Handling Sourcing Issues in Emerging Industries: Ecostrat’s Biomass Supply Dilemma

All figures in Canadian dollars unless otherwise noted.

It was a cold but sunny winter afternoon early in 2014, and it had been a regular workday for Pat Liew, Director of Business Development at Ecostrat, with no bumps and bruises until he opened the email from one of Ecostrat’s key customers (the customer). The customer complained that the biomass wood supply they received from Ecostrat did not meet the specifications required by their newly installed biomass boiler. Liew quickly reviewed all the documents, including the request for quote (RFQ), the purchase order, the order receipt from the customer, the internal sales order, the shipping documents, etc. Though all of the paperwork looked accurate, Pat was puzzled because the biomass wood chips clearly did not fit the brand-new boiler, and this was a showstopper. He wondered how this could have happened. With many unanswered questions, he picked up the phone to call the customer to determine the best next steps to resolve this problem.

Biomass Industry and Wood Chips Boilers

Bioenergy included various renewable energy sources derived from biomass. According to the International Renewable Energy Agency (IRENA), 70% of the renewable energy supply and 10% of the total primary energy supply globally came from bioenergy.^[1] Biomass came in different forms, such as wood, agricultural residue, food waste, and animal manure. Of these, woody biomass was the largest source of bioenergy. Bioenergy from wood was considered sustainable because its carbon emissions were largely offset by the carbon sequestered by trees. However, to be both renewable and carbon-neutral, wood needed to be sourced from sustainably managed forests, and its life-cycle carbon emissions needed to be minimized. Bioenergy facilities typically utilized by-products of logging, forest thinning,^[2] and wood processing operations, as well as post-industrial, C&D (construction and demolition), and urban wood waste (e.g., waste from the clearing of yards or power lines).

Woody biomass could be turned into biopower (heat and electricity), biofuels (gasoline, diesel, and sustainable aviation fuel), renewable chemicals, or other bioproducts. Power was produced by the combustion of wood in large biomass power plants or small-sized biomass boilers. Companies and institutions (e.g., hospitals and schools) could install small biomass boilers to partially replace fossil fuel power generation. They were often incentivized to reduce their carbon emissions by governments through renewable energy credits.

Aggregators were essential players in the biomass industry. They were intermediary entities that aggregated biomass from various suppliers (biomass generators) and provided it to one or more end-users (facilities using biomass as feedstock). While some end-users sourced feedstock directly from multiple suppliers, others worked with aggregators to minimize sourcing complications and headaches associated with managing multiple contracts and to reduce the risk and impact of supply disruptions. Aggregators could have more flexibility to deal with potential supply chain or supplier failures (such as breach or insolvency) as their wide supply networks allowed them to replace the lost supply quickly. Aggregators’ deep market experience could enable them to anticipate and mitigate supply chain disruptions. Also, a single master supply contract with an aggregator could facilitate project financing with capital markets.

Whole tree chip (WTC) was a type of forest biomass derived from forest thinning residue and low-grade trees. It consisted of chipped crowns, branches, trunk, and bark. In some rare cases, the feedstock could be inconsistent in size, creating problems for biomass facilities.

Ecostrat

Ecostrat was a leading company in the bioeconomy sector in North America. Its biomass supply group had over 25 years of experience aggregating wood fibre and organics for bioenergy projects across the continent. Ecostrat’s advisory group supported bio-project developers, lenders, and investors in evaluating biomass supply chain risk. Ecostrat developed the world’s first comprehensive framework, the Biomass Supply Chain Risk Standards, a CSA National Standard of Canada, for evaluating biomass projects and designating bioeconomy development opportunity zones.

Customer’s New Wood Chip Boiler

The customer was a Fortune 500 corporation with multiple facilities in North America. The customer purchased a wood chip boiler for one of its manufacturing facilities to support its corporate sustainability goals of reducing carbon emissions. The customer was also motivated by some government grants that incentivized environment-friendly initiatives. The customer operated in a highly regulated industry, which required the boiler to be installed inside an enclosed structure to keep fumes away from the manufacturing facility.

With the excitement of getting closer to achieving their sustainability goals while enjoying the government grants, the project team hurried to collect bids from biomass boiler providers and contractors. The installation project started soon after the contracts were signed with the winners. The customer was happy to acquire a good-quality boiler with an economic life of 20 years. Closer to the time of commencement, the customer, in consultation with the boiler supplier, sent out RFQs to biomass aggregators, including Ecostrat, to buy 15,000 to 20,000 tons of  WTC annually. The customer’s review of quotes resulted in a multi-year supply contract with Ecostrat. The Ecostrat team was excited to sign a deal with another prestigious customer. As a biomass aggregator, the role of Ecostrat was to work with the local wood chip suppliers to gather enough wood chips and ensure a stable biomass fuel supply for its new customer’s boiler.

Ecostrat made all the necessary arrangements with local partners, and the first shipment was on its way to the customer. As the customer received the first batch of the WTC, Ecostrat got one step closer to the beginning of another long-term business relationship. All transactions went so smoothly that the Ecostrat sales team never imagined the significant complications that would surface in just a matter of days.

What Was the Problem With the Wood Chips?

The biomass industry had not yet achieved maturity. Nevertheless, it still offered many financial and environmental benefits to organizations that adopted biomass as their fuel source, accompanied by government incentives promoting green initiatives. There were no established standards that govern the specifications of the many different types of wood chips available.  As with any developing business sector, the biomass industry had caveats demanding caution from its clients. For instance, as it relates to this case, there were no established standards that governed the specifications of the many different types of wood chips available. The specifications of wood chips available in one region, such as size and moisture content, could vary significantly compared to those available in another region, based on its climate and flora.

The wood chip boiler technologies were diversified to meet the needs of different regions with different wood baskets. A boiler designed for the size and moisture content of the wood basket in southern New England in the U.S. might not function properly with the wood chips available in northern Ontario, Canada. Therefore, companies planning to acquire wood chip boilers needed to allocate resources to study and understand the local wood basket (i.e., specifications and supply conditions of locally available wood chips) before making any long-term investment decisions.

Liew learned that the customer, due to marketing pressure from the boiler provider, rushed the decision process and installed a boiler that consumed a type of biomass that was not available in the local wood basket. In this case, the percentage of oversize material it could tolerate was far less than the percentage typically available in the local wood basket.

One small mistake in the wood chip terminology caused a big challenge for the customer. Based on feedback from the boiler manufacturer, the customer specified WTC as the boiler feedstock in its RFQ. However, in the customer’s region, WTC meant chipping trees together with the crown and the bark, inevitably creating many oversized pieces. While woody biomass produced in this manner was typically used by power plants in that region, it was not suitable for the type of boiler the customer had installed. Apparently, the boiler manufacturer was not aware of this difference. Now stocked with biomass that would not fit its recently installed boiler, the customer urgently needed an alternative solution. In Liew’s own words: “what’s going on with this customer is actually quite common in the industry. Boiler manufacturers […] just want to sell the equipment. They don’t really care if the facility is able to source the material.”

Ecostrat’s Options

Once the root cause of the problem was identified, Liew and his team met to evaluate their options. Evidently, they were not in breach of the contract terms with the customer. Now that it became clear that the material received by the customer was out of spec, Ecostrat would have to cancel all the deals made with local suppliers.

Liew checked the contract terms to ensure that Ecostrat was not obligated to pay penalties to local suppliers and could renege on the contract with the customer without any serious ramifications. Thus, terminating the contract and ending the relationship with the customer was an option to consider, though the team would need to redirect their valuable resources into finding new customers.

However, Liew was aware that there could be alternative solutions to propose to the customer. So, he requested some time from the customer to explore those alternatives. Some machinery manufacturers offered specialized equipment – called a resizer or hammer mill – that could resize the wood chips as per the specifications before feeding them into the boiler. The customer could acquire a typical fitting resizer for their boiler with an investment of about $70,000. However, it turned out that the resizer would not fit inside the enclosed space where the boiler was housed, and the regulations did not permit the installation of the resizer outside the enclosed area. Therefore, Liew contacted a contractor to assess the cost of a project to expand the boiler space to fit the resizer. The total estimate, including the expansion and the boiler, was in the ballpark of $350,000.

In the meantime, Liew contacted the local wood chip suppliers to understand whether they would be willing to resize the wood chips for an additional cost before shipping. He was able to find enough suppliers who agreed to resize the wood chips. It would cost the customer $5 to $8  extra per ton of wood chips (due to variable market supply conditions).

Reflecting upon the options he uncovered in his analysis of the situation, Liew gathered his team to discuss the best next steps to resolve the issue. He was hesitant to renege on a potentially profitable deal with the customer but realized the shortcuts the customer took in installing a non-compliant boiler had caused the problem. Could he return to the customer with recommendations based on the options he explored to salvage the deal, saving the team from future efforts toward finding a new customer? Was it worth it?

References

IRENA. (2020, September). Recycle: Bioenergy. Circular Carbon Economy Report, 5. International Renewable Energy Agency. https://www.irena.org/publications/2020/Sep/Recycle-Bioenergy

Oregon Forest Resources Institute. (n.d.). Thinning for forest health. https://oregonforests.org/node/113

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How to cite this case: Yegul, F. & Shamshiev, A. (2023). Handling sourcing issues in emerging industries: Ecostrat’s biomass supply dilemma. Open Access Teaching Case Journal, 1(1). https://doi.org/10.58067/FG55-9Z52

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