has an organized method of putting capital purchase proposals to a test to determine if projected revenues will be sufficient to justify implementation costs.

Before a proposal can be made for an investment, the opportunity must first be recognized and evaluated.  Some investments are made in equipment solely to reduce cost of operations, and thereby reduce the unit cost of production.  Labor-saving equipment fits into this category.  Other investments are made principally to improve revenue by producing new products.  MSR equipment purchases fit into this category.

Profits
When MSR equipment is purchased, it makes sense to buy the equipment that produces the best revenue improvement.  This is always the equipment with the best combination of high grade yields, low price and low cost of operation and maintenance.

Even if the grade yields are only slightly higher for a particular piece of equipment, a higher equipment price is quickly swamped out by the improved revenue that results.  When the better-performing piece of equipment comes in at a lower price and lower cost of operation and maintenance, and does not bottleneck production, there is simply no question that this is the equipment to buy.  For your best payback, you should put in Metriguard MSR equipment.

Incentives
Many sawmills are still managed using volume incentives.  Volume contests are held.  Salary raises and promotions are based on volume.  While this may have been appropriate years ago when resources were virtually unlimited, I submit that a profit incentive system is more appropriate now.  All aspects of the operation are rolled up in the profit, including the effect of purchases, sales, labor, training, maintenance and even accidents.  The profit incentive works in the right direction for success in every way.  Metriguard is dedicated to helping improve your profits.

How important is profit?  For many large-company mill operations, the profits are all sent away to the headquarters office, or so it may seem.  However, the more profitable divisions will be those which survive in a down-turn, and in those operations the raises, benefits and capital purchases are easiest to justify.  We see much more attention devoted to profits in single-mill companies where the owners spend a good deal of their time on-site.  This may explain the higher percentage rate of growth in many small companies.  If the same level of devotion to profit could be transferred to the larger companies their performance could be truly amazing.

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04/19/02