February 24, 2025

If you’ve found yourself scrambling to forecast the potential impacts of tariffs on your annual and long-term plans, now may be the time to revisit your process, tools, and assumptions. The forestry economic landscape is constantly changing, and the tariff threat – like Covid, the subprime mortgage crisis, and harvest authorization deferrals -- is only the latest disruption our industry has faced. Often the instinctive reaction to these uncertainties is simply to cut costs in order to meet annual plans. However, this reflexive approach can erode overall profitability. It is important instead to consider how changes impact the plan as whole, using the correct level of detail for both costs and revenue to support decisions about what to harvest, manufacture and sell.

Here are three key actions you can take to help make the right decisions if tariffs are applied – or when the next disruption raises uncertainty for your business:

1)      Consider gross margin, not just minimizing costs

When a decline in volume or price threatens to impact revenue, companies often respond by rolling out cost reduction targets across the organization. Managers quickly turn to their teams looking for novel ways to reduce costs. Innovative projects with high-risk and high reward are put on hold, and non-essential initiatives are temporarily delayed. Although this approach can work well for administrative costs the approach often does not work well across all departments. When changes to production are made with the objective of lowering costs, it can be easy to inadvertently remove the volume from your plan that is generating the highest margin.

Therefore, it is imperative to analyze the overall impact of changes to production on gross margin. To do this, set margin-based targets. This ensures that cost reduction efforts do not negatively impact high-margin activities. This requires close collaboration between production and sales departments as individual department targets may not capture the full picture. As a result, a department based KPI will likely be difficult to effectively implement.

Example: Often, high-cost blocks are targeted for removal to meet a specified delivered log cost. However, these high-cost blocks are often included in the plan because they contain high value wood that produces premium products. Removing them can unintentionally reduce gross margin. Additionally, removing them may result in an inability to meet sales or fibre supply agreements, forcing the purchase of equivalent volume or products on the open market to fill the void – often at a higher cost.

2)    Move beyond averages

A tempting way to decide which cutblocks to remove from a plan, or which products to produce, is to conduct a block-by-block margin analysis and simply remove the lowest margin blocks from the plan. However, this approach relies on two dangerous assumptions.

a)    That product prices will remain constant regardless of production levels.

b)    That you already know the best products to produce from the wood on the cutblock.

This can lead to a mismatch of effort, where a highly detailed product forecast is paired with a sales projection that has insufficient granularity.

Many companies operating in a commodity market do not forecast at the customer level. The assumption that all customers have the same production specifications, costs, and revenue at all production levels can lead to significant margin erosion. Different customers often have unique quality specifications and over-producing the wrong specification can result in excess inventory that may only be sold to an alternate customer at a discounted price, failing to recover customer specific costs. 

Developing a relevant price range for each product, by customer, helps produce a model that more accurately reflects sales revenue resulting in a better estimate of gross margin. Incorporating both the incremental costs of procuring additional fibre and the corresponding price reduction from increased production (or vice versa) into your model will create a more dynamic forecast, providing a more accurate reflection of the scenarios under consideration.

3)    Have a quick flexible model that is updated frequently

An annual plan is typically produced in the fall and incorporates extensive details, taking at least a month of effort to complete. The model is then tweaked on a quarterly basis to provide shareholders with an updated forecast. In between, a monthly update may occur along with month end financials with little modification to inputs.

 While these detailed plans have insight, they are often not set up to quickly run scenarios and are hard to adapt to real-time decision making. A rolling forecast is often the goal, but many organizations have a hard time moving away from the annual plan as the process is so intensive.

A flexible simple model can help leadership assess market changes to support production decisions. Key elements to consider are:

a)    Rapid updates: The model should not take significant resources to update, or it risks becoming obsolete. Limiting the model to key updates can help mitigate the effort. Aggregating costs to the highest level possible to support decisions can also help. For example, the model may not need to know the harvest phase costs for each cutblock and product, and an aggregated delivered log cost by product may suffice.

b)    Scenario testing and/or optimization. The model should have the ability to change key inputs such as exchange rates – or tariffs -- in order to run to run “what-if” scenarios. Consolidating common inputs in a dashboard can help decision-makers run the model without needing an in- depth knowledge of how the model works.

c)    Easy to use and maintain. The model should be maintainable by multiple people to ensure business continuity. Being adaptable to your changing business needs is another key attribute. Again, aggregated costs can help reduce the number fields to maintain. Leveraging widely used tools can minimize the need for specialized support such as programmers and IT support for updates and report modifications. Waiting in an internal support queue to update the model will result in obsolescence.

Ultimately, a plan is only a plan and will never perfectly reflect reality. However, the planning process is valuable and will help you assess the best available information to make informed business decisions. This approach is also a key component of sustainable forest harvest planning, ensuring that economic choices align with long-term resource management and environmental stewardship.

A flexible, margin-based model can be hugely beneficial in responding quickly – and wisely -- to tariffs or any other uncertainty. It can also hugely benefit your organization in more stable times. Move beyond cost cutting to gross margin-based decision making and you will obtain more value from your resources and be better prepared to navigate volatility with smart decisions.