Market Dynamics in Timber
Procurement
2007 TAPPI Engineering, Pulping & Environmental Conference
Authors: Kendra C. Taylor, Paul M. Griffin, and Joel S. Sokol
Presented by Kendra C. Taylor, Ph.D.
Senior Consultant
Booz Allen Hamilton
October 23, 2007
Agenda
 Procurement Process
 Overview of B2B Auction Environment
 Analysis
 Conclusions & Summary
1
Agenda
 Procurement Process
 Overview of B2B Auction Environment
 Analysis
 Conclusions & Summary
2
The focus of this work centers on the procurement transaction that
occurs between timber suppliers and mills in the Southeastern U.S.
Generic Pulp & Paper Supply Chain
Procurement
Suppliers of Wood Fiber
Mill (Convert to Pulp then Paper)
Distributor
Retailer
Consumer
3
Trends in timber procurement indicated changes in consumption
of timber by mills and in the processes and technology used
 Recycled fiber is replacing virgin wood fiber as an input for paper production
– Government mandates and environmental regulations (1990s)
Recycled paper use in US mills projected to grow from 25% in 1998 to 36% in
2040 while timber consumption decreases from 50% to 30%– (Skog et al., 1999 )
 Mills have begun to alter their production process & sell timberlands to private landowners
Become more dependent on suppliers for wood fiber
(Hillstrom, 1994)
 Mills slowly began adopting e-commerce in 1999
(Shaw, 1999 and Vlosky, 2001)
4
Mills were adopting e-commerce for timber procurement but less
than 50% of auctions attracted 1 or more timber companies to bid
 Goal of auctioneers: aggregate supply
 Out of 507 auctions, 58% did not attract 1 or
more bidders
Auction Participation on Timber
Exchange, 2004
42%
58%
Single Bidder
Multiple Bidders
 Internal and external factors may lead to
plausible explanations
Source: Company data of an anonymous timber exchange, 2004
5
This finding is interesting given the ratio of loggers to mills in the
Southeast was ample to serve as a base for auction bidders
 Context
– In the United States, private individuals and firms own roughly 71% of all timberlands with
the balance owned by the government or public agencies *
– Most timber purchased in the U.S. is purchased from thousands of private land owners
– Many landowners work with consultants to sell the rights to cut the timber on their land
– Timber companies add value to timber by logging it and delivering it to a pulp and paper mill
– There were roughly 92 mills operating and procuring timber in the Southeast and roughly
26,000 loggers working in the Southeast in 2004*
* See published manuscript for all sources
6
Additionally, timber companies can sell timber to pulp and paper
companies via long- or short-term (spot market) contracts
Participants in the Procurement Process
Land Owners
Sells timber via a sealed bid auction (aided by a consultant)
Timber Companies
Sells timber to pulp & paper mills via contracts/spot market transactions
Pulp & Paper Mills
(Buyers)
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Agenda
 Procurement Process
 Overview of B2B Auction Environment
 Analysis
 Conclusions & Summary
8
A third-party online exchange for timber provided a platform for
business-to-business auctions
 Auction & Bid details
– Auctions typically lasted 1 week
– Each bid included a quantity & a price
– Each request for bids included the auction length, delivery location, bid increment,
description of the good, volume and reservation price
 Marketplace details
– The price paid for timber changes as new tracts of timber are logged (includes price of
timber, logging costs and hauling costs)
– High number of sellers relative to the number of buyers
9
Mills used reverse auctions to gain visibility into the available
supply of timber and to aggregate that supply
 Reverse Auction Design
– Auctions held at random times over 10 months
– The good up for auction was delivered timber
– Multiple winners (timber companies) possible
– Price-quantity bids: winners chosen based on price first
– Reservation price was set
10
Agenda
 Procurement Process
 Overview of B2B Auction Environment
 Analysis
 Conclusions & Summary
11
Factors internal and external to the auction details and design
potentially influenced the amount of timber supplied online
 Internal factors – includes activities in which a bidder/auctioneer may behave strategically
– Auction design
– Rules
– Outcomes
 External factors – affect the availability of the timber supply to the logging company
– Not easily accounted for in auction data
– Influenced by external market factors
12
Key measurable factors were selected for the regression analysis
 Internal Factors
 External Factors
– Demand*
– Supplier capacity
– Reservation price*
– Weather patterns*
– Pricing rule*
– Substitute market (e.g. recycled fiber)
– Type of Good*
– Competing products (e.g. satellite chip mills)
– No. of bidders*
– Favoritism/relationships
– Length of the auction*
– Little/no access to Internet
– Delivery location
– Long-term contracts
*Factors used in analysis
13
A preliminary review of the internal factors considered, indicated
that the description of the good might impact auction participation
 Custom goods included a ‘custom cut’ description in the product line
– Accounted for 62% of the auctions
– Accounted for 82% of auctions initiated that concluded with zero bidders
 Prices for custom goods were statistically different (higher) than standard prices
 Custom goods had a statistically different number of bidders (lower)
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The external factor of wet and cold weather makes logging difficult
and dangerous causing adverse affects on timber availability
 Two measures of availability of supply
– Precipitation
– Keetch-Byrum Drought Index (KBDI)
Used by U.S. forest service to measure drought
Considers precipitation, temperature and evapotranspiration
 Both the expected and actual values of these two measures were considered to check whether
the prediction of weather or the actual weather was a stronger influence
15
Observations from KBDI climate divisions across the Southeast
and were matched to softwood timber production for input data
Softwood Timber Production, 2001
Climate Divisions Across Southeastern States
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Regression analysis was used to determine that four factors were
most significant in influencing the volume of timber transacted
 Which internal factors most influence the
volume of timber transacted online?
– Number of bids
– Demand
– Description of good
– Reservation price
Variables
β
t-value
Constant
-784
-3.7***
Descrip
592.6
2.96***
ExpPrecip
105
0.86
ActPrecip
-205.9
-1.81*
ExpKBDI
171.2
1.59
Demand
0.13
3.97***
Res Price
13.32
3.13***
BidCat
391.5
2.07**
BidCat*Res Price
8.46
2.48***
ExpPrecip*Demand
-0.07
-1.86**
Exp*BidCat
254
2.06**
Demand*ExpKBDI
-0.12
-3.61***
Res Price*Descrp
-10.6
-2.99***
ActPrecp*Demand
0.12
3.22***
Demand*Descrp
-0.05
-2.19**
Demand*BidCat
0.22
11.19***
*** p<0.01, ** p<0.05, * p<0.10, Rsq=71.9
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Agenda
 Procurement Process
 Overview of B2B Auction Environment
 Regression Analysis
 Conclusions & Summary
18
Conclusions
 Plausible explanation for low bidder participation: The online exchange appeared to be used
to check availability of custom cuts of timber and to transact standard timber
 Reservation price is correlated with description of good, but not with the # of bidders, supply
or demand
– Suppliers have no price incentive to withhold supply in favor of a better price –
Discriminatory auction
 Successful auctions occurred more often for standard goods although some commodity
goods such as plylogs were successful as well
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Summary
 Contribution to empirical research with study of data from timber auctions between businesses
 Provide managers realistic description of past online auction performance
 Suggestions of data to capture for future studies that may indicate certain
behaviors/preferences of participants include:
– Number of invited bidders
– The tracts from which timber is logged
– Geographic location of mills may
 First study of timber auctions between logging companies and mills
 Determined factors that had significant affect on timber volume transacted online
 Found plausible explanation for low aggregation of timber supply
20
This research was made possible due to support from several
organizations and programs
 David and Lucile Packard Foundation
 FACES Fellowship Program
 SREB Doctoral Fellowship Program
 Center for Paper Business and Industry Studies
 ForestExpress
 International Paper
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