Stochastic programming to evaluate the benefits of coordination mechanisms in the forest supply chain

Abstract

In natural resource sectors such as forestry, supply is subject to yield uncertainty, which can make planning decisions a challenge. A common way of dealing with uncertainty is to coordinate the decisions so all units in a network can better prepare for unpredicted events. This can generate plans that are more robust and reduce the negative impacts of uncertainty. The objective of this study is to evaluate the benefits of including coordination mechanisms in a forest supply chain to better face yield uncertainty. First, a stochastic program is developed to simulate a sawmill production planning decision process, taking wood supply uncertainty into account. Based on this model, six coordination mechanisms are proposed to help reduce the impact of an uncertain wood supply. The impact of uncertainty is measured using the individual transportation cost of each sawmill, the overall network cost, the cost for replanning operations, the volume of extra resources needed, backorders, and the prescribed wood supply from forest sites to sawmills. Historical data from a partnering company in the province of Quebec, Canada, are used to quantify the current level of uncertainty. Compared to the typical strategy of Fixed Supply and Fixed Demand, the Free Supply with Free Demand mechanism generates plans with more stability, offering a 64% reduction in transportation cost, and a reduction of 84 % in the volume of extra resources to be acquired outside the regular sources at a higher cost to prevent production shortage.