Listen to your Customers
Vice President, Resources
Port Blakely Tree Farms, L.P.
The added value that a high-quality resource
inventory brings to forest management organizations is easily overlooked.
Inventory designers and managers legitimately work hard at reducing data
costs, but run the risk of costing their enterprise far more than they save
if their efforts reduce the data’s quality too far. Inventory managers
need to listen to all of their inventory customers to understand the
enterprise-wide implications of the resource data they produce. This article
briefly describes the characteristics of a quality resource inventory and
introduces some of the enterprise inventory customers dependent on high
quality information.
Responsible stewardship and smart resource
management cannot occur without quality information. The efficiency,
effectiveness, and credibility of any forest management organization are
directly related to the quality of its resource inventory. Strategic
planners and tactical planners, silviculturists and other business
investment decision makers, financial managers, tax accountants, public
policy advocates, and owners are all inventory customers that cannot
effectively operate with bad, inconsistent or non-existent information.
These are customers that must assume that the resource information they work
with is based on solid, quality data. Their success depends on it.
What makes up a quality inventory?
An inventory can be many things, depending on the
resource and management objectives. For this brief discussion I list five
characteristics that I believe distinguishes good quality inventories from
poor ones, regardless of the resource:
1. Design and sample intensity appropriate to the resource and
management objectives.
2. Consistent collection and compilation of reproducible data.
3. Accurate spatial data.
4. Regular data maintenance to keep inventory relevant.
5. Validation and quality control practiced and documented throughout.
1. Design & sample intensity appropriate to the resource and
management objectives. To be good natural resource steward today you need
adequate data to support your organizations’ planning and decision-making
processes at all levels. To be a good inventory manager you need to produce
that data in a timely, cost-effective, and credible manner. To be a great
inventory manager, your design needs to be robust enough that its accuracy
and content will remain relevant to your organization during its planned
shelf life. The customers will ultimately determine relevancy.
2. Consistent field data collection and compilation of reproducible data.
A quality inventory consistently measures the attributes within the design
across the entire inventory block. The sampling precision should be
consistent with the inventory design. The precision does not have to be
consistent across the landscape, just consistent with the design. No black
holes with partial data, arbitrary estimates or broad classifications.
Consistent data compilation for all data applications is essential for data
credibility among inventory customers.
3. Accurate spatial data. Area estimates are always the number one source
of error in cruising and therefore the number one source of error in
inventory data. The quality of an inventory’s data is as dependent on
accurate spatial measurements as it is on accurate field measurements.
Financial customers in particular depend heavily
on an accurate determination of net operable areas. Both the importance and
difficulty of this calculation has grown as new spatially specific
regulatory constraints are implemented that assume a higher level of
precision than traditional resource grade mapping data was originally
designed for.
Today, with the incorporation of accessible
geographic information systems (GIS), many organizations are building or
refining enterprise systems that blend strategic plans, tactical plans and
actual operations. In these systems inventory databases are being accessed,
worked and evaluated more often by a wider customer base than ever before.
Data once thought sufficient for strategic planning is often found wanting
for actual operations. Most database managers will tell you that as database
customer usage and dependence increases, so does the demand for increased
accuracy and precision. Success has a cost.
4. Regular data maintenance to keep inventory relevant. Silvicultural
investments such as site preparation, planting stock size and genetics,
thinning, fertilization and pruning all affect growth and habitat
projections and need to be reflected in the inventory. Harvests,
catastrophic losses and ownership changes need to be accounted for as they
occur. A quality inventory can deliver current data to its customers in a
timely manner.
A quality inventory also includes a regular
re-sampling schedule. Forests are complex systems, which limits the
effective shelf life of field data no matter how much we want to believe
growth model projections.
5. Validation and quality control practiced and documented throughout.
Data is nothing without credibility, and credibility comes with proof of
quality. Proof of quality starts with an intelligent auditing program of
process and measurements and ends with validation of cutout and independent
measurements. Cruise cutout records compared to inventory are the most
common means of validating an inventory. An up-to-date version of this
analysis should be at the fingertip of every inventory forester. Bankers,
appraisers, and even IRS agents all cite it as the single most important
source of inventory credibility. Cutout and re-cruised stand data provide a
regular supply of validation data that a quality inventory incorporates into
a continuous improvement routine.
Listen to your customers
Discovering who your customers are and soliciting
their opinions are important steps toward understanding the real value a
quality resource inventory brings to your organization. Try to do this on a
one-on-one basis with professional craftsmen1;
real inventory customers. The process will require diplomacy and
occasionally an interpreter, but can be quite illuminating. Listed below are
the thoughts of some of the professional craftsmen and women that I have had
the pleasure to work with; a SFI certification auditor, tax accountant, IRS
Agent, two bankers and a corporate appraiser regarding resource inventory
data. Listen to your customers.
Len Eddy, Price Waterhouse Coopers, Edmonton, Alberta: “Objective
11 of the AF&PA Sustainable Forestry Initiative (SFI) now requires that
a certified organization has systems in place that enables management to
review current practices and insure that they are heading towards their
desired future outcome. This is part of a continuous improvement cycle. A
good forest inventory system is key to satisfying this objective.”
Ed Bancroft, CPA, Partner, Bancroft Buckley Johnston & Serres,
Seattle, Washington: An accurate assessment of the standing timber inventory
is necessary in connection with federal income tax compliance. The allowance
of depletion (a deduction for the cost of capital recovery) is based on the
total cost of the timber block divided by the total standing volume of the
block. The result is the average unit cost ($ per MBF). IRC Sec. 611 and
related Internal Revenue Service rules and regulations require appropriate
forest and accounting records be maintained. Plus, upon audit, systematic
adjustment to the standing volume for growth, ingrowth, utilization and
acquisitions are likely to be tested by IRS forest engineers in accordance
with Internal Revenue Service audit manual “Audit Techniques Relating to
Forest Industry Taxpayers” (IRM 4232.4)”.
From another accounting viewpoint accurate
inventories seem extremely important in a partner relationship. Accurate
forest inventories are necessary for combining separate interests into a
joint venture, administering the joint venture agreement during the
operating period, and finally separating the interests at exit.
Nathaniel Ray, IRS Agent & Forester, Seattle, Washington: “The
more accurate an inventory, the better I like it. A sloppy inventory peaks
my interest. If there are no records, or if they are inconsistent, I assume
that the taxpayer is hiding the ball. I will then drill in or order my own
inventory. At that point the taxpayer has lost control of the audit. These
instances are commonly associated with estate taxes or depletion
calculations.
The biggest issue at the moment is dealing with
casualty losses from storms or fire. The biggest problem with these claims
is always the original inventory. I don’t think an inventory should have a
shelf life more than 3-5 years. I also think the practice of only cruising
those stands eligible for harvest is risky.”
Bob Ingram, Senior Vice President, Bank of America, Seattle,
Washington: “I consider a quality inventory extremely important. Most of
the time forest industry loans are underwritten based on the timberland
value. Sawmills are usually limited to liquidation value. If I am not
comfortable with an inventory, I will either require a new third party
inventory, or just will not participate.
An inventory is a good indicator of the
management quality of a company. How can they manage properly and meet their
obligations if they don’t know what they have?”
Kristy Searles, Vice President, Farm Credit Services, Salem,
Oregon: “A good inventory system is critical to the loan analysis process.
The quality of the inventory is often a reflection on the quality of the
management team. The more highly leveraged the transaction the more fine
tuned the inventory reporting needs to be. The $/mbf is one analysis tool
that provides an indication of the risk in the transaction. It's imperative
that the volume figure be verified and accurate. The quality of the
inventory reporting can make the difference between getting a loan or not.
A third party cruise and appraisal is often
required before a loan is approved. During the life of the loan we rely upon
our staff foresters to meet with the customer's foresters, to make physical
inspections and compare cutout data to the inventory. In addition, the CFO
of the company is usually required to provide harvest reports and updates to
the inventory on a quarterly basis. Accurate inventory reporting is critical
to both the lender and the management team of the company.”
Greg Gilbert, MAI, Corporate Valuations, Portland, Oregon: “The
better an inventory, the better a company is treated in my valuation. When I
have had doubts about a company’s inventory and thus, their ability to
perform, I have adjusted discount rates upward by as much as two full
points.”
Finally, consider advocacy. When exposed to
political heat public policy makers regularly demonstrate a willingness to
act in a data free environment. You may or may not like the Forest and Fish
agreement in Washington State, but the final agreement would have been much
less credible and much more draconian for landowners if there had not been
several organizations with quality resource data to support their positions.
_________
Resource inventory is often viewed as a variable
overhead liability that can be deferred or slashed whenever money is tight
and budget cutting occurs. Since there are very few times when money isn’t
tight, managers are regularly tempted to reduce inventory costs by reducing
fieldwork frequency, limiting fieldwork to targeted stands, lowering the
accuracy and precision of collected data, eliminating field audits or
settling for poor fieldwork substitutes such as remote sensing. Such design
changes should only be made after careful consideration; the short-term
inventory cost savings may be greatly outweighed by significant expenses the
organization incurs if all of the resource inventory customer needs are not
considered.
Why not view the resource inventory as an asset?
Consider what a favorable loan, a better business plan, a favorable and
defendable depletion rate, a quicker catastrophic loss settlement, or a good
valuation would be worth to your organization and its owners. What’s your
credibility worth? The advantages of having quality data for planning and
operational activities are obvious, but sometimes hard to pay for. The
takeaway I would like to leave you with is that the cost of poor data is
much higher.
It would be nice if this paper contained an
original thought, but it doesn’t. In 1934 Bruce and Schumacher2
observed, “Mensuration is a means, not an end. It is an indispensable aid
to solving problems in management, finance and silviculture. It must,
therefore, be prerequisite to these subjects.” ....… They knew their
customers.
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1 Iles 1998. Some Practical Aspects of
Designing a Large Inventory. IUFRO Conference Proceedings, USDA General
Technical Report NC-212.
2 Bruce and Schumacher 1934. Forest
Mensuration. The preface should be required reading for all inventory
foresters.
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