Supply chain management of the Canadian Forest Products industry under supply and demand uncertainties: a simulation-based optimization approach

Abstract

The Canadian forest products industry has failed to retain its competitiveness in the global markets under stochastic supply and demand conditions. Supply chain management models that integrate the two-way flow of information and materials under stochastic supply and demand can ensure capacity-feasible production of forest industry and achieve desired customer satisfaction levels. This thesis aims to develop a real-time decision support system, using simulation-based optimization approach, for the Canadian forest products industry under uncertain market supply and demand conditions. First, a simulation-based optimization model is developed for a single product (sawlogs), single industry (sawmill) under demand uncertainty that minimizes supply chain costs and finds optimum inventory policy parameters (s, S) for all agents. The model is then extended to multi-product, multi-industry forest products supply chain under supply and demand uncertainty, using a pulp mill as the nodal agent. Integrating operational planning decisions (inventory management, order and supply quantities) throughout the supply chain, the overall cost of the supply chain is minimized. Finally, the model integrates production planning of the pulp mill with inventory management throughout the supply chain, and maximizes net annual profit of the pulp mill. It was found that incorporation of a merchandizing yard between suppliers and forest mills provides a feasible solution to handle supply and demand uncertainty. Although the merchandizing yard increases the total daily cost of the supply chain by $11,802 in the single industry model, there is a net annual cost saving of $17.4 million in the multi-product, multi-industry supply chain. Under supply and demand uncertainty without a merchandizing yard, the pulp mill is only able to operate at 10% of its full capacity and achieve a customer satisfaction level of 9%. The merchandizing yard ensures pulp mill running capacity of 70%, and customer satisfaction level of at least 50%. However, the merchandizing yard is economically viable only, if the sales price of pulp is at least $680 per tonne. Efficient and effective management of inventory throughout the supply chain, integrated with production planning not only ensures continuous operation of forest mills, but also significantly improves the customer satisfaction.