Defining "Value Added"

When it comes to wood and lumber products and by-products, what is the term "value added" all about? April 18, 2009

Let's not forget the purpose of the "Value-Added" wood products forum, i.e., "value-added" questions, topics, tips, etc. "Adding value" (money) through adding manufacturing steps, "adding value" by creative marketing, "adding value" by creating a new or improved product, etc. I believe questions/issues/ideas along these lines should be the focus of this forum. So let's put on our thinking caps and get the creative juices flowing!

Forum Responses
(Value Added Wood Processing)
From contributor Z:
I put the term "value added" in my book right after the term "high end". They are both such subjective terms that folks rarely agree on their use.

From contributor W:
Value added is to me is where the money is. Say you have a board 4/4x9in at $1.50bdft you get $1.13 a ft. Turn that same board into molding you can get six sticks of casing that sells for $1.00 a lineal ft to me thatís the way to get the most out of my lumber. Thatís what I call value added.

From the original questioner:
I tend to agree with your example: re-working a product to make it more valuable (more money for you to put in your pocket).

From contributor F:
Value added to me is what I am planning on doing in the very near future; purchasing a Logosol moulder/planer. My initial thought was, "how do I come up with the $15,000 for the initial purchase of the machine to make the value added material?" Answer: save my nickels and dimes to create the dollars to purchase the tool.

From contributor P:
My very first lesson in "value-added" was to properly care for what I have been cutting. In other words, the careful building of foundations and careful stickering of sawn lumber for drying was my first step.

What I was doing was this: sawing free logs as available in my free time, but not carefully processing the wood. Sloppy foundations, sloppy alignment of sticks. Too-widely-spaced sticks. I have remedied this and now plan to step it up one more level by doing "small packs." What I mean by this is to subdivide all my stacks in parcels. Any given stack may have three to five subdivisions one on top of the other, divided by 3" or 4" thick blocking to allow each small pack to be lifted and placed on someone's trailer to take to their home or shop, leaving their money with me. The value added? No manual labor for me after that vertical stack of "small stacks" is done. More cash in the pocket.

From contributor E:
We exclusively manufacture shoe moulding. Presently, we simply buy kiln dried lumber, gang rip, profile, and package the material we sell. There are probably at least a dozen different manufacturing processes that would further add value to my product. A pre-finish line would be a consideration. I could kiln dry our raw materials and add more value. I could sell closer to the end user and gain value. All of these processes seem lucrative on paper but every process you add takes more time, lots of operating capital, more employees, and more headaches. Of course this always leads back to what a person really wants out of the business. I like to keep things simple. I can add value faster with a moulder than any other machinery in our facility. At what point should a business put focus on value added operations instead of expanding on the "main" product? Once a business has established their "niche", isn't volume the key factor?

From the original questioner:
Everything else being equal, I like to think in terms of "profits" and not "volume production." Lots of product is of little importance if you lose money on every unit you produce.

From contributor P:
Another angle we can consider in the value-added arena is direct marketing. Today I noticed some ornate carved mantel brackets under a mantel and under a nearby counter/bar. One could easily imagine that these could be a Chinese product. The fact that these were hand-chiseled almost guarantees that they were imports from some low-labor-cost area off-shore. I bet, however, that there were at least three different profit margins added to the initial price point.

So here is my point. The internet and its offshoots have created direct market methods which can bypass one or two "markups." If the producer of the product can direct-market, that producer can get the profit contained in those markups. Being closer to the end user means eliminating those layers of profit which go to someone else and putting that profit in your own business' pocket!

From contributor E:
I think the key to competing against the Chinese is by complete focus on efficiency. It's never made sense to me that hardwood is shipped overseas, manufactured in China and sold in the U.S. market for less money than we can manufacture here. Yes they have lower wages, but they also have more freight, longer lead times and the quality is poor.

As far as demand, I always look at it this way. From a small manufacturer's point of view, there never really is a limit to the demand. For example, if I decided to produce face frame stock, I could not possibly produce enough face frame material for the entire cabinet market from my facility. If I ran 400 lineal ft. per minute through my machine around the clock, I doubt I would meet 20% of the global demand for face frame material and that's just one product.

To a certain extent, it takes volume for any business to succeed. I've noticed that the more material we move, the lower our cost per unit becomes. Basically, this happens because we have a certain amount of fixed expense which is factored into the cost of the product. This expense is the same whether I'm producing around the clock, or using my crew to get the new pellet machine working.

I think value added is great so long as it doesn't interfere with the normal flow of production and doesn't require a large capital investment. Maybe I'm overly conservative, but I generally believe that a penny saved is the same as a penny earned. Any way of reducing cost without sacrificing quality or efficiency is most attractive even from a value added standpoint.

From contributor L:
One area of "value-added" that is becoming more important is forest and mill residue, especially for wood pellets and hog fuel. I guess that even Anheuser-Busch is planning to convert some of their facilities to wood fuel. We are seeing an increase in the number of requests for information on wood pellets. The catch is always the transportation end. How do we get all those piles of mill and forest residue to the user?

From contributor C:
I run my mill with the philosophy that I need to get the greatest economic value from every log in the most efficient manner possible. Each process we do to a log or board changes its economic value. I must know to the best of my ability the cost of the process and the change in value of the processed log or board. From this I know the profit or loss associated with what we are doing. Since we have limited capital and limited help I need to concentrate on those processes that give us the greatest return on investment. I also need to study my competitors, study markets and study new processes and equipment that comes on line.

Two years ago there was very little demand for 1" to 3" ERC poles. Today we sell tractor trailer loads, some aged, some new, some run through our German peeler that adds value by smoothing the log and getting rid of the bark. New markets have developed that let us add value by getting loggers to bring in ever smaller stems and having the equipment to peel some of these stems.

I think more in terms of increasing profit margin more so than just adding value. Using processes that add value that increase profits are the ones I look for. We developed the process for converting ERC on the ranchlands of Oklahoma into mulch. Landowners are tickled that we will remove these trees for free. We found a way to add value to what was formerly a cost to the landowner who had to pay to have them pushed up and burned. I discovered this by running ERC limbs with brown needles still on through our grinding hog in Indiana and sending the product to mulch companies to see if they liked it. There will always be new ways of adding value. Some require original thinking, some require research and development, some require new equipment, some require rethinking marketing, and some just require more efficient methods. The main thing is to not be complacent and feel that nothing can be improved.

From contributor C:
We let the trees dry for several months before grinding. They shatter better and the companies we sell to haul dry fiber rather than a lot of water. We barge cedar mulch out of south central AL to east St. Louis. It is bagged and I have seen the mulch in central KY and southern IN. Barges can haul 40 to 50 truck loads at a time. We load this barge in 1 and 1/2 days. This includes trucking 15 miles to the loading dock. Large quantities of material can be moved quickly and inexpensively with planning. Why don't the railroads get in the act? I would rather deal with the government rather than railroads. The railroads have been completely unresponsive to moving mulch out of OK.

From the original questioner:
I used to live in Oklahoma 25 years ago. I watched the pastures start to fill up with cedar trees. People complained but not much was done. I'm happy to hear you've found an economical means of using these trees.