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Review of planning and evaluation models as a basis for the simulation of a forest firm Birchmore, Michael John 1972

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A REVIEW OF PLANNING AND EVALUATION MODELS AS A BASIS FOR THE SIMULATION OF A FOREST FIRM by MICHAEL JOHN BIRCHMORE B.Sc. (Ecological Science) honours Resource Management) Un i v e r s i t y of Edinburgh, 1970 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF FORESTRY i n the Faculty of Forestry We accept t h i s t h e s i s as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA September, 1972 In p r e s e n t i n g t h i s t h e s i s in p a r t i a l f u l f i l m e n t of the requirements f o r an advanced degree at the U n i v e r s i t y of B r i t i s h Columbia, I agree that the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r reference and study. I f u r t h e r agree t h a t permission f o r e x t e n s i v e copying of t h i s t h e s i s f o r s c h o l a r l y purposes may be granted by the Head of my Department or by h i s r e p r e s e n t a t i v e s . I t i s understood that copying or p u b l i c a t i o n of t h i s t h e s i s f o r f i n a n c i a l gain s h a l l not be allowed without my w r i t t e n permission. Department of ^ce^r^ The U n i v e r s i t y of B r i t i s h Columbia Vancouver 8, Canada Date i . ABSTRACT Forest planning i s characterised by the necessity to s a t i s f y a s e r i e s of long term objectives and yet s t i l l to meet a s e r i e s of short term o b j e c t i v e s . This problem of c o n f l i c t s i s p a r t i c u l a r l y p e r t i n e n t to the Province of B r i t i s h . Columbia where the f o r e s t ownership and the f o r e s t operator are each, p r i m a r i l y concerned with d i f f e r e n t time spectra. Further, the demands that are being made on the f o r e s t resource are becoming ever more str i n g e n t and demanding as the p o l i t i c a l and environmental awareness of the p u b l i c increases. The need to consider m u l t i p l e objectives i n the planning process causes the inadequacies of many of the e a r l i e r models to be hig h l i g h t e d . A new s e r i e s of models f o r f o r e s t planning i s c a l l e d f o r . The develop^ ment of operations research, techniques and improved computers has f a c i — l i t a t e d the i n t r o d u c t i o n of a new s e r i e s of planning models. Many models have been developed using the optimising techniques of l i n e a r and dynamic programming f o r example, but the technique that, through i t s f l e x i b i l i t y and l a t i t u d e f o r v a r i a t i o n i n the basic assump-t i o n s , holds the most promise i s simulation. Under the conditions of B r i t i s h Columbia, the f o r e s t f i r m , which, i s the main influence on the f o r e s t resource and l i n k s the natural environment with the socio-economic environment, i s the natural planning u n i t . The f i r m i s constrained by the superior environments and i t i s the responses of the f i r m to changes i n e i t h e r that a f f e c t s the flow of goods and servi c e s from the f o r e s t . i i . An a n a l y s i s of the f i r m shows that i f a systems approach i s adopted the planning and productive stages of the f i r m may be defined i n a su i t a b l e manner f o r the construction of a computer simulation model. The model may have several stages of operational development and may be used f o r d i f f e r e n t purposes as i t i s developed towards f u l l o perational use. The ultimate stage of development w i l l only be known when the d e t a i l e d construction of the model i s undertaken. This t h e s i s o u t l i n e s the need f o r the model and develops i t to a pre-construction stage. The major steps and processes that must be described f o r con-s t r u c t i o n of the model to the f i r s t development stage are o u t l i n e d . The f i r s t development stage i s that of a f o r e s t management game. The sources of the data and the i n i t i a l l i m i t a t i o n s of the model and the output are given and the subsequent development stages described. "And therefore a general custom of simulation i s a v i c e r i s i n g e i t h e r of a natural falseness or f e a r f u l n e s s , or of a mind that hath some main f a u l t s , which because a man must needs di s g u i s e , i t making him p r a c t i c e simulation i n other things, l e s t h i s hand should be out of use." Francis Bacon (1561-1626) "Of Simulation and Dissimulation" i v . ACKNOWLEDGEMENTS I would l i k e to thank Dr. D. Haley, Chairman of my Academic Committee, f o r h i s great help and assistance i n the preparation of t h i s t h e s i s . My thanks are a l s o due to Dr. M. A. Goldberg of the Faculty of Commerce, and Dr. J . H. G. Smith and Mr. G. G. Young of the Faculty of Forestry, who reviewed t h i s t h e s i s and provided many h e l p f u l comments. I am a l s o indebted to the Faculty of Forestry f o r providing me with the opportunity and f i n a n c i a l assistance to carry out t h i s study. To Miss Kathy P l e t t I owe a debt of gratitude f o r typing much of the f i r s t d r a f t and a l s o to Miss Penny Lewis f o r her s t e r l i n g assistance with the f i r s t d r a f t and f o r typing the f i n a l copy so magnificently. M. J . Birchmore V. CONTENTS Page 1. Introduction . . . . . . 1 1.1 Objective of the th e s i s 10 2. Forest planning models .12 2.1 S i l v i c u l t u r a l models . , 15 2.1.1 P h y s i c a l c o n s t r a i n t s . . . . . . . . . . 15 2.2 Economic models 22 2.2.1 Zero i n t e r e s t models , 22 2.2.2 Non-zero i n t e r e s t models . . . . 23 2.2.2.1 Present value models . . . . . . 24 2.2.2.2 Internal rate of return models 27 2.2.3 The problem of the discount r a t e 28 2.2.4 The e f f e c t of the i n t e r e s t rate s e l e c t i o n on the r o t a t i o n length , . 33 2.3 Cost-benefit a n a l y s i s . . . . . . . . . . . . . . . . . . 33 i 2.4 Conclusions 35 3. Operations research techniques and f o r e s t planning . . . . 37 3.1 Calculus 38 3.2 I t e r a t i v e optimisations , . 39 3.3 Simulation , . 42 3.4 A p p l i c a t i o n of operations research techniques to f o r e s t planning , 44 v i . Page 4. Analysis of the f o r e s t f i r m . , 49 4.1 C h a r a c t e r i s t i c s of the firm's organisation 52 4.2 Systems of the f i r m 53 4.2.1 H i e r a r c h i c a l systems 55 4.2.2 Decision making sub-systems 56 4.3 Goals and objectives 60 4.3.1 S t r a t e g i c objectives 60 4.3.2 T a c t i c a l o b j e c t i v e s . 65 4.4 Planning horizons, operational scope and the f o r e s t f i r m . 65 4.5 Firm's const r a i n t s 66 4.6 Summary 68 5. A p p l i c a t i o n of simulation to elements of the f o r e s t f i r m . 69 5.1 Sensor sub-system 69 5.2 Data storage sub—system . . . . . . . . . . . , . 70 5.3 Data processing and planning sub-systems 70 5.4 Decision making sub—systems 74 5.5 Control and functioning sub-systems 80 5.6 Summary 80 6. Outline d e s c r i p t i o n of a model of the f o r e s t f i r m . . . . . 81 6.1 Objective of the model 82 6.2 Desired output from the model 83 6.2.1 Limi t a t i o n s to the model output 84 6.3 Form of the model 85 6.3.1 Phase chart of the model 91 6.4 Assumptions of the model 93 v i i . Page 6.5 Va r i a b l e s of the model 94 6.5.1 Exogenous v a r i a b l e s 94 6.5.2 Endogenous v a r i a b l e s 96 6.5.3 Data 96 6.6 I n i t i a l model status 101 6.7 Planning processes and d e c i s i o n making 103 6.8 Descriptions of the elements of production 105 6.8.1 Symbols and v a r i a b l e s names used i n flow diagrams . . . . . 106 6.8.2 A c q u i s i t i o n of f i n a n c i a l resources . 108 6.8.2.1 Engagement of labour 110 6.8.2.2 Setting the productive capacity I l l 6.8.3 Production systems 113 6.8.3.1 Fixed investment 115 6.8.3.2 Harvesting . 120 6.8.3.3 Thinning 122 6.8.3.4 Plant i n g 122 6.8.3.5 Maintenance and overheads 123 6.8.4 Post-productive systems . 124 6.8.4.1 Log conversion and sales 124 6.8.4.2 C a p i t a l d epreciation 126 6.9 F i n a n c i a l p o s i t i o n of the f i r m 133 6.10 Game evaluation , 138 6.11 Future development of the model 139 6.12 I n i t i a l and p o t e n t i a l use of the model 141 7. Conclusion . . . . . 145 References 3_4g v i i i . FIGURES Page 1.1 The f o r e s t f i r m l i n k i n g the natural and socio-economic environments . ° 7 3.1 Flow chart of the model development using the systems approach (modified from Smith, 1970) 47 4.1 The system of the f i r m - 57 4.2 The planning system 58 4.3 A l t e r n a t i v e average and marginal cost curves under d i f f e r i n g market conditions 62 4.4 A l t e r n a t i v e production cost schedule f o r the f i r m 64 4.5 Environment of the f i r m 67 6.2 Depreciation streams of movile investments 130 6.3 A l t e r n a t i v e productive capacity streams 131 FLOW DIAGRAMS i x . Page 1. F i n a n c i a l resources 109 2. Labour a c q u i s i t i o n 112 3. Production function . . . . . 116 4. Fixed investment 119 5. Harvesting » • 121 6. Log conversion and sales . . . . . . 127 7. C a p i t a l depreciation 132 TABLES 6.1 Production f e a s i b i l i t y and cost data 114 6.2 Interim statement of accounts 136 6.3 Dividend payment 137 1. INTRODUCTION C o n f l i c t between resource uses has r e c e n t l y been the subject of considerable debate and d i s c u s s i o n . Much of the debate has centered around the use of the resource i t s e l f and the making of the best use of the resource i n the context of the t o t a l environment. As an example of the trend to the d i s c u s s i o n of resource c o n f l i c t s the theses of Smith (19701 and Hogg (19721 may be c i t e d . Both authors r e f e r r e d to the need to integrate the use of the f o r e s t resource within the context of the t o t a l system of our soc i e t y , which comprises the natural environment and the socio-economic environment. The natural environment i s the p h y s i c a l and b i o l o g i c a l system i n which man, as an important and ever more s i g n i f i c a n t p a r t of the ecosystem, e x i s t s and the socio-economic environment which i s the system of human i n t e r a c t i o n both f o r personal communication and the production and d i s t r i b u t i o n of goods and s e r v i c e s . As the impact of man on the environment dramatically increases and the p u b l i c c o g n i t a t i v e processes of p o l i t i c a l , s o c i a l and environ-mental spheres become more f i n e l y honed, through both, improved educational f a c i l i t i e s and the dissemination of information, the r e s p o n s i b i l i t i e s of the environmental manager become more demanding. The environmental manager i s often the f o r e s t manager, as the man on the ground and with the r e s p o n s i b i l i t y f o r a c t i o n . The manager must pay a t t e n t i o n to the whole range of system perturbing a c t i v i t i e s of the f o r e s t or resource user, within the context of both the natural and the socio-economic sys-tems. The requirements f o r improved welfare, economic s t a b i l i t y , and 2. f u l l employment must be balanced with the impact on the f o r e s t resource, i t s disturbance and the d i s r u p t i o n of the f i s h , w i l d l i f e and water resources, be they e i t h e r b e n e f i c i a l of detrimental to e i t h e r system. Considerations of t o t a l system impact are p a r t i c u l a r l y p ertinent to the management of the f o r e s t resource of B r i t i s h Columbia, where so much of the present affluence i s a t t r i b u t a b l e to the u t i l i s a t i o n of the f o r e s t . Indeed, the forest-based i n d u s t r i e s account f o r 45% of the Gross P r o v i n c i a l Product and are by f a r the most important segment of the eco-nomy CGovernment of the Province of B r i t i s h Columbia, 19701. The annual cut of the f o r e s t has been expanding at a rate of 4.6% per annum and i t has been predicted that t h i s rate of expansion could continue u n t i l 1990 (Smith and Kozak, 1970 a & b l , and a general optimism f o r the industry has been expressed by both Haley C1971al and Drysdale (19691. The need f o r managers to operate within ever more str i n g e n t con-s t r a i n t s was commented upon by Asher (1960, p. 238) who wrote: "Within the corporation, between the corporation and i t s natural environment, and v i s - a - v i s the world around us, tomorrow's managers w i l l face new challenges, new prob-lems, and v a s t new op p o r t u n i t i e s . At each l e v e l we see a world of dynamic change. At each l e v e l the manager must cope i n c r e a s i n g l y with new demands placed upon him and h i s corporation by the diverse groups within h i s organi-sa t i o n and i n the s o c i e t y which provides h i s environment." The corporate environment of the f i r m extends to include the natural environment, which provides i t s raw m a t e r i a l , socio-economic environment, which receives the goods and services generated, neither of which function independently of the other. No s i n g l e measure of u t i l i t y w i l l serve f o r the whole system. The maximisation of a be n e f i t function i n one system may sub^-optimise over the whole. I s h a l l term models that are based on a s i n g l e o b j e c t i v e fu n c t i o n , " f i r s t generation models". The economic b e n e f i t i s the one most u s u a l l y perceived, but as Keynes (.1936, p. 157) wrote: "There i s no c l e a r evidence from experience that the p o l i c y which i s s o c i a l l y advantageous coincides with that which i s most p r o f i t a b l e . " The achievement of goals other than s o l e l y economic ones was al s o r e f e r r e d to by Sloan C1956, v o l . 1, p. 342}, who wrote: " I t seems to me that the time has come when the sale and di s p o s a l of Crown timber must be the instrument and r e f l e c t t i o n of a Government p o l i c y i n which the i n d i r e c t values, such as the s t a b i l i t y of communities and the general welfare of the people at large, must be the dominating f a c t o r s . " Many of the elements of both of man's environments are int a n g i b l e and d i f f i c u l t to quantify. However, the value of the in t a n g i b l e s i s not i n f i n i t e and each, input that i s devoted to the enhancement, maintenance or preservation of an in t a n g i b l e may r e s u l t i n a r e a l l o s s elsewhere i n the system, and fu r t h e r , consideration of a sing l e element within the system without due regard to the remainder i s a f a l l a c i o u s approach that w i l l lead to a m i s a l l o c a t i o n of scarce resources. Yet, many of the models that form the bases of planning decisions under the present circumstances are based on s i n g l e o b j e c t i v e functions. The i n d u s t r i a l productive system i s concerned with the supply of goods and services and t h e i r d i s t r i b u t i o n . The f o r e s t f i r m conforms to t h i s norm and i s unusual only i n the nature of i t s resource base, which i s renewable over a long period of time and i s s i g n i f i c a n t l y influenced by the a c t i o n of the fir m . The f o r e s t f i r m must continue to operate within the d i c t a t e s of producing economic s a t i s f a c t i o n . The f o r e s t f i r m must be considered to be the important l i n k i n the chain of production within the Province of B r i t i s h Columbia, f o r 4. although the f o r e s t resource i s i n p u b l i c ownership (95% of the f o r e s t land area) the wood processing industry i s f i r m l y i n the p r i v a t e sector of the economy. Industry i s given access to the resource by a s e r i e s of leases and tenures which are administered by the B r i t i s h Columbia Forest Service CB.C.F.S.). The h i s t o r i c a l e volution of the leases and tenures was discussed at length by Nagle (19701. T r a d i t i o n a l l y , the rate of use of the f o r e s t resource has been regulated by the use of a p h y s i c a l model^ namely the Hanzlik formula. The formula, i t s advantages and disadvantages are discussed i n d e t a i l i n Chapter 2. The shortcomings of the p h y s i c a l model are i r r e l e v a n t pro-vided the volume of wood demanded by industry i s l e s s than the model s t i p u l a t e s . However, once the volume demanded coincides with, or exceeds the allowable cut, even on a l o c a l i s e d s cale, the inadequacies of t h i s form of r e g u l a t i o n become c r i t i c a l . I t i s then to be expected that pressure w i l l be exerted on the Forest Service to increase the allowable cut. For the Forest Service to y i e l d to these pressures would require a p u b l i c abandonment of i t s management p r i n c i p l e s and an admission that the regula— t o r y model i n use i s u n s a t i s f a c t o r y . There i s no reason why these actions should be viewed as embarrassing to the Forest Service, considering the changes that have occurred since the p o l i c y was f i r s t i n s t i g a t e d . However, the adoption of an economic -model by a government agency, such as the Forest Service, implies the ^ Within t h i s t h e s i s the term "physical model" r e f e r s to models based on the p h y s i c a l c h a r a c t e r i s t i c s of the resource, whereas the term "economic models" r e f e r s to models based on the economic values of the resource. 5. adoption of an entrepreneurial r o l e ; a r o l e f o r which the Government does not automatically have a mandate from the people. The entrepre-n e u r i a l r o l e i s implied by nature of the model which would have to be adopted. An economic model, by the nature of the c o n t r o l l i n g functions and basic data i s , perforce, more l i a b l e to short term er r o r i n i t s p r e d i c t i o n s . The predicted value w i l l , however, bear a greater r e l a t i o n -ship to the state of the socio-economic system than an i n d i r e c t extra-p o l a t i o n from the state of f o r e s t resource. As an a l t e r n a t i v e to the Forest Service p l a c i n g i t s e l f i n the p o s i t i o n of entrepreneur and p u t t i n g i t s c a p i t a l , i . e . the f o r e s t resource, i n a state of r i s k , the r e s p o n s i b i l i t y f o r management can be passed to the f o r e s t industry. The industry then assumes r e s p o n s i b i l i t y f o r i t s own future supplies of raw m a t e r i a l . Further a l i e n a t i o n of the land from p u b l i c ownership i s presently unacceptable (Nagle, 1970) and, therefore, to implement a p o l i c y of devolution of r e s p o n s i b i l i t y , a system of Tree Farm Licenses has been evolved. Control over the f o r e s t i s retained d i r e c t l y by the requirement that a l l management plans are approved by the B.C.F.S. and i n d i r e c t l y by taxation (Johnson, 1962; Jones, 1969). With the r e s p o n s i b i l i t y f o r management divested from the Forest Service^" i t i s p o s s i b l e to foresee a new era i n f o r e s t management, where-upon the key element i n the productive processes i s the f i r m , which i n terras of the production process i n B r i t i s h Columbia has been given remarkably l i t t l e a t t e n t i o n . From Nagle's (1970) data i t i s estimated that 23% of the P r o v i n c i a l Allowable Cut comes from Tree Farm Licenses and p r i v a t e lands. 6. On the basis of the f o r e s t f i r m having an ever more important r o l e i n the i n t e r a c t i o n between the socio-economic and natural environ-ments (see F i g . 1.11, changes i n e i t h e r system which have a bearing on the other w i l l be displayed by a system modifying process within the f i r m that w i l l spawn a compensatory reaction within the other system. Changes i n the resource base, i . e . the f o r e s t , e i t h e r through natural responses or man-rinstigated a c t i v i t i e s , w i l l r e s u l t i n changes i n p r o f i t and jobs f o r example within the f i r m and, conversely, a change i n p r o f i t s due say to a hardening or softening of the demand f o r lumber w i l l cause the f i r m to respond by a l t e r i n g i t s r a t e of resource use. We are faced with a complex problem of l i m i t e d resources that must be a l l o c a t e d to s a t i s f y m u l t i p l e objectives. To ensure the optimum s a t i s f a c t i o n of the diverse elements of the natural and socio-economic environments c a r e f u l planning and d e t a i l e d evaluation of the plans i s c a l l e d f o r . Many models f o r d e c i s i o n making have been advanced but as Simon (1959) wrote: "The d e c i s i o n maker's model of the world encompasses only a minute f r a c t i o n of a l l the relevant c h a r a c t e r i s t i c s of the r e a l environment and h i s inferences extract only a minute f r a c t i o n of a l l the information that i s present i n h i s model." Many of the present models that are a v a i l a b l e have serious inadequacies, f o r the a n a l y t i c a l processes employed do not permit mu l t i p l e o b j e c t i v e functions to be evaluated and the t o t a l consequences of the planning decisions to be assessed. Indeed, Thompson (1966) concluded that "while the t r a d i t i o n a l f o r e s t r e g u l a t i o n model i s an inappropriate guide f o r many f o r e s t managers, completely adequate substitutes are not presently a v a i l a b l e " . SOCIO-ECONOMIC ENVIRONMENT Jobs Wood Production RECREATION Other Land Demands Services FOREST PRODUCTIVE SYSTEM As VISUAL IMPACT Average Stand Diameter Access Volume/Acre NATURAL ENVIRONMENT Figure 1.1 THE FOREST FIRM LINKING THE NATURAL AND THE SOCIO-ECONOMIC ENVIRONMENTS 8. The inadequacies of the planning models are becoming more apparent at a time when the need f o r planning i s becoming more pressing. D i s -illusionment with the free market system and i t s a b i l i t y to provide f o r non-market f a c t o r s , be i t e i t h e r economies of the supply of services or the diseconomies of the creation of undesirable e x t e r n a l i t i e s , i s bringing about c e n t r a l i s e d , p o s i t i v e economic planning. Much of the planning continues to be negative, that i s the "thou s h a l t not" type, but p o s i t i v e planning i s being more frequently used, encompassing such methods as tax incentives and c a p i t a l grants to provide s p e c i f i c i n v e s t -ment s t i m u l i . The f o r e s t resource i s not escaping the planner. However, many of the models that are i n use f o r f o r e s t planning are l i m i t e d i n t h e i r a p p l i c a t i o n s . There i s a need f o r a s e r i e s of new models with a t o t a l system and m u l t i - d i s c i p l i n a r y approach. I s h a l l term these, "second generation models". This t h e s i s i s written therefore to advance the pr o p o s i t i o n that the new techniques a v a i l a b l e i n operations research, and f a c i l i t a t e d by the advent of the e l e c t r o n i c computer, permit the development of complex models that give consequential information about system perturbing a c t i o n s . Thus, the r a m i f i c a t i o n s of decisions may be investigated i n greater d e t a i l than previously without recourse to experimenting with the r e a l system. The uncertainty that i s associated with the planning process can never be t o t a l l y eliminated but, as the s o p h i s t i c a t i o n of the models improves, t h i s uncertainty can be reduced, p a r t i c u l a r l y when r a d i c a l changes are proposed. The e f f e c t i v e c o n t r o l of the system requires a knowledge of at l e a s t three things about the system, namely: 1) where the system a c t u a l l y i s at the present time; 2) what the l e v e l s of the c r u c i a l exogenous v a r i a b l e s w i l l be i n the f o r e c a s t period of i n t e r e s t to the c o n t r o l l e r ; 31 what the structure of the system i s , so that i t i s p o s s i b l e to estimate the e f f e c t s on the target v a r i a b l e s of any given p o l i c y mix of changes i n the c o n t r o l v a r i a b l e s . A l l three questions are fundamentally q u a n t i t a t i v e i n nature. I t i s postulated that simulation technique w i l l most p r o f i t a b l y be used i f applied to the f o r e s t f i r m . D e t a i l e d , systematic a n a l y s i s of the f i r m w i l l permit the f o r -mulation of the b a s i s of a computer simulation model of the f i r m . An approach such as t h i s and the formulation of the model basis w i l l have several immediate and long term b e n e f i t s . The immediate b e n e f i t s are: 1) a l o g i c a l and concise framework f o r considering the problems and i m p l i c a t i o n s of resource c o n f l i c t s ; 2) the h i g h l i g h t i n g of the data requirements f o r these resource con-f l i c t s , the nature of the data required and the present status of the data c o l l e c t e d ; 3) i d e n t i f i c a t i o n of the relevant v a r i a b l e s and parameters f o r t o t a l resource planning. The basis that i s formed may be developed i n several d i r e c t i o n s to a s s i s t the t o t a l resource planner. The future development of the model base i s o u t l i n e d and discussed at length i n s e c t i o n 6.11 below. 10. A general survey that discussed the terminology, h i s t o r i c a l develop-ment, preconditions f o r r a t i o n a l planning, i n c l u d i n g the use of computers, and the economics of y i e l d planning and s i l v i c u l t u r a l treatments has been published by Grayson and Johnson C19701. 1.1 OBJECTIVES OF THE THESIS There i s a need f o r planning models that consider the implications of m u l t i p l e goals and objectives f o r the resource base, with a broad and diverse data and c o n s t r a i n t input. We may state the objectives of t h i s t h e s i s as follows: 1) to review the present planning models and to assess t h e i r l i m i t a -t i o n s ; 2) to i n v e s t i g a t e the p o t e n t i a l use of operations research f o r resource planning models; 3) to i n v e s t i g a t e the system of the f i r m as a basis f o r a simulation model; 4) to review the l i t e r a t u r e as regards simulation models within f o r e s t r y and to apply these models to the f o r e s t firm; 5) to prepare the basis f o r a simulation model of the f o r e s t f i r m as i t might be used f o r f o r e s t resource planning and to determine as f a r as p o s s i b l e the p o t e n t i a l of such a model and to o u t l i n e the po s s i b l e means of development of the model. These obj e c t i v e s are d e a l t with systematically i n the subsequent chapters. The t h e s i s has been written to have as general a p p l i c a t i o n as i s f e a s i b l e without the in t r o d u c t i o n of blatant e r r o r s , c o n t r a d i c t i o n s and frequent r e j o i n e r s , but i t i s intended that the comments apply p a r t i -c u l a r l y to B r i t i s h Columbia and where examples are required f o r c l a r i f i -c a t i o n or elaboration these are drawn from information and f a c t s relevant to t h i s Province. Such a model as i s described i s of general a p p l i c a -b i l i t y though the data sources l i s t e d are to permit the v e r i f i c a t i o n of the model f o r B r i t i s h Columbia coast regions. 12. CHAPTER 2 FOREST PLANNING MODELS Many models have been proposed f o r f o r e s t planning and investment a n a l y s i s . These models have ranged from the purely s i l v i c u l t u r a l models to p u r e l y f i s c a l models. The former were designed to regulate the flow of wood of a p a r t i c u l a r type or q u a l i t y to the market place, and the l a t t e r were designed to maximise the p r o f i t . The models were a p p l i c a b l e to d i f f e r e n t sets of circumstances. The s i l v i c u l t u r a l models were a p p l i c a b l e to p u b l i c or p r i v a t e f o r e s t e n t e r p r i s e s under conditions of zero economic growth, zero discount r a t e s , continuous f o r e s t ownership and stable demand. Under these circum-^ stances the o b j e c t i v e i s the flow of goods rather than the e f f i c i e n t use of the c a p i t a l deployed within the resource, or the optimum redeployment of the c a p i t a l within the economy. The economic models are a p p l i c a b l e to p u b l i c or p r i v a t e f o r e s t s with non-zero economic growth and discount rates (either i n the neo-c l a s s i c a l sense or the neo—Keynesian sense) and no conditions as to the s t a b i l i t y of demand or the c o n t i n u i t y of ownership, but where there i s a requirement to optimise the e f f i c i e n c y of the use of scarce resources within the economy as a whole. The scarce resource may be e i t h e r land or c a p i t a l . The models may be applied d i f f e r e n t l y depending upon the scope of the b e n e f i t function that i s being applied. The scope of the function w i l l depend upon whether the model i s being applied by the p u b l i c or p r i v a t e sector. A whole spectrum of models e x i s t s between the two extremes, but many are often i n v a l i d e i t h e r because of the i n c o m p a t i b i l i t y of the objectives or because of the i n t e r n a l i n c o n s i s t e n c i e s within the model r e s u l t i n g from c o n f l i c t i n g assumptions. Having established which model i s to be used i n the planning process, i t may be used i n e i t h e r of two ways. E i t h e r the goal i s set and the preconditions required to achieve t h i s outcome are ascertained, or a l t e r n a t i v e l y the reverse process may- be followed, whereby the pre-conditions may be set and the outcome and f i n a l system state predicted. The approaches have a p p l i c a t i o n s at d i f f e r e n t stages of the planning process. Goal oriented models and procedures are of value p r i o r to implementation, whereas consequential a n a l y s i s becomes of value during the enactment of the p o l i c y to t e s t the e f f e c t s of changes i n parameters or v a r i a b l e s and to i n d i c a t e the need f o r changes i n the system or goal. Let us accept at t h i s juncture that consideration should be given to several general areas of f o r e s t p o l i c y , which are: 1) the p r o v i s i o n of s a t i s f a c t o r y incomes from p u b l i c lands, e i t h e r by p u b l i c or p r i v a t e e x p l o i t a t i o n with the payment of land rents, logging taxes, stumpage charges or r o y a l t i e s ; 2) the p r o v i s i o n s of s u i t a b l e employment opportunities and the generation of p r i v a t e incomes within the wood producing or pro-cessing i n d u s t r i e s , which under the c a p i t a l i s t system means a v a i l a b i l i t y of adequate p r o f i t s to a t t r a c t and r e t a i n c a p i t a l within the industry; 14. 3) the generation of secondary economic and s o c i a l b e n e f i t s from the f o r e s t based i n d u s t r i e s ; 4) the p r o v i s i o n of a legacy of u t i l i s a b l e f o r e s t resource to sub-sequent generations; 5) minimising the impact of the f o r e s t operations on the resource and the resource r e l a t e d aspects of the natural environment. The importance that i s attached to each point i s a matter of p o l i t i c a l d e c i s i o n , but unless the weighting that i s attached to any of the f i v e i s zero, then there i s a m u l t i p l e objective f u n c t i o n to the f o r e s t p o l i c y . The p o l i c y based on these points w i l l undoubtedly contain anomalies and co n t r a d i c t i o n s that w i l l require trade-offs to be made at the implementation stage. The anomalies and c o n f l i c t s s t i l l e x i s t within the f o r e s t p o l i c y of B r i t i s h Columbia as debate p e r s i s t s as to the weighting that should be given to various aspects of the p o l i c y (Pearse, 1967). C l e a r l y , the so r t s of models discussed so f a r , having noted t h e i r l i m i t e d o b j e c t i v e function and r e s t r i c t e d operating conditions, present d i f f i c u l t i e s when attempting to ensure an o v e r a l l optimisation f o r a p o l i c y . The information y i e l d e d as to the r e a l or opportunity costs or ben e f i t s associated with a given p o l i c y i s generally of an inadequate nature. The information as to marginal rates of cost or b e n e f i t sub-s t i t u t i o n i s sparse, the assumptions are u s u a l l y v i o l a t e d and the t o t a l impact of changes i n p o l i c y are unknown. Despite these l i m i t a t i o n s , the models are being used f o r f o r e s t planning. Presently, there are no s u i t a b l e a l t e r n a t i v e s . In t h i s chapter two l i n e s of debate w i l l be followed. The p h y s i c a l and economic models w i l l be explored i n greater d e t a i l f i r s t l y i n terms of t h e i r f a i l u r e to a s s i s t with the s e t t i n g of the preconditions f o r the achieve-ment of the stated p o l i c y goals, and secondly i n terms of t h e i r f a i l u r e to a s s i s t i n the determination of the planning and operational c o n t r o l s reguired f o r the achievement of these goals. I t should be noted that the only v a l i d c r i t e r i o n f o r assessing the v a l i d i t y of the model i s the usefulness of the model i n a i d i n g the planner to achieve the stated goals. 2.1 SILVICULTURAL MODELS One of the most e f f e c t i v e mechanisms f o r r e g u l a t i n g the f o r e s t industry and the r a t e of use of the f o r e s t resource, both i n the short and the long term, i s the r e g u l a t i o n of the flow of raw m a t e r i a l to the market place by the use of administrative procedures. The administra-t i o n may achieve i t s ends by the imposition of p h y s i c a l l i m i t a t i o n s to the rate of use or by the f i s c a l procedures. The p h y s i c a l l i m i t s are c a l c u l a t e d on the basis of a model r e l y i n g on the p h y s i c a l a t t r i b u t e s of the f o r e s t whereas the f i s c a l c o n s t r a i n t s are imposed on the economic system. 2.1.1 PHYSICAL CONSTRAINTS The p h y s i c a l c o n s t r a i n t s are simply l i m i t s , both upper and lower, on the amount of wood that may be removed each year or period. This requires a model based on the p h y s i c a l c r i t e r i a to permit the determina— t i o n of the value of the l i m i t that i s used i n t h i s administrative procedure. The word " p o l i c y " has been c a r e f u l l y avoided because i t must 16. be remembered that the p h y s i c a l model used i s not an end i n i t s e l f but s o l e l y a means to an end (Hummel, 1969). The f o r e s t l i t e r a t u r e abounds with a plethora of models f o r the re g u l a t i o n of the f o r e s t and the more commonly used are summarised i n the Forestry Handbook f o r B r i t i s h Columbia (U.B.C. Forest Club, 1971). In the e a r l y days of f o r e s t planning the p h y s i c a l models were the only p r a c t i c a l ones as they de a l t with the e a s i l y definable and measurable aspects of the f o r e s t . The rate of use, or a l t e r n a t i v e l y , the allowable cut, was based on the f o r e s t area, the volume of standing timber or the rate of growth of the f o r e s t , or any combination of a l l three. These models, r e f e r r e d to above as s i l v i c u l t u r a l models, were gen e r a l l y d i r e c -ted towards the attainment of the normal f o r e s t and the p r o v i s i o n of continuous production i n perpetuity. The p h y s i c a l c r i t e r i a p e r t a i n i n g to these models were reviewed and discussed at length by Richmond (1969). Models of t h i s type continue to be a p p l i c a b l e f o r f o r e s t management and administration i n some areas, such as newly developing areas without a developed market system (Moss, 1970). In B r i t i s h Columbia, despite passing from t h i s stage and having a developed market system, a p h y s i c a l model i s s t i l l i n use. The B.C.F.S. controls the rate of e x p l o i t a t i o n by the use of a modified Hanzlik formula (Young, 1969): AAC = Vm + 1 R where AAC = allowable annual cut R = r o t a t i o n V_ = volume of mature timber 17. I = mean annual increment at the r o t a t i o n age of second r o t a t i o n stands f o r each i n d i v i d u a l growth type The cut i s i n f a c t subjected to furth e r c o n s t r a i n t s . On the recommendation of Royal Commission of 1945 i n "The Public Enquiries Act: Report of the Commissioner r e l a t i n g to the Forest Resources of B r i t i s h Columbia", (commonly r e f e r r e d to as the Sloan Report) the Province committed i t s e l f to the concept of maximum sustained y i e l d as the manage-ment ob j e c t i v e , which was o r i g i n a l l y defined i n the Forest Act (1947) as the "growing continuously and perp e t u a l l y successive crops of f o r e s t products to be harvested i n approximately equal annual or p e r i o d i c cuts adjusted to a sustained y i e l d capacity." (subsection (21 of section 331. Thus A A C t = A A C t + l where t denotes a d i s c r e t e time period In p r a c t i c e t h i s condition i s relaxed such that i n any year the amount a c t u a l l y cut may vary by 50% from the planned cut and the ten year cut may vary by 10%. The use of the p h y s i c a l model has been c r i t i c i s e d by many authors on many accounts. The objections have been reviewed by Pearse (1970) and the l i t e r a t u r e s p e c i f i c a l l y concerned with sustained y i e l d , that i s the constrained model, was apperceived by Smith and Haley (1970). Let us f i r s t consider the objections to the use of the ph y s i c a l model per se, using the Hanzlik model f o r an example. Secondly the implications of the c o n s t r a i n t s w i l l be considered. 18. Fedkiw (1961) asked as to the area of a p p l i c a t i o n of such models. The model i t s e l f makes no reference to the area, or working c i r c l e , to which i t i s to be applied. I f the area considered i s too extensive then l o c a l d i s e q u i l i b r i u m s of supply and demand may a r i s e \ causing l o c a l p r i c e f l u c t u a t i o n s independent of the p r e v a i l i n g industry p r i c e . The extent to which transportation can r e c t i f y the l o c a l shortages or ex-cesses i s l i m i t e d . At the other extreme, i f the area i s too small the economic e x p l o i t a t i o n of the resource may be precluded. In e s t a b l i s h i n g the region of e x p l o i t a t i o n , consideration must be given to t e c h n o l o g i c a l changes i n the harvesting and wood using i n d u s t r i e s , which e f f e c t the p r a c t i c a l working c i r c l e , and to s h i f t s i n the population and i n d u s t r i a l centres, which e f f e c t s the catchment area of the resource demand. The model may be c r i t i c i s e d f o r i t s lack of consideration of economic f a c t o r s . No reference i s made to c a p i t a l value of the standing timber. With regards to the old-growth timber, which i n B r i t i s h Columbia accounts f o r 48% of the resource^ and with the adoption of what may l o o s e l y be c a l l e d a n e o - c l a s s i c a l approach, then the c a p i t a l value i s zero, as no investment ( i . e . e f f o r t ) has been expended on the resource. Equally, by the neo-Keynesian philosophy, the c a p i t a l value of the resource i s a l s o zero, as the future earnings or p r o f i t s of the standing timber, which i s more growth, i s zero. On the basis of the value of the stagnant resource having a c a p i t a l value of zero, the f o r e s t becomes equivalent to a mine. The un-constrained model in d i c a t e s the e l i m i n a t i o n of the o l d growth, i f i n c r e -Forest Industry S t a t i s t i c s of B r i t i s h Columbia, V i c t o r i a 1969 f o r 1970. merit i s zero, over the r o t a t i o n period. However, as the increment CD increases, the rate of depletion of the o l d growth increases, i f a l l the annual cut i s removed from the o l d growth. Palmer 0-965) however, c r i t i c i s e d such a p o l i c y and showed that i n some cases i t i s better, i n the economic sense, to begin harvesting second r o t a t i o n crops before the f u l l d e pletion of the old-growth resource. The model t e l l s us that rate of removal of o l d growth should increase with time. Also there being a resource of f i x e d s p a t i a l dimen-sions the production i n any given period i s not independent of produc-t i o n i n any other. In the normal production process, the optimum rate i n any period i s set at the p e r i o d i c p r o f i t maximising point, namely where marginal cost equates with marginal revenue, any l o s s of produc-t i o n i n that period i s production l o s t forever. For the mine however, the production foregone today can always be produced tomorrow. Indeed, any production today i s a l o s s of future production and a user cost i s imposed on the resource user (Scott, 1953, 1955, 1967). This represents the opportunity cost of production over time as discussed by Bain (1937) and Gaffney (1965). The p a r a l l e l between the mine and the f o r e s t was also drawn by Nautiyal (1966, 1970) when he applied the concept of user cost to the optimum rate of harvesting. He showed that the i n i t i a l rate of harves-t i n g would decrease with time, assuming a p o s i t i v e rate of i n t e r e s t , i f the user cost were considered. The s o l u t i o n that Nautiyal presented was, however, overly cautious because he ignored opportunity cost of the new growth by r e t a i n i n g the o l d growth and assumed that the future f o r e s t e x i s t e d with c e r t a i n t y . Allowance f o r these f a c t o r s shows an increased rate of resource removal. Thus, by adopting two a l t e r n a t i v e approaches to the removal of the o l d growth, one based on the p h y s i c a l model and the other on the concept of the user cost, c o n f l i c t i n g rates of removal are suggested. The model does not ensure the achievement of market equ i l i b r i u m f o r the supply of e i t h e r o l d growth or second growth timber to the mar-ket (for a f u r t h e r comment on t h i s p o i n t see Haley, 1966). I f the con s t r a i n t s that were mentioned are now introduced i n t o the model a fu r t h e r s e r i e s of complications a r i s e . U l t i m a t e l y the model must tend towards the state o f: AAC = I where i n t h i s case, I, the mean annual increment, i s a maximum. C r i t i c a l to the model as a whole, regardless of the con s t r a i n t i s the choice of the r o t a t i o n age. No i n d i c a t i o n i s given regarding the optimum choice as the model does not sp e c i f y a maximising or minimising con d i t i o n . However, the intr o d u c t i o n of the const r a i n t of maximum sus-tained y i e l d presents an objec t i v e function to the model. There i s l a t i t u d e f o r debate as to i t s v a l i d i t y , but on the basis of t h i s objec-t i v e the r o t a t i o n age should be that which maximises the mean annual increment. The objec t i v e of maximum sustained y i e l d i s c r i t i c i s e d below. There i s no i n d i c a t i o n as to the time period over which the model should be achieved and i t i s a question that has received l i t t l e formal a t t e n t i o n , though Nautiyal and Pease (1967) applied the l i n e a r programming to optimise the conversion within the confines of economic o b j e c t i v e s . A l i t e r a l i n t e r p r e t a t i o n of the constrained model implies an economic 21. growth rate of zero CHardin, 1968), which i s c l e a r l y a f a l l a c i o u s approach at the present time with a growth oriented economy. There are advocates of the zero-economic growth rate and turning to a s o l e l y replacement economy, (e.g. Mishan, 1967; Boulding, 1966). This state of a f f a i r s might be achieved some day but as yet these prophets of Malthusian doom are s t i l l but small voices i n the wilderness, venting t h e i r words of wisdom on a growth oriented economy. We may extend the concept of zero growth to the f o r e s t firm, with im p l i c a t i o n s of stable conditions. P r i c e f l u c t u a t i o n s do occur (Council of Forest Industries, 19721 i n d i c a t i n g an unstable market. The f i r m i s operating within a dynamic socio-economic system and must pay heed to the changes of technology and market demands. The s t r i c t a p p l i c a t i o n of the sustained y i e l d p o l i c y and the f a i l u r e to respond to p r i c e f l u c t u a -t i o n s , which are a function of demand changes, w i l l f r u s t r a t e the a t t a i n -ment of market eq u i l i b r i u m and the optimum a l l o c a t i o n of scarce resources (Waggener, 1969). An i n d i c a t i o n that the use of the model i s causing market d i s t o r t i o n s i s implied by the i n f l a t e d p r i c e s paid f o r young growth by some f o r e s t owners such that the annual allowable cut, as c a l -culated by Hanzlik formula, i s increased (Pearse, 1965). This i s what has been termed the "allowable cut e f f e c t " . A l t e r n a t i v e explanations f o r t h i s p o s i t i o n , such as the d e s i r e f o r backward i n t e g r a t i o n by processing firms are discounted by Pearse on the grounds that such actions are uneconomic. The contention that the sustained supply of timber leads to community s t a b i l i t y has been questioned by Shalau et al. (1969), who studied the implications of the p o l i c y i n the Douglas-fir region of the United States of America. Baird (1965) showed that the f a i l u r e to d i v e r -s i f y the i n d u s t r i a l base during periods of r a p i d depletion of the resource would lead to r e g i o n a l depression. A r a p i d run down of the resource i s an acceptable p r a c t i c e i f the rate of depletion i s coordinated with general economic aims of economic development (Nautiyal and Smith, 1968).. Smith and Haley (ibid) concluded that the s t r i c t adherence to sustained y i e l d severely r e s t r i c t s the a b i l i t y of industry to respond to p r i c e change and to achieve economic e f f i c i e n c y . They make a c a l l f o r a more f l e x i b l e approach to f o r e s t management, which they claim i s p o s s i b l e by the i n t r o d u c t i o n of modern managerial t o o l s and techniques. 2.2 ECONOMIC MODELS The use of economic models i s advocated for use as a planning t o o l because they d i s p l a y a greater harmonisation with, the r e a l i t i e s of the socio-economic system. Again, several forms of model have been pro-posed, each with t h e i r l i m i t a t i o n s through doubts as to the v a l i d i t y of the assumptions, lack of s u i t a b l e data or overly narrow b e n e f i t func-t i o n s . 2.2.1 ZERO INTEREST MODELS I f we assume that c a p i t a l and land have no cost, then a zero i n t e r e s t s o l u t i o n w i l l be adopted. Both volume and economic solutions e x i s t . I f the wood harvested has a f i x e d p r i c e per u n i t volume then s o l u t i o n A i s s i m i l a r f o r both volume and value c r i t e r i a ; and s i m i l a r l y f o r s o l u t i o n B. Solution A ; Maximum t o t a l revenue or t o t a l volume occurs when the marginal growth or revenue i s zero. Solution B: Maximum average gross revenue or volume - when marginal growth rate equates with the average growth r a t e . Solution C; Maximum average annual net revenue — when regenera-t i o n and other costs are considered and the f e l l i n g occurs when marginal net revenue equates with average net revenue. However, c a p i t a l i s u s u a l l y scarce and f o r e s t land always has the opportunity of a second crop tHaley, 1964). Therefore, neither c a p i t a l or land can be considered to be c o s t l e s s . C a p i t a l i n t h i s case i s the opportunity f o r acquiring the means of production and land i n simply a form of committed opportunity. Both the option of earning i n t e r e s t , which i s the wages of c a p i t a l , and f a i l u r e to recognise the p o t e n t i a l earnings w i l l r e s u l t i n an opportunity cost. Zero i n t e r e s t solutions must therefore be precluded whenever economic parameters are included i n the d e c i s i o n process and there i s a non-zero rate of growth. 2.2.2 NON-ZERO INTEREST MODELS Several non-zero solutions have been proposed. In consideration of these s o l u t i o n s , c e r t a i n s i m p l i f y i n g assumptions may be made (Bentley and Teeguarden, 1965). F i r s t l y , i t i s assumed that reinvestment at a f i x e d sum can be c a r r i e d out on the same land; secondly, that equal value crops are produced i n s i m i l a r time periods. These two assumptions imply a s t a t i c economy, no technological change and p e r f e c t c e r t a i n t y . Included i n t h i s assumption i s that the i n t e r e s t rate i s s t a t i c and known. The problem of i n t e r e s t rates and t h e i r e f f e c t s on the models w i l l be 24. discussed below. T h i r d l y , i t i s assumed that a l l outlays and revenues occur at the times of regeneration and harvesting. This assumption serves only to s i m p l i f y the models by reducing the incomes and i n v e s t -ments to more s p e c i f i c times but does not a l t e r t h e i r conclusions. Fourthly, i s the assumption that the regeneration i s of even^-aged, s i n g l e specied stands. Bentley and Teeguarden also assumed that owner-ship and management are synonymous. In the s t r i c t e s t sense t h i s i s an i n v a l i d assumption f o r B r i t i s h Columbia i n that the land i s owned by the Province and the management the r e s p o n s i b i l i t y of the companies. However, as the r o t a t i o n age i s a p o l i c y d e c i s i o n of the P r o v i n c i a l Forest Service, which, i t i s assumed, i s a c t i n g benevolently, the assump-t i o n i s acceptable p r a c t i c a l l y . 2.2.2.1 PRESENT VALUE MODELS The problem of f o r e s t v a l u a t i o n has long been of concern. Faustmann (1849) proposed the s o i l (landl expectation value as a means of f o r e s t evaluation and as a method of determining the r o t a t i o n length. Two d e r i v a t i v e s of the formula were demonstrated. F i r s t l y , he proceeded by converting the i r r e g u l a r flow of costs and y i e l d s i n t o an equivalent stream of equal annual f o r e s t rents which f i n a l l y i s c a p i t a l i s e d to give the land value. Secondly, he showed that we a r r i v e at the same formula i f we reduce to the present a l l the incomes and expenditures occurring u n t i l i n f i n i t y . The formula i s : V, ' n - f • -, CE + rD - CU.OpL I - A C1.0plu-1 where E = investment cost at f i n a l y i e l d D = y i e l d from thinning rD = value of P compounded to end of r o t a t i o n C = i n i t i a l investment cost A = annual expenditure u = r o t a t i o n length P = i n t e r e s t rate per cent R = annual land rent The c a p i t a l i s e d value (Bl i s then-: B = R = E + rD - C(1.0p) U - A 0 - O.Op Cl.Qp)"a - 1 °-°P thus u = Log (B + rD + E) - log (B - C) log (l.Op) The r o t a t i o n adopted i s that which maximises B, which i s not n e c e s s a r i l y the maximised value of the harvest. According to the theory of marginal economics, the optimum r o t a t i o n i s when the change i n r e a l i -sable value of the f o r e s t equals the change i n the cost of maintaining the f o r e s t . This i s Bentley and Teeguarden's (1965) general s o l u t i o n . Pearse (1967) solved "u" i n a d i f f e r e n t manner than shown above and so maximised "B". That i s (by Pearse's notation): when AS = a - i S where AS = the change i n stumpage i S = i n t e r e s t charge against stumpage value of the growing stock. The s o l u t i o n depends upon the rate of change of value of the trees. The marginal d e c i s i o n w i l l depend upon the market that the f e l l e d logs are going to have. When the harvest i s t i e d to a given m i l l the r e s u l t may d i f f e r from when the open market p r i c e i s operative CSinden 1964, 1965, 1968), as the o b j e c t i v e then becomes the maximisation of the p r o f i t of 26. the whole operation from p l a n t i n g to f i n i s h e d lumber rather than s o l e l y the f o r e s t operation. Grainger (1968) discussed some l i m i t a t i o n s to the a p p l i c a t i o n of Faustmann's formula but i n general the s o i l rent approach has gained the support of many authors, f o r example Hiley (19301 and Gaffney (19601. In h i s comprehensive review of the basic concepts of r o t a t i o n determina-t i o n Watt (1967) concluded, on the basis of marginal a n a l y s i s , that, provided the assumption of c e r t a i n t y and p r o f i t maximisation were accepted, the best a v a i l a b l e t o o l f o r f o r e s t investment a n a l y s i s was the Faustmann formula. Gaffney commented on the general a p p l i c a b i l i t y of the theory to problems of c a p i t a l renewal i n general, and Weingartner (1965) used a s i m i l a r form of a n a l y s i s f o r equipment replacement problems. This general s o l u t i o n was developed by Naslund (1969). f o r the simultaneous s o l u t i o n of the optimal r o t a t i o n and the optimum time f o r thinning, which takes place whenever the instantaneous increase i n the revenues i s greater than the ensuing decrease i n the present value of the f i n a l s a l e s . The confidence i n present value models i s borne out By the frequent adoption and use of the D.C.F. (Discounted Cash Flowl, a method f i r s t e x p l i c i t l y advocated by F i s h e r (19071, which i s the present r e c e i p t s l e s s the present worth of the costs (e.g. Merrett and Sykes, 1963, 1967; Hague, 1969). The term Net Discounted Revenue i s presently i n vogue i n the f o r e s t l i t e r a t u r e (Johnson, Grayson and Bradley, 1967) where; NDR t Sn n=o (1+p). n n=o (l+pl n t = year of harvest n = year of operation 27. Sn = income i n year n Cn = cost i n year n p = i n t e r e s t rate The optimised form of the NDR d i f f e r s from the s o i l rent i n that the former ignores the land element and c a l c u l a t e s the return to entre-p r e n e u r i a l e f f o r t , which being a negotiable q u a l i t y implies an e f f e c t i v e consistent managerial status, whereas the l a t t e r c a l c u l a t e s the return to the land as the f i x e d f a c t o r . 2.2.2.2 INTERNAL RATE OF RETURN MODELS In order to circumvent the problem of the discount rate and on the basis that present net worth maximisation i s a f a l s e o b j e c t i v e , as the absolute d i f f e r e n c e between the investment and return i s considered, without e x p l i c i t reference to the scale of investment, and therefore i t f a i l s to rank investment a l t e r n a t i v e s without e x p l i c i t reference to the e f f i c i e n c y , or rate of c a p i t a l accumulation of the investment, i n t e r n a l rate of return models have been proposed. The i n t e r n a l rate i s that rate which reduces the r e c e i p t s to the present worth equal to the present worth of the costs. The use of the IRR i s supported by Merrett and Sykes (1966) and i t s value i n f o r e s t r y by Gane C1969). The optimum r o t a t i o n by t h i s c r i t e r i a i s when the average i n t e r n a l rate of return i s maximised CBoulding, 1955). However, there are drawbacks. The Boulding s o l u t i o n assumes a land value of zero and therefore by previous argument i s inadmissable (Gaffney, 1956). A more general s o l u t i o n that includes the land value w i l l return a longer r o t a t i o n that i s s i m i l a r to the Faustmann s o l u t i o n . The s o l u t i o n , however, involves the assumption of a f i x e d c a p i t a l input; that i s , establishment costs 28. are allowed f o r but subsequent costs such as, f o r example, "beating up", and f i r e c o n t r o l , are not considered within the model which maximises the return to i n i t i a l investment. Further, the i n t e r n a l rate of return assumes that a l l incomes p r i o r to f i n a l harvest are reinvested at the same r a t e , which subsumes an exter-nal r a t e , and that the i n i t i a l and terminal p o s i t i o n s are known. In some instances the rate of return may not be unique or may not e x i s t ( H i r s h l i e f e r , 1958). In t h e i r comparisons of the i n t e r n a l rate of return and the present value models both Haley (1969). and Turvey (1963) concluded that the present value models were t h e o r e t i c a l l y superior. 2.2.3 THE PROBLEM OF THE DISCOUNT RATE The zero i n t e r e s t s o l u t i o n s were r e j e c t e d because they f a i l e d to recognise the urgency of c a p i t a l . There i s no a priori reason f o r the assumption that present consumption i s to be preferred to future consump-t i o n , and hence, i f i n t e r e s t i s the reward f o r waiting, there i s no reason why the discount rate should be p o s i t i v e . I f i t i s assumed to be p o s i -t i v e i t follows that when an investment i s made the marginal d i s u t i l i t y of a decrease i n current consumption must be accounted f o r . The i n t e r e s t rate would thus equate the marginal p r i c e of c a p i t a l with the marginal time preference. However, as mentioned, i n t e r e s t i s the wages of c a p i t a l , and therefore, provided the prospective wages are greater than the margi-nal rate of time preference, which i n d i c a t e s the minimum return, and wages are p o s i t i v e , the investment should be made. The problem i s to decide which discount rate to apply (Staebner, 1931). 29. Several a l t e r n a t i v e discount rates e x i s t . The rates at which money may be borrowed or l e n t i n the open c a p i t a l market are termed the market rates, and i n a p e r f e c t market system these rates would coincide and be the l o g i c a l rate to apply to a l l investments, i n that the market c o n t i -nually r e f l e c t s the preferences of i n d i v i d u a l s and s o c i e t y . With the assumption of a p e r f e c t market, then i n the mixed economy, where part of the t o t a l investment takes place i n the p u b l i c l y owned firms or resources, i t i s obvious that the optimum p u b l i c investment strategy i s found by equating the marginal p r o d u c t i v i t y of p u b l i c i n v e s t -ment to the market rate of i n t e r e s t ; the marginal conditions f o r e f f i -ciency or Pareto-optimality w i l l then be s a t i s f i e d a l l round. The going-borrowing, or going-lending rate, allowing f o r market i n e f f i c i e n c i e s , would be adopted depending on the source of c a p i t a l . However, the market i s characterised by: 1) imperfect knowledge by i n d i v i d u a l s ; 2) rates r e f l e c t d i f f e r e n t p r o p e n s i t i e s and a t t i t u d e s to r i s k and uncertainty; 3) i n s t i t u t i o n a l i n e f f i c i e n c i e s (taxation and government f i s c a l p o l i c y ) ; 4) the income l e v e l of the investor a f f e c t s h i s propensity to save; 5) the desires and a s p i r a t i o n s s o l e l y of i n d i v i d u a l s are r e f l e c t e d i n the rate, which i n d i c a t e s p r i v a t e and not p u b l i c u t i l i t y ; 6) the rate i s unstable and changes frequently. The rate i s u n s a t i s f a c t o r y f o r p u b l i c investments because: 1) a more complete knowledge i s , or should be, possessed by p u b l i c a u t h o r i t i e s . 30. 2) the a u t h o r i t i e s are generally not a source of r i s k c a p i t a l ; 3) government f i s c a l p o l i c y i s often d i r e c t e d at i n f l u e n c i n g the market f o r p o l i t i c a l reasons through such mechanisms as the bank rate and c e n t r a l bank deposits; 4) once made, an investment i s i s o l a t e d from societ y u n t i l maturity, though not from the i n d i v i d u a l , between whom investments are negotiable. Hence, the time horizon before maturity i s of l i t t l e consequence to the i n d i v i d u a l i f he i s content s o l e l y with c a p i t a l gains. Such an a t t i t u d e i s u n s a t i s f a c t o r y with p u b l i c i n v e s t -ment as the investment remains i s o l a t e d u n t i l maturity; 5) the government acts f o r the advantage of the e n t i r e population, not j u s t the inv e s t o r c l a s s e s ; 6) the p r i v a t e and s o c i a l welfare functions do not n e c e s s a r i l y c o i n -cide. The market cannot express c o l l e c t i v e demand; 7) the f u l l s o c i a l costs and bene f i t s of investment are not r e f l e c t e d i n the returns; 8) many markets e x i s t and a l l of which may show d i f f e r e n t p r e v a i l i n g r a t e s . To the major f o r e s t firms of B r i t i s h Columbia, the Vancouver market i s probably of l i t t l e s i g n i f i c a n c e , as most of whom are owned outside the Province and often r a i s e the required finances from sources other than the open market. General d i f f i c u l t i e s of the c a p i t a l market were discussed by S t i g l e r (1967). Several l i m i t a t i o n s are associated with the a p p l i c a t i o n of the market rate to the management of p u b l i c resources. In the d i s t o r t e d economy, such as when taxation occurs, where the e q u a l i s a t i o n of marginal 31. rates of s u b s t i t u t i o n and transformation i n the p r i v a t e sector are prevented, then the i d e n t i f i c a t i o n of the c o r r e c t discount r a t e f o r use i n the p u b l i c sector i s impeded. I t has been argued by Baumol (1968) that under c e r t a i n assumptions corporate income tax interposes between the marginal rate of transformation i n p r i v a t e firms and the marginal rate of time preference of consumers. Baumol concluded that i n such cases "there remains an inescapable indeterminacy i n the choice of a discount rate on government p r o j e c t s " , since the discount rate cannot simultaneously be equal to the marginal rate of time preference of consumers and the marginal p r o d u c t i v i t y of p r i v a t e c a p i t a l , and on t h i s basis he found no t h e o r e t i c a l grounds f o r accepting e i t h e r of these rates (or presumably any t h i r d a l t e r n a t i v e ) as the appropriate discount rate to use i n the p u b l i c sector, and that any choice of such a rate w i l l to some extent be a r b i t r a r y . Pigou (1932) commented that "economic welfare w i l l not serve f o r a barometer or index of t o t a l welfare" i n h i s d i s c u s s i o n on the need to consider the t o t a l welfare f u n c t i o n , and f e l t so strongly that the market rate was the wrong choice f o r a p u b l i c discount rate that he termed i t the " i r r a t i o n a l r a t e " . Marglin (1963) and F e l d s t e i n (19641 r a t i o n a -l i s e d on the need f o r normative discount rates which are a d m i n i s t r a t i v e l y determined. The use of a s o c i a l time preference rate or a s o c i a l discount rate assumes that a l l p u b l i c investments y i e l d equal i n t a n g i b l e s o c i a l b e n e f i t s which i s c l e a r l y a f a l s e p r o p o s i t i o n and i t s imposition v i o l a t e s consumer sovereignty. However, the use of such a rate has been argued f o r i n that without i t the e t h i c a l r e s p o n s i b i l i t y to p o s t e r i t y w i l l be be ignored and that the continuous existence of the state would be threatened. A l t e r n a t i v e to the doctrine of the p o l i t i c a l theory of the 3 2 . s o c i a l w i l l i s that of the economic theory of soc i a l i s m . A theory that advocates the r e j e c t i o n of the market manifestations of i n d i v i d u a l preferences and thereby negates consumer sovereignty. However, whatever the reasoning adopted, Scott (1955) rejected the s o c i a l rate of time preference as a r a t i o n a l e f o r the adoption of a sub-market rate as i t was unclear whether t h i s would lead to the con-servation of e i t h e r stock or renewable resources. The use of the opportunity cost rate f o r c a p i t a l ignores the s o c i a l b e n e f i t s foregone which are u s u a l l y inestimable. The d i f f i c u l t y of r a t i o n a l i s i n g a discount rate suggests that the choice i s pragmatic and w i l l remain so. The choice of the wrong rate of discount may, however, cause a serious m i s a l l o c a t i o n of scarce resources, f o l l o w i n g the Keynesian model, i n that i f the rate i s too low c a p i t a l investment w i l l be overly encouraged. This w i l l r e s u l t i n i n f l a t i o n a r y tendencies and p o s s i b l y a discouraging e f f e c t on the supply of p r i v a t e savings. A l t e r n a t i v e l y , i f the rate i s too high the economy w i l l move i n t o excessive consumption. I f the investment i n the f o r e s t was s o l e l y by p r i v a t e v o l i t i o n , without d i r e c t pressure involvement by the p u b l i c sector then, assuming a v e r t i c a l l y integrated company, the o v e r a l l p o s i -t i o n of the firm, i n c l u d i n g conversion return, would be e x p l i c i t l y accounted f o r i n the r o t a t i o n determination. The f o r e s t would be f e l l e d when the marginal increase i n conversion return expectation equated with cost of holding the f o r e s t . The cost of holding the f o r e s t would be the opportunity cost of the c a p i t a l involved and the land opportunity-cos t . 2.2.4 EFFECT OF INTEREST RATE SELECTION ON ROTATION LENGTH Private firms w i l l c arry investment to the p o i n t where the marginal p r o d u c t i v i t y of the c a p i t a l equates to the i n t e r e s t rate and the higher the i n t e r e s t r a t e chosen f o r the present worth models the shorter the r o t a t i o n . This i s because the cost of holding the c a p i t a l becomes greater and the worth of more remote earnings i s correspondingly l e s s . Thus, any non-zero i n t e r e s t s o l u t i o n w i l l be shorter than a zero i n t e r e s t s o l u t i o n . The l i t e r a t u r e on the e f f e c t s of i n t e r e s t rates was reviewed by Goundrey (.I960) . The r e s u l t i n g shortening of the r o t a t i o n by the adoption of a f i n a n c i a l r o t a t i o n w i l l permit the allowable cut to be increased (Smith and Haley, 1964). 2.3 COST-BENEFIT ANALYSIS A more comprehensive technique f o r investment a p p r a i s a l than simple economic a n a l y s i s i s that of c o s t - b e n e f i t a n a l y s i s . The subject was reviewed i n terms of economic theory by Prest and Turvey (1965) f o r p u b l i c investment by F e l d s t e i n (1964) and f o r general a p p l i c a t i o n by Davis et at. (1962). i n i t s simplest form the technique i s the compari-son of the sum of the costs and the sum of the benefits of proposed p r o j e c t s . L e s l i e (1967) gave the e s s e n t i a l elements of c o s t - b e n e f i t analy-s i s as: 1) a statement of the costs and b e n e f i t s to be taken i n t o account; 2) a method of evaluating them; 3) a discount rate f o r converting the values of b e n e f i t s , and costs occurring at d i f f e r e n t times to a common basis; 34. 4) a statement of the c o n s t r a i n t s ; 5) a c r i t e r i o n f o r comparing costs and b e n e f i t s . I t w i l l have been noted that the s o l u t i o n i s based upon other forms of a n a l y s i s , the t h e o r e t i c a l problems of which were discussed above, and the inherent shortcomings of these analyses p e r s i s t . I f i t i s assumed that these problems have been solved, then the most a t t r a c t i v e a l t e r n a t i v e to the investor i s that which maximises the d i f f e r e n c e between the costs and the b e n e f i t s . The v a l u a t i o n of abstract values i s presently very u n s a t i s f a c t o r y from the viewpoint of q u a n t i t a -t i v e a n a l y s i s . A s u i t a b l e method by which these values may be reduced to a common base, u s u a l l y d o l l a r values, does not e x i s t . Scenic values f o r instance cannot be t r a n s l a t e d , or even transmogrified, to d o l l a r values. C l a s s i c a l l y , the value of c a p i t a l can be expressed according to: 0 = ftL,C) where 0 = s o c i a l product L = labour C = c a p i t a l whereby C can be ascertained by the determination of the p o t e n t i a l pro-d u c t i v i t y at the p r e v a i l i n g f a c t o r r a t i o (the quantity of c a p i t a l a v a i l -able per person employed). The s o c i a l product i s , assuming p e r f e c t markets, the sale value of the goods produced. What i s the sum of the goods produced by f o r e s t r y ? Hence, what i s the value of the c a p i t a l t i e d up i n the f o r e s t ? .In the f i n a l a n a l y s i s , where the costs and b e n e f i t s are of such a divergent nature as i n the case of f o r e s t r y p r a c t i c e , the a n a l y s i s reduces to the l i s t i n g of the costs and be n e f i t s to form a s e r i e s of cost b e n e f i t combinations. For each, combination of investment or p o l i c y a l t e r n a t i v e s an exhaustive l i s t i s recorded. I d e a l l y , these l i s t s are extended to cover n e t - s o c i a l b e n e f i t and cost f a c t o r s , secondary f a c t o r s and a d e s c r i p t i o n of the i n t a n g i b l e s . Further a n a l y s i s of the informa-t i o n i s p o s s i b l e i f opportunity- cost values, expressed q u a n t i t a t i v e l y or q u a l i t a t i v e l y , are considered. Under present conditions, where the t o t a l o b j e c t i v i t y of f o r e s t investment i s not a p r a c t i c a l p r o p o s i t i o n , c o s t - b e n e f i t combinations present a u s e f u l a i d to d e c i s i o n making. However, where many non-s p e c i f i c values are included i n the a n a l y s i s the method i s i n a p p l i c a b l e as the sole basis f o r d e c i s i o n making. We may conclude that the method, though imperfect, i s an improvement over the si n g l e o b j e c t i v e maximisa-t i o n s of c l a s s i c a l investment a p p r a i s a l . This conclusion i s shared by L e s l i e C1967), who wrote that the method " i s an example of the trend f o r the development of more r e a l i s t i c a n a l y t i c a l t o o l s f o r decision-making". 2.4 CONCLUSION On the basis of there being several facets f o r consideration i n f o r e s t p o l i c y , p h y s i c a l models are inadequate f o r achieving these goals. They generally give excessive weight to future b e n e f i t s as a r e s u l t of the use of zero time preference, and are generally thought to be too i n f l e x i b l e to be used s a t i s f a c t o r i l y w i t h i n a market oriented economy. Economic models c o r r e c t the biased weighting to future b e n e f i t s but even these have l i m i t a t i o n s as not a l l values and bene f i t s can be expressed i n a si n g l e u n i t a r y value. The requirements to s a t i s f y many 36. goals preclude maximising behaviour i n the d e c i s i o n making process by the use of e i t h e r p h y s i c a l or economic behaviour. Further, the information output from the planning techniques i s too narrow to give a t o t a l systems evaluation of the e f f e c t of a given p o l i c y . Also, the inherent r e g u l a r i t y and l i m i t e d input data f a i l to r e f l e c t the true complexity of the t o t a l system response to input or p o l i c y changes. The present -models bear no r e l a t i o n s h i p to the f o r e s t firm, which i t i s envisaged w i l l continue f o r the foreseeable future to be the main operator of B r i t i s h Columbian f o r e s t s , make no e x p l i c i t reference to e x t e r n a l i t i e s or secondary b e n e f i t s , and do not ensure e f f i c i e n t use of the resource. With the narrow basis f o r planning and the l i m i t e d a b i l i t y that we now possess f o r the a n a l y s i s of the consequences of co n s t r a i n t s or p o l i c y changes, i t becomes abundantly c l e a r that new procedures f o r the a p p r a i s a l of p o l i c y and investment d e c i s i o n need to be i n v e s t i g a t e d . CHAPTER 3 OPERATIONS RESEARCH TECHNIQUES AND FOREST PLANNING Systematic a n a l y s i s of the f i r m i n a dynamic and q u a n t i t a t i v e manner may only be r e a l i s e d r f the system i s expressed as a s e r i e s of mathematical algorithms that express the f u n c t i o n a l r e l a t i o n s h i p s between the i n t e r a c t i n g elements of the system. The f u n c t i o n a l r e l a t i o n s h i p s reduce i n the simplest case to the "go-nogo" state Cor a l t e r n a t i v e l y the "yes-no" or "active-passive" response)., which i s commonly r e f e r r e d to as the l o g i c a l model. The need f o r q u a n t i f i c a t i o n i n economic studies was hinted at by Ricardo from h i s e a r l i e s t works and Jevons C 1 8 7 1 ) r e a l i s e d that mathematics was the key; " I t seems p e r f e c t l y c l e a r that Economy, i f i t i s to be a science at a l l , must be a mathematical science." There e x i s t s much prejudice against attempts to introduce the methods and language of mathematics i n t o any branch of the moral sciences. Most persons appear to hold that the p h y s i c a l sciences form the proper sphere of mathematical method, and that moral sciences demand some other method; I know not what. My theory of Economy, however, i s purely mathematical i n character. I know not when we s h a l l have a p e r f e c t system of s t a t i s -t i c s , but the want of i t i s the only insuperable obstacle i n the way of making P o l i t i c a l Economy an exact science." (p. 3). The advent of the e l e c t r o n i c computer, with i t s f a c i l i t y f o r the handling of prodigous amounts of data and the execution of otherwise tedious, mundane and humdrum algorithms has been a major step towards the "perfect system of s t a t i s t i c s " . The e a r l y use of computers i n f o r e s t r y was reviewed by Csizmazia Q-963) and more re c e n t l y by Dixon 38. (1970). Bunce (1967) i n a tome on f o r e s t r egulation with reference to the t o t a l environment commented; "The d e t a i l of the system of mathematical c a l c u l a t i o n required has not Been shown but rather remains f o r f u r t h e r research. The a p p l i c a t i o n of modern e l e c t r o n i c computing devices at t h i s stage would seem most l o g i c a l . " (p. 306). The systematic mathematical approach to planning i s termed opera-t i o n s research, and the i n t e r e s t displayed i n the use of these techniques f o r many aspects of f o r e s t planning problems i s r e f l e c t e d i n the amount of l i t e r a t u r e devoted to the subject (e.g. B r i t i s h Forestry Commission, 1965; H u l l , 1967; I.B.M., 1964, 1965; Wardle, 1971). The term operations research covers several techniques. Amongst those used f o r f o r e s t r y problems are c a l c u l u s ; the i t e r a t i v e optimising techniques of l i n e a r , non-linear, integer and dynamic programming; search techniques such as PERT (Programme Evaluation and Review Technique) and c r i t i c a l path a n a l y s i s , game theory; and s t o c h a s t i c and d e t e r m i n i s t i c simulation. The a p p l i c a b i l i t y of these techniques within the context of the a n a l y s i s of the f i r m w i l l depend to a large extent on the planning l e v e l i n question and the r e l a t i v e importance of the d e c i s i o n i n the o v e r a l l scheme. The relevance of operations research to f o r e s t management has been discussed by Wardle (1968), though h i s work r e f e r r e d p r i n c i p a l l y to l i n e a r programming. 3.1 CALCULUS Calculus may be applied to simple maximising and minimising prob-lems. However, several d i f f i c u l t i e s are inherent i n the -method. F i r s t l y , a d e r i v a t i v e that becomes zero i s a necessary, but not s u f f i c i e n t c ondition, 39. for a glo b a l l i m i t and where a c o n s t r a i n t i s introduced the maximum or minimum value over the f e a s i b l e range may not be where the d e r i v a t i v e i s zero. Further, non-rdifferentiable and l i n e a r functions are not s a t i s -f a c t o r i l y resolved by t h i s technique. 3.2 ITERATIVE OPTIMISATIONS I f an n-space of f e a s i b i l i t y i s defined for a system or se r i e s of systems then an optimal s o l u t i o n may be found by the comparison of extreme points of t h i s space "until the maximum or the minimum i s found. One of the more commonly used techniques of t h i s type that i s -used i n f o r e s t planning i s l i n e a r programming. The following assumptions and l i m i t a t i o n s p e r t a i n to the l i n e a r programming model; 1) As with a l l optimising techniques a d e f i n i t i v e o b j e c t i v e i s required. Under conditions of broad planning with extreme uncer-t a i n t y a d e f i n i t i v e o b j e c t i v e may not be t o t a l l y f e a s i b l e . I t i s a l s o assumed that the returns from a l l a c t i v i t i e s can be mea-sured i n common u n i t s . 2} A d d i t i v i t y and p r o p o r t i o n a l i t y within the model imply l i n e a r i t y , and the assumption that l i n e a r i t y holds may be an over s i m p l i f i c a -t i o n . The assumption of a l i n e a r objective function implies i n f i n i t e demand e l a s t i c i t y f o r the f i n a l product, constant costs of production and f i x e d input f a c t o r proportion. The problem may be a l l e v i a t e d by the use of a s e r i e s of l i n e a r approximations. Such ac t i o n may be applied, f o r example, i n cases of diminishing returns to scale where the return from any a c t i v i t y i s independent of the returns or inputs to other a c t i v i t i e s . 40. 3) Unrestrained a d d i t i v i t y within the formulation of the model i s assumed. That i s , the products of the system are non-competitive and the e f f e c t s of market s a t i a t i o n are ignored. 4) The technique produces f r a c t i o n a l answers. Where d i v i s i b i l i t y i s not a c h a r a c t e r i s t i c of the system, the rounding-off of r e s u l t s may product a sub-optimal or even an i n f e a s i b l e answer. 5) The co n s t r a i n t s must be maintained over the f u n c t i o n a l time spectrum of the model, which may be overly r e s t r i c t i v e f o r long term a l l o c a t i o n problems or where the system i s responsive to feedback. Linear programming has been applied to f o r e s t management, with varying degrees of success by C u r t i s (1962), Donnelly et al. (1963), Kidd et al. (1966), Leak (1964), and Wardle (1965) amongst others. Use has been made of the technique f o r the optimising of the a l l o c a t i o n of scarce resources, and has been applied to quite large problems of resource a l l o c a t i o n . For example, Navon (1971) has developed the "Timber Resources A l l o c a t i o n Model" f o r f o r e s t planning over a ten year time horizon. This model was discussed and compared with two t r a d i t i o n a l methods of f o r e s t c o n t r o l and r e g u l a t i o n by Hennes et al. (1971). Other techniques have been developed to overcome some of the problems associated with l i n e a r programming. v Non—linear programming has been developed i n order to overcome the assumption of l i n e a r i t y , but presents considerable d i f f i c u l t i e s as to the formulation of the problem and the respective functions, and also to the s o l u t i o n which, must s a t i s f y the s o - c a l l e d Kuhn-Tucker c o n d i t i o n . 41. Where n o n - d i v i s i b i l i t y of an integer i s a requirement f o r the so l u t i o n of a l i n e a r equation, integer programming needs to be employed. The integer s o l u t i o n may- Be achieved by the progressive i n c l u s i o n of cons t r a i n t s i n t o non-integer s o l u t i o n s u n t i l the integer condition i s s a t i s f i e d . C e r t a i n problems may- be solved hy the use of mixed-integer programming whereby integer v a r i a b l e s are introduced as con s t r a i n t s i n t o the general l i n e a r programming format. The most common form of i t s use i s zero-one (0.1) programming, where a zero value e n t a i l s exclusion and an integer value e n t a i l s i n c l u s i o n . For a constrained optimisation, branch and bound methods may be employed. These methods were reviewed by Lawler and Wood (1966).. Another important technique that may be applied to resource a l l o -c a t i o n i n sequential or multistage processes i s dynamic programming. I t has been applied by Amidon and Atkin (1968), Bailey (1970), Hood (1966), K i l k i and Vaisenen (1970), Risvand (1970), and Schreuder (1968). Problems that are s u i t a b l e f o r dynamic programming are charac-t e r i s e d by; 1) the need f o r decisions i n successive and sequential stages, where a stage may be a p a r t i a l e n t i t y or d e f i n i t e or i n d e f i n i t e duration; 2) several states e x i s t at each stage and there i s a known stage coupling function; 3) a p o l i c y d e c i s i o n r e l a t e s the state of the current stage to a state associated with the following stage. The p r i n c i p l e of the technique i s that f o r an optimum s o l u t i o n then the current d e c i s i o n i n an n-stage sequence must be optimised with respect to the n-1 decisions remaining, given the state r e s u l t i n g from 42. the f i r s t d e c i s i o n . D i f f i c u l t i e s a r i s e , however, i n s e t t i n g up the problem i n a manner amenable to s o l u t i o n by t h i s technique. 3.3 SIMULATION For the a n a l y s i s of complex systems, simulation has proved a valuable technique. Simulation i s the use of a model that simulates a r e a l l i f e process. The model may use p h y s i c a l , d e s c r i p t i v e or mathema-t i c a l concepts to reproduce the e s s e n t i a l c h a r a c t e r i s t i c s of the system. Models using mathematical concepts are most commonly used f o r f o r e s t planning purposes. The model may be based on various forms of i n t e r - r e l a t i o n s h i p s between the elements that comprise the system. The i n t e r - r e l a t i o n s h i p s may be l o g i c a l , i n that given a set of circumstances (x^, i = 1 n i then a second set of circumstances Cy^, i = 1 n) w i l l occur. A l t e r -n a t i v e l y , the r e l a t i o n s h i p may be f u n c t i o n a l . That i s , given a set of circumstances (x^, i = 1 n) the subsequent circumstances are dependent upon the state of the f i r s t set Cy^ = f ( x J , i = 1 n). Stochastic processes are used where the t r a n s l a t i o n between elements i s governed by a p r o b a b i l i t y . I f the exact d e f i n i t i o n of the r e l a t i o n s h i p i s unknown, or i s excessively demanding, e i t h e r i n terms of computer time or complexity h e u r i s t i c s , or "rules of thumb" that adequately describe the t r a n s l a t i o n , may be employed. A model may contain any combination of these forms. The advantages associated with the use of simulation are the f l e x i b i l i t y of approach, the freedom from constraining assumptions that appertain to the previously mentioned techniques, the changing of the defined con s t r a i n t s and assumptions w h i l s t operating the model i f desired, 43. the complexity of the systems that may be simulated, and the i n c l u s i o n of multiple goals and o b j e c t i v e s . The flow of goods and services during the execution of the model may be noted and an intervention may occur at any chosen time. A l l models are abstractions from r e a l i t y . However, the degree to which the model resembles r e a l i t y i s constrained by various f a c t o r s . ^ F i r s t l y , the degree to which the system i s understood and known; secondly the amount and the accuracy of the data input; and t h i r d l y , the objective of the exercise as s o p h i s t i c a t i o n beyond that required i s f r u i t l e s s ; l a s t l y the computational f a c i l i t i e s at the d i s p o s a l of the modeller. One approach to model formulation i s : 1) determine the problem; 2) define the goals and objectives-; 3) recognise the elements of the problem; 4) designate the c o n s t r a i n t s p e r t a i n i n g to the problem; 5) i d e n t i f y the operating system, with i t s boundaries, v a r i a b l e s and parameters; 6) d e t a i l the algorithms f o r each sub-system; 7) programme the algorithms. The construction of the model e n t a i l s c e r t a i n steps and procedures. Conway (1963) considered there to be three phases e n t a i l e d a f t e r the problem has been i d e n t i f i e d : 1) model implementation - d e s c r i p t i o n of the system i n a language acceptable to the computer; 2) s t r a t e g i c planning - design of an experiment that w i l l y i e l d the desired information; 44. 3) • t a c t i c a l planning — determination of how each of the t e s t runs s p e c i f i e d i n experimental design i s to be executed. Smith. 0.9701 discussed the steps involved i n using the systems technique f o r problem a n a l y s i s i n developing a -management model, where much of the inherent d e c i s i o n processes are based on experience and value judgement. Smith's d e s c r i p t i o n can be modified (see F i g . 3.1) to make * more e f f i c i e n t use of the model i n the ea r l y stages. Whereas a model , may not represent the system s u f f i c i e n t l y f o r use i n f i e l d procedures, i t j may be used to reproduce f i e l d c h a r a c t e r i s t i c s within the classroom and i thus f i n d use as a t r a i n i n g t o o l besides d e l i v e r i n g more d e t a i l e d i n f o r -mation as to the nature of the system. Further i f the model f a i l s to reach the f i e l d status, due to l a c k of data f o r example, the input of e f f o r t s t i l l renders some value. The v e r i f i c a t i o n and v a l i d a t i o n of the model and the a n a l y s i s of generated data has been discussed by Fishman and K i v i a t e (1967 a & bL. 3.4 APPLICATION OF OPERATIONS RESEARCH TO FOREST PLANNING For a s a t i s f a c t o r y management plan f o r f o r e s t use to be 'developed the f u l l range of the m u l t i p l i c i t y of pos s i b l e inputs and outputs should be considered. I f i n s u f f i c i e n t v a r i a b l e s are included i n the allowable cut c a l c u l a t i o n the r e s u l t i n g s o l u t i o n should be considered i n v a l i d (McConnen et al., 19661. The "what should be approach" that they adopted i s a very i d e a l i s t i c approach that cannot, however, always be emulated. C l e a r l y , each input and output w i l l carry d i f f e r e n t weights as to t h e i r importance and therefore t r a d e - o f f s between a l t e r n a t i v e s are often c a l l e d f o r . The marginal case f o r decisions between a l t e r n a t i v e s i s f a c i l i t a t e d 45. more e a s i l y i f a l l the fa c t o r s are based on a common unit of measurement. However, the use of common values i n complex planning problems i s imprac-t i c a l at the present time. The r e l a t i o n s h i p s that e x i s t between various elements within the course of the use of the f o r e s t may vary considerably and follow no r i g i d form or type. Further, the d e f i n i t i o n of the optimum o v e r a l l state of the system may be a p o l i t i c a l d e c i s i o n . A l l that can be established i s a se r i e s of acceptable and f e a s i b l e s t a t e s , with the f i n a l d e c i s i o n being the r e s p o n s i b i l i t y of the p o l i t i c i a n s . In view of the nature of the problem and with regard to the c h a r a c t e r i s t i c s of the problem and various operations research techniques discussed, f o r the formulation of a p o l i c y evaluation model of a f o r e s t f i r m and the consequential e f f e c t on the f o r e s t resource, simulation i s the most appropriate. The general a p p l i c a t i o n of simulation and i t s value to an a l y s i s was discussed by Gould (1967). Sasser and Naylor (1967) gave an example of the a p p l i c a t i o n of simulation to economic systems and Vaux (1970) demonstrated the management of complex systems, a l b e i t over a short time horizon with both exact temporal and s p a t i a l d e f i n i t i o n . In t h i s case, operating personnel i n a plywood plant e f f e c t i v e l y managed complex d e c i -sion processes of resource a l l o c a t i o n with both economic and production c o n s t r a i n t s . Smith (1966) supported the use of stand growth simulations as an a i d to d e c i s i o n making. A t o t a l systems simulation has been adopted fo r the HPS ( I n t e r - I n s t i t u t i o n a l P o l i c y Simulation) study at the Univer-s i t y of B r i t i s h Columbia (Goldberg et al. , 1971). The f o r e s t resource was viewed as a system by R i p l e y and Yandle (.1969) , and Seale (1965L considered that the f o r e s t as a whole formed a system. When seen as such, the advantages of the system approach as discussed previously may be capitalised-upon, Both to the advantage of the d e c i s i o n maker and the modeller. The need f o r the accurate and r e a l i s -t i c representation of the system was stressed By Gane (1966). A systems approach was adopted by 0'Regan et at, (1965) f o r t h e i r evaluation of a l t e r n a t i v e harvesting p o l i c i e s under conditions of p r i c e i n s t a b i l i t y . However, the use of models f o r p r e d i c t i o n i s perforce uncertain and subject to e r r o r , due to the cumulative i n t e r n a l e r r o r s and to changes i n the environment not accounted f o r by the model. The errors w i l l increase i n absolute magnitude though not n e c e s s a r i l y i n importance, as the time horizon of the model i s extended. The development of the l i t e r a t u r e i s characterised by the ever increasing d i v e r s i t y of inputs i n t o the management d e c i s i o n . The f u n c t i o n i n g system i s being subject to a r a d i c a l , systematic d i s s e c t i o n i n order to comprehend the multitude of i n t e r a c t i n g and r e a c t i n g f a c e t s . Coincident with t h i s development has been the evolution of the mathematical techniques that lead us to begin to consider the formulation of a t o t a l systems model f o r f o r e s t planning and the consequential a n a l y s i s of these d e c i s i o n s . These models could be developed along many d i f f e r e n t l i n e s . In the subsequent d i s c u s s i o n j u s t one approach w i l l be considered. In the course of developing the model there are several stages to be followed (see F i g . 3.1). These stages have been taken from Smith (1970) and modi-f i e d to include a gaming phase. This phase has been included as the model has p o t e n t i a l "use p r i o r to i n t r o d u c t i o n i n t o the operations phase. I d e n t i f i c a t i o n of the system observation and measurement 7 T T ) analysis management goals ^ hypothesis <-+ te s t i n g t e s t i n g ^ gaxnmg experience of the system by gaming ^ optimisation -^.-^  f i e l d model 7N simulation 1^ Figure 3.1 FLOW CHART OF MODEL DEVELOPMENT USING THE SYSTEMS APPROACH (MODIFIED FROM SMITH, 1970) 48. The educational worth of the model f o r teaching the structure of the systems and the operations i n the general sense must be recognised. Though the model may have s p e c i f i c data inadequacies- and only g e n e r a l l y defined production functions-, or even be prejudiced against operational use by those i n power, the educational -value i s not i n v a l i d a t e d . Further, increased experience with the model w i l l enable refinements and develop-ments to be included along with c l e a r e r i n d i c a t i o n of the c r i t i c a l functions and/or system limitations-. 49. CHAPTER 4 ANALYSIS OF THE FOREST FIRM There has r e c e n t l y Been increasing attention paid to the theory and r o l e of the f i r m i n resource a l l o c a t i o n . The p o s i t i o n of the f i r m i n the o v e r a l l structure has been discussed at some length, but the theory has so f a r not been mentioned. There i s considerable disagreement between economists as to p r e c i s e l y what i s the "theory of the f i r m " . No one theory has been graced with the t i t l e f o r any length of time though a d i s t i n c t course of evolution can be followed. I n i t i a l l y there was the c l a s s i c a l theory* which i n essence was the theory of market behaviour and was concerned with explaining the a l l o c a t i v e process of the market place. The theory set out to explain the behaviour of firms and, consequently, the a l l o c a t i o n of resources among firms under varying market conditions, e.g. pure competition, o l i g o p o l y and monopoly. According to the theory, the f i r m was an e n t i t y whose obje c t i v e was to maximise i t s net revenue ( p r o f i t s ) . The objec-t i v e was accomplished by the f i r m taking the p r i c e of i t s f a c t o r inputs as being given by the market place and the net revenue was then maxi-mised by the f i r m deciding upon a p a r t i c u l a r combination of inputs and outputs i n accordance with i t s p a r t i c u l a r production function, which was determined by the current state of technology, and the given product p r i c e . * For a more d e t a i l e d d e s c r i p t i o n of the c l a s s i c a l theory see Henderson and Quandt Q958I pp. 42-84. 50. Under pure competition the f i r m was allowed to s e l l at a given p r i c e whatever quantity of f i n i s h e d product i t produced, and the f i r m would continue to produce u n t i l the marginal cost equalled the marginal revenue. The theory was extended from sin g l e product to multi-product firms to explain how they- would achieve t h e i r o v e r a l l production. A f t e r s p e c i f y i n g the conditions under which the firms engaging i n pure competi-t i o n could maximise t h e i r net revenue, the theory then explained the e f f e c t s of changes i n the p r i c e s of products and the f a c t o r s of produc-t i o n which r e s u l t e d from changes i n the e q u i l i b r i u m p o s i t i o n of the t o t a l market. Pure competition was not u n i v e r s a l and so the theory was extended to meet conditions where the market f o r f a c t o r s of production or f i n a l products was imperfect. Several i n t e r p r e t a t i o n s of the theory were proposed i n order to account f o r imperfect market states such, as o l i g o p o l y , (Modigliani, 19581. However, c e n t r a l to the extensions was the assump-t i o n that the objective of each f i r m was to maximise i t s p r o f i t . Thus, while the c l a s s i c a l theory was extended to meet various market conditions i t s purpose, the explanation of the a l l o c a t i v e processes of the market place, remained unchanged. Opposition to the theory mounted as c r i t i c s argued that the f i r m d i d not decide how much to produce by equating marginal cost to marginal revenue. They noted that the theory d i d not view the f i r m as an organisa-t i o n and ignored the existence of management planning, budgeting and sales t a r g e t i n g f o r instance, which, they argued, should be included i n the firm's d e c i s i o n processes. The c l a s s i c a l theory had been constructed to explain at the general l e v e l the behaviour of the firms withxn the 51. market and not the behaviour of i n d i v i d u a l s within a p a r t i c u l a r firm. Consequently-, the c r i t i c i s m s not only r e f l e c t e d the d i s p a r i t y between the behaviour of the actual firms and the firms of the theory, but also the d i r e c t i o n s i n which the theory ought to be revised. This was necessary i f the theory was to become a v e h i c l e f o r explaining and p r e d i c t i n g the v a r i e t y that firms exhibited within the market place as well as within the systems of the i n d i v i d u a l firms. Baumol (1958L proposed a major r e v i s i o n when he proposed the sales maximisation hypothesis suggesting that firms do not have a s i n g l e objec-t i v e . He asserted that sales maximisation was the o b j e c t i v e of the f i r m but there was the c o n s t r a i n t of an o v e r a l l p r o f i t l e v e l that had to be maintained. The acceptable p r o f i t l e v e l was a c o n s t r a i n t on the f i r m while i t s t r i v e d to maximise i t s sales revenue. Whereas c l a s s i c a l theory s a i d that f i x e d costs d i d not influence the l e v e l of production, which contradicted observed behaviour, described by the general dictum, " i f costs r i s e , so must p r i c e s " , Baumol's theory was c l e a r l y more consistent with t h i s observed behaviour. However, the theory s t i l l neglected the p a r t i c u l a r set of decisions and procedures that lead to a p a r t i c u l a r goal. Further development of the theory of the f i r m lead to what may be described as the 'behavioral t h e o r i e s ' , or the 'Carnegie School of Thought'. Instead of concentrating on the market mechanisms the f i r m i s taken as an e n t i t y and analysed according to the firm's d e c i s i o n making behaviour on p r i c e s e t t i n g , output l e v e l s , i n t e r n a l resource a l l o c a t i o n , e t c . The theory i s most comprehensively reported i n Cyert and March (1963). With the abandonment of the s i n g l e u n i v e r s a l o b j e c t i v e of the c l a s s i c a l theory and the s u b s t i t u t i o n of the notion that the firms have a v a r i e t y of goals, the d e c i s i o n mechanism that permitted the r e s o l u t i o n of c o n f l i c t s between objectives had to be introduced. Each goal enters i n t o the d e c i s i o n process as a s e r i e s of c o n s t r a i n t s which define the s e r i e s , or set, of s a t i s f a c t o r y performance l e v e l s , and the management makes plans and decisions by s a t i s f y i n g the set within the confines of the a v a i l a b l e , always imperfect, knowledge. Asp i r a t i o n s n a t u r a l l y change over time and so the l e v e l of s a t i s f a c t o r y performance within the f i r m a l s o changes. A d e t a i l e d study of the f o r e s t f i r m i n B r i t i s h Columbia i s not a v a i l a b l e , but p r i o r to the use of the f i r m as the instrument f o r planning, a d e t a i l e d understanding of i t s mode of operation, objectives and con-s t r a i n t s i s required. However, a perfunctory a n a l y s i s i s p o s s i b l e as the f o r e s t f i r m i n B r i t i s h Columbia has many c h a r a c t e r i s t i c s of organisa-t i o n s i n general, and other firms i n p a r t i c u l a r , which allows several g e n e r a l i s a t i o n s regarding the f i r m to be made. 4.1 CHARACTERISTICS OF THE FIRM'S 0RG7-NISATI0N The f i r m i s comprised of i n d i v i d u a l s ; each with h i s own hopes, a s p i r a t i o n s and a b i l i t i e s . The i n d i v i d u a l s are r e l a t e d with each other i n pursuing the core a c t i v i t i e s of the firm. Argyris (1968} gave these core a c t i v i t i e s as: 1) the organisation's goals; 2) maintenance of the i n t e r n a l system; and 3) i n t e g r a t i o n of the organisation with the environment. The achievement of these goals i s f a c i l i t a t e d by a formalised o r g a n i s a t i o n a l structure for information and i n s t r u c t i o n flow, though the formal structure i s augmented by the formation of casual and informal ones. The organisation has steady state and dynamic p r o p e r t i e s . The d e c i s i o n making, problem so l v i n g and d e c i s i o n implementation processes tend to be r e l a t e d to the informal, or dynamic pr o p e r t i e s . The e f f e c t i v e n e s s of these a c t i v i t i e s i s dependent -upon: a) awareness of the relevant information necessary to understand the problem needing s o l u t i o n ; b) a b i l i t y to understand the a v a i l a b l e information; c) a b i l i t y to use and manipulate the information; d) a v a i l a b i l i t y of resources f o r s o l u t i o n implementation; and e) existence of a long term problem s o l u t i o n that does not detract from the current l e v e l of e f f e c t i v e n e s s of the organisation. 4.2 SYSTEMS AND THE FIRM The foundations f o r modern systems theory were l a i d by Ludwig von B e r t a l a n f f y (1951) and were applied to management by K. Boulding 0-956). As systems are made up of sets of components that work together f o r the o v e r a l l o b j e c t i v e of the whole, we are able to analyse the most complex of systems by the d i s s e c t i o n of the whole into i t s component parts f o r s c r u t i n y . Systems pervade a l l aspects of our environment, be i t a t r a n s i t system, an ecosystem, an economic system or a p o l i t i c a l system. The systems approach i s simply a way of thinking of the t o t a l systems and t h e i r components. The problems of r e a l i s t i c d e s c r i p t i o n of complex systems were commented upon at length by Churchman (1968). The systems 54. approach may be made i n d i f f e r e n t ways. The d i v i s i o n of the whole i n t o a s e r i e s of i n t e r - r e l a t e d sub-systems was advocated by Simon (1962) and has been applied with considerable success to water resource planning by Maass (1962). An o v e r a l l framework can be provided i n which phenomena common to several d i s c i p l i n e s can be i s o l a t e d and general models developed to include such phenomena. A l t e r n a t i v e l y , a hierarchy of complexity l e v e l s can be structured f o r the basic u n i t s of various empirical f i e l d s . I t would also involve the development of a l e v e l of abstraction to represent each f i e l d . This a l t e r n a t i v e approach i s that which was adopted by Boulding i n h i s o r i g i n a l c l a s s i f i c a t i o n model and the approach that was developed with reference to business by Johnson, Kast and Rosenweig (.1964) . Within the framework of the business as a system, the s c i e n t i f i c -management school has drawn machine-man analogies, showing each component of the f i r m as a f u n c t i o n a l element within the organisation. The machine system per se f o r the f i r m was de-emphasised by the human r e l a t i o n i s t s who concentrated more on the i n t e r - r e l a t i o n s h i p s between components and how they i n t e r a c t e d . Recognition of the inter-personal r e l a t i o n s h i p s and human behavioural f a c t o r s within the f i r m has l e d to a r e a p p r a i s a l of managerial approaches, o b j e c t i v e s , and techniques. This movement u l t i -mately a r r i v e d at the concept of the f i r m as a s o c i a l system. This s o c i a l system school looks upon management as a system of c u l t u r a l i n t e r -r e l a t i o n s h i p s . The teachings of t h i s school of thought r e l y h e a v i l y on sociology and recognise that the components group and regroup i n informal and formal a c t i v i t y , and function i n groups within the t o t a l integrated system. The system of the f i r m i s subject to c u l t u r a l influences and i s operating within an o v e r a l l l a r g e r environmental system. 55. The r e a l i s a t i o n of the complexity of the enterprise system n u l l i f i e s the e a r l i e r simple models of maximising behaviour as t o o l s f o r organisa-t i o n a l a n a l y s i s . The mechanical models of " s c i e n t i f i c management" have given way to theories and systems representative of the "human r e l a t i o n s " movement with current emphasis developing around de c i s i o n making, communi-cati o n s , organisation s t r u c t u r e , growth of the firm and uncertainty. 4.2.1 HIERARCHICAL SYSTEMS The existence of formal structures within the f i r m w i l l require the r e t e n t i o n of c e r t a i n features CSimon, 1960, p. 49). These features are: a) the organisation w i l l be h i e r a r c h i c a l i n form and w i l l be divided i n t o parts i n a departmental manner; b) the organisation w i l l be constructed of three layers; an underlying system of p h y s i c a l production and d i s t r i b u t i o n , a layer of pro-grammed and p o s s i b l y l a r g e l y automated d e c i s i o n processes f o r routine r e g u l a t i o n of the production system and a system of non-programmed d e c i s i o n processes f o r monitoring the other systems and governing them. Simon's h i e r a r c h i c a l systems may p e r s i s t ; however, the l a t e r a l r e s p o n s i b i l i t y of i n d i v i d u a l s must be expected to expand as m u l t i - d i s c i p l i n a r y , t o t a l information decisions systems are developed. The f i r m system must maintain a s e r i e s of sub-systems i n order to react to, f o r and with the t o t a l dynamic system of which i t forms a part. The system as a whole must note: 1) the t o t a l system o b j e c t i v e ; 2) the systems environment and f i x e d c o n s t r a i n t s ; 56. 3) resources of the system; 4) components of the system, i n a c t i v i t i e s , goals and measures of performance; 5) management of the system. The management aspect may be divided i n several operating sub-systems. These sub-systems are Csee F i g , 4.1, p. 57): 1) a g o a l - s e t t i n g sub-system which establishes the objectives of the organisation; 2) a sensor sub-system to i d e n t i f y and monitor changes within the environment; 3) a data storage sub-system; 4) an information processing sub-system such as accounting; 5) a d e c i s i o n making sub-system that receives information inputs and outputs planning messages; 6) a c o n t r o l component that ensures the achievement of goals and provides the feedback c o n t r o l ; 7) a production sub-system that responds to information and production goods to achieve c e r t a i n goals. The performance of the system w i l l be assessed by the degree to which the stated objectives are achieved, r e l a t i v e to the t o t a l environmental system. 4.2.2 DECISION TAKING SUB-SYSTEM The informal d e c i s i o n taking system of the f i r m may be s t r a t i f i e d i n t o three l e v e l s , (see F i g . 4.2, p. 58) though information- flow and feed-back between these l e v e l s i s prevalent. The importance of a d e c i s i o n and the influence exerted become l e s s s i g n i f i c a n t at each succeeding d e c i s i o n l e v e l . 57. SENSOR SYSTEM I 1 1 data requests 1 i i I new information and information renewal DATA STORAGE DATA PROCESSING I I data requests i i DECISION TAKING SUB-SYSTEM Goal s e t t i n g and goal constraining sub-system: - shareholders - c r e d i t o r s - bond holders CONTROLLING SUB-SYSTEM F U N C T I O N I N G S U B S Y S T E M S inventory processing administration sales et hoc genus omne changes OUTPUT and ENVIRONMENT s a t i s f a c t i o n Figure 4.1 THE SYSTEM OF THE FIRM THE PLANNING SYSTEM Str a t e g i c Planner sets broad p o l i c i e s and goals of the f i r m . General d e c i s i o n taking under uncertainty. T a c t i c a l Planner plans the p r o j e c t s and the f a c i l i t a t i n g systems. Resources a l l o c a t e d . Operational Planner operations of each p r o j e c t and f a c i l i t a t i n g system planned. Figure 4.2 1) S t r a t e g i c planning I t i s at t h i s l e v e l that a l l major long term decisions are made. Operating over a long time horizon the broad p o l i c i e s of the fir m are set. The general p o l i c i e s concerning the operation of the fi r m , the investment p o l i c y and the responses to uncertainty are formulated. The decisions taken at t h i s l e v e l are non-programmed, novel, unstructured and consequential, and are taken under the greatest uncertainty. 2) T a c t i c a l planning The planning goals and modes of operation are t r a n s l a t e d at t h i s l e v e l i n t o more s p e c i f i c terms wherein the p r o j e c t systems and f a c i l i t a t i n g systems are planned. General resource a l l o c a t i o n occurs at t h i s l e v e l . The d e c i s i o n process s t i l l demands i n i t i a t i v e but the degree of l a t i t u d e i s severely constrained and the degree of uncertainty reduced. Programmed d e c i s i o n making occurs at t h i s l e v e l and the planning horizon i s f a r shorter. 3) Operational planning The operation of each p r o j e c t and f a c i l i t a t i n g system i s planned i n d e t a i l over a very short time horizon. The l a t i t u d e f o r innovation and i n i t i a t i v e i s u s u a l l y l i m i t e d and programmed responses are employed frequently. Operational research techniques may often be applied at t h i s l e v e l because of the comparative c e r t a i n t y of operations and c l o s e l y defined o b j e c t i v e s , resources and c o n s t r a i n t s . A l l d e c i s i o n making structures such as t h i s permit integrated planning at the pr o j e c t l e v e l and on a systems bas i s . There i s a down-60. current of goals, premises and c o n s t r a i n t s from the higher l e v e l s to the p r o j e c t managers who are delegated the function of integrated planning f o r t h e i r p r o j e c t , and there i s an up-current, or feedback, of success quotients, c o n f l i c t s , and bottlenecks. 4.3 GOALS AND OBJECTIVES The cohesion and d i r e c t i o n of the f i r m are maintained by o v e r a l l goals. These goals are not, however, always e x p l i c i t and may be tempered by the need f o r short term operational goals. The o r g a n i s a t i o n a l goals may themselves be s t r a t i f i e d according to the planning l e v e l . The o v e r a l l goal i s set by the owners of the company who are generally maximising i n t h e i r behaviour. Depending upon the stage of development and the commodity being produced the share holders w i l l be c a p i t a l gains maximising or income flow maximising. In the former case, the rate of expansion of the stock and i n the l a t t e r case the annual dividends are important. 4.3.1 STRATEGIC OBJECTIVES As firms compete on the open market f o r c a p i t a l , i t must be assumed that they are p r o f i t motivated. The p r o f i t motivation w i l l be constrained by the need to maintain; 1) a minimum return to c a p i t a l ; 2) an adequate cash flow; 3) a s a t i s f a c t o r y stock p o s i t i o n . The p r o f i t motive manifests i t s e l f according to the p r e v a i l i n g circumstances. In p e r f e c t l y competitive free market s i t u a t i o n s the p r o f i t i s maximised when the marginal cost equates with p r i c e . However, i f the 61. production i s beyond the c o n t r o l of the f i r m and the production i s l i m i t e d or constrained, as i t i s under constrained y i e l d conditions, then the return function i s f i x e d f o r the f i r m , which must then become cost mini-mising i n i t s operations. I t i s always i n the i n t e r e s t s of the f i r m to move onto a lower average cost curve i f i t i s at a l l p o s s i b l e , but under the circumstances o u t l i n e d above, the f i r m w i l l continue to depress the average cost curve at the point of production without reference to the marginal cost s i t u a t i o n Csee F i g . 4.3, p. 62). The depression of the average cost curve w i l l normally e n t a i l increased c a p i t a l investment. Thus i n an assured production p o s i t i o n the f i r m w i l l become more c a p i t a l i n t e n s i v e . With the firms on a cost m i n i -mising basis at high c a p i t a l i n t e n s i t y , they tend to be p o l i c y responsive rather than p r i c e responsive i n t h e i r a c t i o n s . The continued investments i n mobile assets w i l l however, s t i l l be subject to the short term expecta-t i o n of p r o f i t s , which are themselves dependent on the expected sales and p r i c e l e v e l s . The f a i l u r e to apply the marginal c r i t e r i a w i l l , according to the c l a s s i c a l economic a n a l y s i s of the firm, lead to economic i n e f f i -ciency. I f the f i r m becomes l e s s s e n s i t i v e to p r i c e changes by operating on the average cost curve i t i s to be expected that the f i x e d cost element of the production function w i l l increase. This i s p a r t i c u l a r l y so i n the f o r e s t i n d u s t r i e s where the labour costs are high and workers are showing a reluctance to work i n remote areas. I t may be deduced that the propen-s i t y to substitute c a p i t a l f o r labour i s high, but unfortunately, the mar-g i n a l rate of s u b s t i t u t i o n i s unknown. 62. V — production set by the allowable cut P - p r e v a i l i n g p r i c e MC^ - marginal cost curve of f i r m operating i n a free market AC^ - average cost curve of the same f i r m MC 2 - marginal and average cost curves f o r the f i r m AC 2 MC^ - marginal cost curve of a f i r m operating i n a f i x e d harvest p o s i t i o n AC^ - average cost curve of the f i r m i n assured market p o s i t i o n Figure 4.3 ALTERNATIVE AVERAGE AND MARGINAL COST CURVES UNDER DIFFERING MARKET CONDITIONS 63. With the increased r e l i a n c e on mechanisation, and consequently a high f i x e d cost element of the production function, i t follows, assuming r i s i n g marginal costs over the p o t e n t i a l productive range, that the production d e c i s i o n w i l l become l e s s s e n s i t i v e to short term p r i c e f l u c -tuations than at present. At the upper l i m i t , short term production decisions w i l l s t i l l be dependent upon the marginal cost function Csee F i g . 4.4, p. 64). In the s i m p l i f i e d Figure 4.4, when the going p r i c e f o r output i s at P^, then neither production a l t e r n a t i v e w i l l be i n a p o s i t i o n of advan-tage as both w i l l produce to capacity at v . However, i f the p r i c e were to drop to P 2 then the f i r m with operating cost schedule of OC,, w i l l be forced to reduce i t s production to V^, w h i l s t the f i r m operating on OC^ w i l l continue i n production at V , as i t s operating costs are covered. m Only when the p r i c e f a l l s below P^ w i l l the l a t t e r f i r m begin to c u r t a i l i t s production. Obviously t h i s f i g u r e r e f e r s only to the short term and i f the p r i c e were depressed below t o t a l cost l i n e s f o r any s u b s t a n t i a l period both firms would move to reduce t h e i r costs. I t i s to be expected that i n time organised labour w i l l force the labour cost element of the production function to be considered more as a f i x e d cost f a c t o r by f o r c i n g guaranteed contracts, and thereby modifying the production d e c i s i o n s t i l l f u r t h er. Further, the firm's operations w i l l have to become compatible with more r e s t r i c t i v e and demanding standards f o r the c o n t r o l of environmental impact r e s u l t i n g from production a c t i v i t i e s . Recreational demands, p a r t i -c u l a r l y i n areas close to population centres w i l l e n t a i l a d d i t i o n a l costs to the firms. 64. OC^ - operating cost of f i r m with high f i x e d and low operating costs FC^ - f i x e d cost of the same f i r m TC^ - t o t a l operating cost of that f i r m OC^ - operating cost of f i r m with low f i x e d and high operating costs FC^ - f i x e d cost of the same f i r m TC 2 - t o t a l operating cost of that f i r m P 2 P^ - a l t e r n a t i v e p r i c e l e v e l s . — maximum production p o s s i b l e - production l e v e l under low p r i c e s Figure 4.4 ALTERNATIVE PRODUCTION COST SCHEDULES FOR THE FIRM i 65. 4.3.2 TACTICAL OBJECTIVES For short terra functioning the general maxim of "maximise p r o f i t s " has l i t t l e meaning. Targets f o r operations must be set as short term goals. Thus, elements of a firm's functioning become de c i s i o n v a r i a b l e s rather than market response v a r i a b l e s (Cyert and March, 1963). A p e r i o d i c sales goal i s set and a budget i s a l l o c a t e d to finance a marketing and sales strategy. The output goal i s set f o r a f i x e d period depending upon inventory and s t o c k p i l e requirements and sales f o r e c a s t s . The p r i c e of the produce i s set by the managerial d e c i s i o n and i s t i e d to the inventory p o s i t i o n , planned production l e v e l , sales forecasts and s t r a t e g i e s , and thereby the p r o f i t goal i s set. The d e c i s i o n v a r i a b l e s are r e v i s e d as the need a r i s e s , according to the success achieved within the var i o u s sections of the fir m , 4.4 PLANNING HORIZON'S, OPERATIONAL SCOPE AND THE FOREST FIRM Planning horizons within the f o r e s t f i r m w i l l vary according to planning l e v e l . The f i r m w i l l have a v a r i e t y of plans i n existence at any given time which may fo l l o w the fo l l o w i n g o u t l i n e (Wellburn, 1972) : 1) Ten year plan. The expected area of operations with p o s s i b l e Volumes and road requirements c u r s o r i l y outlined; 2) Five year production plan. A plan revised annually and i s s i m i l a r to the above but i s more d e t a i l e d i n i t s contents; 3) Five year sales plan. Economic forecasts are prepared and the sales p o t e n t i a l o u t l i n e d ; 4) Annual plan. The firm's budget i s set and o v e r a l l operations d e t a i l e d ; 66. 5) Monthly plan. Prepared f o r each production camp by the camp f o r e -man and d e t a i l s programmed f o r production and budgeting; 6) Engineering plans. Prepared every t h i r d month and o u t l i n e engineering plans f o r the coming year. The p u b l i c a u t h o r i t i e s w i l l tend to show concern f o r the f o r e s t over a much longer period, generally at l e a s t one f u l l r o t a t i o n . The planning authority of the r e g u l a t i n g body, which i n B r i t i s h . Columbia i s the B r i t i s h Columbia Forest Service, takes precedence over the pleas of the operating firms. Besides the temporal l i m i t a t i o n to the firm's a c t i v i t i e s there are the s p a t i a l l i m i t a t i o n s . The information flow and operational c o n t r o l l i m i t a t i o n s begin to impose themselves as the scale of the operation expands. Beyond a c e r t a i n s i z e the diseconomies of scale intervene, c a l l i n g f o r the i n t r o d u c t i o n of secondary production c o n t r o l l e v e l s . As f a r as the author i s aware there i s no a v a i l a b l e study as to the optimum scale of f o r e s t operations at the primary c o n t r o l l e v e l . However, preliminary i n v e s t i g a t i o n s i n d i c a t e that an operational logging u n i t , which may com-p r i s e several logging operations, covers about 200,000 acres of tree farm l i c e n s e i n the c o a s t a l region of B r i t i s h Columbia. 4.5 FIRM'S CONSTRAINTS The f i r m i s not free to operate at w i l l . I t operates according to a set of r u l e s and regulations and within the confines of i t s environment (see F i g . 4.5). These c o n s t r a i n t s are: 1) Resource base. - production of the f i r m i s u l t i m a t e l y l i m i t e d by the a v a i l a b i l i t y of the resource. This l i m i t a t i o n w i l l have s p a t i a l i- stumpage taxation environmental standards - allowable cut required restocking required - f o r e s t p r a c t i c e s GOVERNMENT POLICY production i n wood "processing industry - l o g p r i c e consumer demand previous a c t i v i t y supply - and demand THE MARKET PLACE p o t e n t i a l - f o r e s t production present -road investment growing stock mobile c a p i t a l other land demands the forest THE RESOURCE competitors production and supply p o s i t i o n f i g u r e 4.5 continued on page 67b. government ai d schemes saving rate investment rate - i n f l a t i o n investment opportunity market optimism exchange rate forms of taxation amount of taxation c a p i t a l 'market previous years a c t i v i t y deprecia-t i o n retained earnings firm's c a p i t a l  i . CAPITAL AVAILABILITY output from t r a i n i n g i n s t i t u t i o n s working conditions wage rate unemployment employee benefit schemes wages i n other industries remoteness of work mortgages bond holders banks cost and  supply iCREDITORS LABOUR Figure 4.5 THE ENVIRONMENT OF THE FIRM 68. and temporal v a r i a t i o n s as the f i r m i s dealing with a dynamic resource. A r t i f i c i a l c o n s t r a i n t s on the resource may be imposed by l e g a l or administrative a c t i o n . 2) Legal c o n s t r a i n t s . - the p l a c i n g of obl i g a t i o n s and s t r i c t u r e s on the firm's operations. 3) S o c i a l c o n s t r a i n t s . - operations are conducted so as to f u l f i l l moral o b l i g a t i o n s to employees and maintenance of the corporate image. 4) Economic and production^.constraints. - the firm's production i s regulated by i t s a b i l i t y to acquire resources and to process them. It s sales are governed by the production achieved and the demand f o r i t s products. 4.6 SUMMARY The organisations and structures as ou t l i n e d i n t h i s chapter may not e x p l i c i t l y occur within the firm. The c l e a r d e f i n i t i o n of r e s p o n s i b i -l i t i e s i s often d i f f i c u l t and the v e r t i c a l i n t e g r a t i o n of the planning and d e c i s i o n making w i l l c e r t a i n l y occur, p a r t i c u l a r l y i n small companies. However, the general pattern as described provides the a n a l y t i c a l frame-work f o r a model of the f o r e s t firm. 69. CHAPTER 5 APPLICATION OF SIMULATION TO SUBSYSTEMS OF THE FIRM Simulation models of the f i r m have often been c r i t i c i s e d f o r t h e i r excessive a b s t r a c t i o n and unrealism, and though t r a d i t i o n a l l y a n a l y t i c a l l y o r ientated, t h e i r complexity and realism have been severely l i m i t e d . However, the formulation of a model s p o t l i g h t s the kind of empirical information needed f o r gaining a b e t t e r understanding of the operation and processes of the firm. The basic problems associated with the simula-t i o n of the f i r m were discussed by Cohen (1960). Many simulation models that r e f e r to parts of f o r e s t planning have been developed. They may be looked upon as r e f e r r i n g to a s p e c i f i c sub-system of the f i r m . Some of the more elaborate models r e f e r to several of the sub-systems, but within the context of t h i s chapter they are d i s -cussed with reference to the sub-system to which they p r i n c i p a l l y r e f e r . 5.1 SENSOR SUB-SYSTEM The sensor sub-system notes the state of the natural and the" s o c i o -economic environments. The sub-system i s d i v i d e d i n t o several sections. Simulation techniques have to be applied to f o r e s t inventory processes as a means of improving sampling techniques. I f e i t h e r r e a l or hypothetical f o r e s t data are stored or generated i n the computer, then a l t e r n a t i v e sampling methods may be applied to sample the given data. The a l t e r n a t i v e sampling methods may then be evaluated f o r r e l a t i v e sampling e f f i c i e n c y i n terms of sample v a r i a t i o n s and sampling costs: A r v a n i t i s (1965), A r v a n i t i s and O'Regan (1969), Mawson (1968), O'Regan 70. and A r v a n i t i s (1966), O'Regan and P a l l e y (1965), Pa l l e y and O'Regan (1961) and Payandeh (1968, 1970 a and b). This sub-system i s also responsible f o r maintaining a constant check on changing demand patterns, p r i c e changes, etc. 5.2 DATA-STORAGE SUB-SYSTEMS Co l l e c t e d data and data changes, both i n t e r n a l l y and e x t e r n a l l y to the system, must be retained f o r future use or processing. Data on f o r e s t accounting, sal e s , personnel, inventory and c a p i t a l stock should be stored i n t h i s sub-system. Gessford ( 1 9 6 2 1 , Hamilton C 1 9 6 4 ) . , and Hewson C 1 9 6 0 1 have applied simulation to m i l l yard inventories and Holemo ( 1 9 7 1 1 d i s -cussed inventory management and co n t r o l but d i d not present a formal model. The use of the computer f o r data storage permits a continuous inventory of the f o r e s t resource to be kept and so allowing f o r improved d e c i s i o n making (Hall, 1 9 6 3 ) . 5.3 DATA PROCESSING AND PLANNING SUB-SYSTEM One of the major d i f f i c u l t i e s that faces the f o r e s t manager i s the p r e d i c t i o n of the outcome of a given p r a c t i c e , procedure or course of a c t i o n . N aturally, no p r e d i c t i v e model i s ever completely c o r r e c t , how-ever, simulation has been applied to reproduce f o r e s t stands to t e s t the e f f e c t s of i n t r a - and i n t e r - s p e c i f i c competition within the f o r e s t . The absolute boundaries of f o r e s t production are l i m i t e d by the environment, though there i s considerable l a t i t u d e f o r v a r i a t i o n within these l i m i t a -t ions . Models have been devised to t e s t the e f f e c t s of changes i n competi-t i o n as brought about by changing s i l v i c u l t u r a l treatments (Lee, 1967; Tsolakides, 1968). Stochastic or d e t e r m i n i s t i c approaches may be adopted. Dress (1968) adopted the stocha s t i c approach and expressed the r e l a t i o n -ships i n terms of p r o b a b i l i t y d i s t r i b u t i o n s , while Newnham (.1964) developed a d e t e r m i n i s t i c model, where the same data input and functioning controls w i l l always y i e l d the same answer. Studies using hypothetical data have been c a r r i e d out (Smith et al. , 1965) though the use of hard data i s more I common (Newnham and Smith, 1964; M i t c h e l l , 1969).. Ea r l y stand models were r e s t r i c t e d to small populations of a si n g l e species but more r e a l i s t i c population simulations ( B e l l a , 1969; L i n , 1969) and also with two species (Pennycuick et al.3 1968) are now a v a i l a b l e . A f o r e s t simulation should contain the elements of: a) s p a t i a l d e f i n i t i o n and i n d i v i d u a l dimension d e f i n i t i o n s ; b) i n t e r - and i n t r a - s p e c i f i c competition, resource l i m i t a t i o n s and t h e i r e f f e c t on growth; c) m o r t a l i t y and the removal of dead trees from the stand. The s p a t i a l arrangement of trees within the f o r e s t has been simulated by Brace (1970) and the frequency d i s t r i b u t i o n s of tree parameters by Newnham (1968) and Newnham and Maloley (1970). Competition and resource l i m i t a t i o n s present d i f f i c u l t simulation problems. Density i t s e l f may be considered to a f f e c t competition (Lemon and Schumacher, 1962), or the zone of influence occupied by competitors may be determined. This l a t t e r approach was adopted by Newnham (1966a), Opie (1968) and Gerrard (1969). On these bases growth and competition regressions are thus e s t a b l i s h e d . 72. The death and removal of trees tends to be set by a r b i t r a r y l i m i t s . Smith et al. (.1965) discussed the use of simulation f o r d e f i n i n g m o r t a l i t y within f o r e s t stands. L i n (1969) k i l l e d trees which had a zero growing space index. The system was improved by P a i l l e (1970) and P a i l l e and Smith (1970) who included m o r t a l i t y tables within the models and k i l l e d trees according to a p r o b a b i l i t y function appropriate to t h e i r age, s i z e and p o s i t i o n i n the tree canopy. A q u a n t i t a t i v e analysis of f o r e s t growth was c a r r i e d out by Pienaar (1965), though simulations have generally been r e s -t r i c t e d to even aged f o r e s t s (Opie, 1970). The simulations have been wide ranging and the species i n v e s t i g a t e d include Douglas-fir (Newnham, 1964), White spruce ( M i t c h e l l , 1966), Lodgepole pine (Lee, 1967)., aspen (Bell a , 1970), Western hemlock (Lin, 1967). Newnham and Smith (19641 commented upon the developing and t e s t i n g of stand models f o r Douglas—fir and Lodgepole pine. Opie (undated) has developed a non—stochastic empirical model, "STANDSIM", f o r various species of Eucalyptus, and i s developing a s i m i l a r model f o r Pinus r a d i a t a . Goulding (1972) simulated the growth of pure, even aged Douglas-f i r . The model, "TOPSY", operates on the d.b.h.'s of i n d i v i d u a l trees i n a sample p l o t of known area, s i t e and age. A range of 50 to 800 stems per p l o t i s allowed. Y i e l d tables and stand tables f o r any desired age from 20 to 100, s i t e classes from 70 to 170 and 100 to 2,OOO stems per acre (depending on s i t e and age) are produced, with or without thinning i n t e r v e n t i o n s . Uneven aged stands present several d i f f i c u l t i e s ; however the d e r i v a t i o n of the growth and y i e l d functions f o r such stands have been inves t i g a t e d (Moser and H a l l , 19691. 73. The simulation of i n d i v i d u a l stands w i l l y i e l d important information as to t h e i r dynamics, but they are, however, too d e t a i l e d f o r general planning. For planning purposes information relevant to the e n t i r e f o r e s t resource within the planning area i s needed. The normal approach i s to use simulation to p r e d i c t wood flows and growing stock l e v e l s of the f o r e s t . Amidon (1958). applied dynamic programming to the r e g u l a t i o n of cut. Chappelle (1966) used a simulation technique to allowable cut planning, using a volume re g u l a t i o n model. An area r e g u l a t i o n model was developed as well (Sassaman and Chappelle, 1967) and the r e s u l t i n g d i f f e -rences i n production r e g u l a t i o n compared. The models have since been improved to take cognizance of sequential planning periods and to regulate the cut with both area and cut s t i p u l a t i o n s (Chappelle and Sassaman, 1968).. A mo d i f i c a t i o n of the "ARVOL" simulation model i s being used by the Depart-ment of Natural Resources, State of Washington (19711 f o r sustainable harvest planning and the achievement of a normal f o r e s t . An a l t e r n a t i v e programme c a l l e d "SORAC" f o r c a l c u l a t i n g allowable cut using the area-volume method has also been produced (Sassaman et al.t 1969).. A more s o p h i s t i c a t e d model has been developed p r i n c i p a l l y by Bergsvik (the development of which i s reported i n Bergsvik, 1970 and Bureau of Land Management, 1968 and 1970). The "SIMAC" model i s designed f o r allowable cut planning and i s i n use i n Western Oregon. Prescribed c o n d i -t i o n s and l i m i t a t i o n s on operations are applied to the model which then outputs the a n t i c i p a t e d stand data f o r these c o n s t r a i n t s . Current inven-tory and growth data are used as a basis f o r the model categorised i n t o f i v e s i t e classes and species. Up to seven management assumptions may be applied which include pre-commercial and commercial thinning, f e r t i l i s i n g , genetic improvement, i n t e n s i f i c a t i o n of management, and changes i n resource 74. base e i t h e r through land reclamation or a l i e n a t i o n of land to other uses. The cut i s c a l c u l a t e d on a decadel basis with a f a c i l i t y f o r quadra-decadel period p r o j e c t i o n . This long term p r o j e c t i o n i s s o l e l y to t e s t f o r the long term consequences of a course of a c t i o n and ensures the main-tenance of a given cut l e v e l i n perpetuity. This i s p a r t i c u l a r l y impor-tant to the B.L.M. who have adopted a very l i t e r a l i n t e r p r e t a t i o n of sustained y i e l d . Rotation length i s not an input f a c t o r within the model but i s derived by the model as that r o t a t i o n which ensures a given harves-t i n g r a t e . The cut i s s p e c i f i e d on a d i s t r i c t basis along with the recommended management p r a c t i c e f o r that d i s t r i c t . The model i s perhaps the most so p h i s t i c a t e d presently i n use f o r f o r e s t planning, but because of i t s f o r e s t o r i e n t a t i o n , comparative land use i s not p o s s i b l e . The establishment of m u l t i p l e goals with m u l t i p l e products presents d i f f i c u l t i e s . Some of these d i f f i c u l t i e s as regards the development of models f o r p r i v a t e f o r e s t management were discussed by McConnen et al.3 (1966). The a n a l y s i s of economic data i s equally important f o r the f o r e s t manager. These models are considered under the following s e c t i o n . 5.4 DECISION MAKING SUB-SYSTEM This sub-system performs the function of the master planning u n i t (see 2.4). Operational decisions as to the f u l f i l l m e n t of decisions from t h i s sub-system are considered as the c o n t r o l sub-system. The d e c i s i o n making sub-system makes a l l major d e c i s i o n of the f i r m as to the firm's o b j e c t i v e s , main plan of operation and formulation of d e c i s i o n r u l e s f o r responses to changes i n the environment. 75. Simulation has found many a p p l i c a t i o n s f o r s t r a t e g i c planning i n f o r e s t management. Several l i n e s of development may be noted and t h e i r l i n e s of evolution followed. Gould and O'Regan (1965) applied simulation i n a -very s i m p l i s t i c manner to assess the advantages of a p r i c e responsive c u t t i n g p o l i c y f o r the Harvard Forest. The model was not area s p e c i f i c but was concerned with the t o t a l standing volume of the f o r e s t . The model ignored the marginal cost of harvesting i n the harvesting d e c i s i o n . The cut i n any given year was a function s o l e l y of the p r i c e which i s c l e a r l y an unrea-l i s t i c premise. The model was also reported by O'Regan et al. (1965) and with minor modifications by Howard et al. (1966). Walton (1965) and Gould (1967) continued to work with even aged stands but reduced the degree of a b s t r a c t i o n considerably by introducing a s e l e c t i o n of s i t e c l a s s e s , a c c e s s i b i l i t y c l a s s e s , species, products and s i z e and q u a l i t y of products. The choice of s i l v i c u l t u r a l operation was allowed f o r and the o r i g i n a l f i r e and storm damage sub-routine improved. These l a t t e r models continued to be non-area s p e c i f i c . At the U n i v e r s i t y of Georgia another management model was developed (Clutter and Bamping, 1965). The model dea l t with a hypothetical f o r e s t e n t e r p r i s e i n the Georgia area, with each f o r e s t block a mutually e x c l u -s i v e and geographically i d e n t i f i a b l e even aged u n i t which was c h a r a c t e r i s -t i c of the stands and s i t e s f o r the region. The aim of the model was to create a r e a l i s t i c f o r e s t operation which could specify c u t t i n g units and operations and c a l c u l a t e the pre- and post-tax net discounted revenues. The management may choose between natural regeneration or p l a n t i n g . The restocking achieved by natural regeneration was randomly chosen from a normal p r o b a b i l i t y d i s t r i b u t i o n function with a given mean and standard d e v i a t i o n . The p l a n t i n g density was a management d e c i s i o n s p e c i f i c to each stand though the number s u r v i v i n g f o r both species i s determined s t o c h a s t i c a l l y . Harvesting may be regulated on an area basis or on the basis of economic maturity. In a l l cases transport costs to market were accounted f o r . The operating of the system under the a l t e r n a t i v e harvesting schedules shows a s i g n i f i c a n t economic advantage f o r the l a t t e r form of r e g u l a t i o n . However, as the authors mentioned themselves, " I t i s inconceivable that such wide f l u c t u a t i o n s i n wood sales could be absorbed by the market and i t would seem high l y u n l i k e l y that our own enterprise could be f l e x i b l e enough to expand and decrease i t s harvesting f a c i l i t i e s according to the schedule required." A model with s i m i l a r c h a r a c t e r i s t i c s to that of the Harvard group was devised by Myers (1968), though i t was more concerned with the evolu-t i o n of long term consequences than the optimisation of the c u t t i n g schedule. Perhaps one of the most r e a l i s t i c f o r e s t management models deve-loped so f a r was by Bare (1969, 1970a and b, 1971a). I t simulates the operations of an i n d u s t r i a l f o r e s t property to study the economic and b i o l o g i c a l i n t e r a c t i o n s of f o r e s t management p r a c t i c e s . Only a s i n g l e species growing on any of four s i t e classes i s d e a l t with, but each s i t e i s geographically located. The model i s played as a game with an annual operations schedule being e s t a b l i s h e d and the appropriate budget prepared. Management choice include thinning, s i t e preparation, inventory regeneration and f i r e p r o t e c t i o n . The operation of the f i r m i s then simulated, and the growth of the f o r e s t updated f o r one year. The process i s then repeated. The management success i s evaluated by return on investments, net income 77. percentage, a f t e r tax p r o f i t , actual annual budgeted expenditures, gross sales, annual cubic foot growth rate and the trend towards sustention of production. For the a l l o c a t i o n of land between a l t e r n a t i v e uses, a computerised land use evaluation system ("CLUES") has been evolved, (Thornburn, 1972). The system u t i l i s e s the Canada Land Inventory data and a l l o c a t e s land between a l t e r n a t i v e uses according to the p o t e n t i a l p r o d u c t i v i t y . The data i s stored on a g r i d with XY coordinates of one mile i n t e r v a l . The basing of the system on the p o t e n t i a l p r o d u c t i v i t y and ignoring the c a p i t a l investment necessary f o r the r e a l i s a t i o n of that p o t e n t i a l , coupled with the need f o r an external i n t e r v e n t i o n f o r the exclusion of anomolies a r i s i n g from the non-recognition of a c t i v i t y cross impact bet-ween the data squares, involves severe l i m i t a t i o n s as to the p r a c t i c a l implementation of the system. Away from the North American continent, Gibson C19691., with h i s "FORSIM, model recorded even aged monocultured sections of the f o r e s t with respect to number of stems, stand height and age. For young stands age and s i t e q u a l i t y are recorded u n t i l age ten when stocha s t i c processes generate standard basal area, stem frequency d i s t r i b u t i o n and predominant height. The a v a i l a b l e cut from the f o r e s t i s c a l c u l a t e d according to managerial p o l i c y decisions such as thinning age and i n t e n s i t y and f i n a l f e l l i n g age. The model searches f o r a l l sections that q u a l i f y f o r thinning or c l e a r f e l l i n g , ranks them according to age, density, or some other s p e c i f i e d c h a r a c t e r i s t i c and f e l l s i n the order of ranking up to a s p e c i f i e d l i m i t . On the basis of a regression using basal area and height as the independent v a r i a b l e s the volume harvested i s ascertained. Log s i z e 78. d i s t r i b u t i o n s , based on t r e e t a p e r l i n e s d e r i v e d from volume and d i a m e t e r a t b r e a s t h e i g h t , a r e p r e p a r e d f o r c o n v e r s i o n i n monetary v a l u e s t h a t a r e d i s c o u n t e d . The p r e s e n t n e t worth v a l u e s from a l t e r n a t i v e management a l t e r -n a t i v e s a r e the n u s e d as the b a s i s f o r comparison. In o r d e r t o take a c c o u n t o f t h e t o t a l f o r e s t r e s o u r c e and i t s p o t e n t i a l p r o d u c t i v i t y A l l i s o n and McKenzie C1971) p r o p o s e d t h e f o r e s t mass c o n c e p t . F o r e s t mass i s d e f i n e d as " t h a t p r o p e r t y o f a f o r e s t which, a t a p o i n t i n time d e t e r m i n e s i t s c a p a c i t y t o s u p p o r t a c u t o v e r a p e r i o d o f t i m e " . The mass c o n c e p t i s d e v o i d o f t i m b e r d i m e n s i o n s and i s c o n -c e r n e d s o l e l y w i t h t h e volume e x p r e s s e d i n c u b i c f e e t . The f o r e s t har-. v e s t i n g p l a n i s based on t h e s u s t a i n a b l e c a p a c i t y u n i t where an S.C.U. has t h e f o r e s t mass t o s u s t a i n t h e s t a n d a r d normal f o r e s t on one a c r e . The optimum f o r e s t mass i s thu s t h e base a r e a o f the f o r e s t t i m e s t h e . v a l u e o f the S.C.U. and t h e h a r v e s t volume becomes t h e a n n u a l change i n mass. The s i m u l a t i o n model t h e y have e v o l v e d i s based on y i e l d t a b l e s and t a k e s c o g n i z a n c e o f a c r e a g e d i s t r i b u t i o n , demand s c h e d u l e s , and l o g g i n g and r e g e n e r a t i o n s c h e d u l e s . Because o f i t s s i m p l i c i t y , f l e x i b i l i t y , and ease o f comprehension o f b o t h i n p u t and o u t p u t i n f o r m a t i o n , s i m u l a t i o n was chosen by Sa y e r s (1971) f o r a model t h a t e v a l u a t e s t h e a l t e r n a t i v e management p l a n s i n p r i v a t e e s t a t e s . The i n d i v i d u a l s t o c k s a r e d e s c r i b e d by F o r e s t r y Commission y i e l d t a b l e s . The i n p u t i s i n the f o r m o f e x p r e s s e d o p e r a t i o n s t h a t a r e p e r f o r m e d a n n u a l l y and o u t p u t i n c l u d e s a d e t a i l e d o p e r a t i o n s a c c o u n t , c a p i t a l a c c o u n t and a v a l u a t i o n o f growing s t o c k w i t h t i m b e r y i e l d s . I t i s r e p o r t e d t h a t the model has been a p p l i e d s u c c e s s f u l l y on t h r e e e s t a t e s i n S c o t l a n d . 79. A more comprehensive approach was presented by Morgan and Bjora (1971) i n which the a c t i v i t i e s of the Forestry Commission were simulated. The model i s intended to aid the corporate planning process. The main de c i s i o n v a r i a b l e s incorporated are the c u t t i n g and p l a n t i n g p o l i c i e s . Allowance i s made f o r the exploration of the e f f e c t s of d i f f e r e n t p o l i -c i e s on net discounted revenue, net income and employment. The r e l a t i o n -ships within the model are described. I t s use i s demonstrated f i r s t l y through examples of projected i n d u s t r i a l man—power requirements f o r d i f f e r e n t c u t t i n g p o l i c i e s under a v a r i e t y of p r o d u c t i v i t y assumptions, and secondly the present value of the growing stock i s c a l c u l a t e d f o r d i f f e r e n t c u t t i n g regimes. On the basis of the net s o c i a l b e n e f i t c r i t e r i o n , Gane (19691 formulated a simulation model of f o r e s t r y development i n T r i n i d a d , using a m o d i f i c a t i o n of the F e l d s t e i n m u l t i p l i e r (Feldstein, 19641. The m u l t i -p l i e r was applied to the primary sector only and ignored the secondary manufacturing, d i s t r i b u t i o n and construction b e n e f i t s . The model p r i m a r i l y used reference tables as the data base, both f o r the pine, teak, and mixed hardwood pl a n t a t i o n s and likewise f o r the economic p r o j e c t i o n s of labour, wage, p r i c e s , etc. The use of computers and simulation f o r management d e c i s i o n making has a l s o been used i n Sweden. Andersson (1971). has reviewed the work so f a r and no development appears to have occurred that does not f i n d a p a r a l l e l i n the E n g l i s h t e x t s . A German bibliography of operations research i n f o r e s t r y has been prepared by Sch&pfer and Hflfle (1970). 8 0 . 5.5 CONTROL AND FUNCTIONING SYSTEMS The c o n t r o l system operates within c l o s e l y defined l i m i t s and r u l e s . The f l e x i b i l i t y of the d e c i s i o n i s severely c o n s t r i c t e d and the time horizon i s generally short. For these reasons t h i s sub-system i s amenable to mathematical, optimising techniques. The functioning sub-system i s the one that a c t u a l l y does the work of production. Again the freedom and l a t i t u d e of ac t i o n are l i m i t e d and operated with a short time horizon. L u s s i e r (1972) f o r example described a simulation model f o r the evaluation of d i f f e r e n t logging systems i n a well described f o r e s t . The model gave information as cost data over s p e c i f i c areas, l o c a t i o n of each logging u n i t within the f o r e s t and a s s i s t e d with the s e l e c t i o n of logging areas over the medium term and the long term p o l i c y d e c i s i o n s . The i n t e r e s t i n g p o i n t about the model was the d e t a i l e d information that was stored about the f o r e s t . Other simulations that have been applied to these sub-systems have been reviewed by Bare (1971). 5.6 SUMMARY Though simulation has found numerous a p p l i c a t i o n s within f o r e s t planning, the models that have so f a r been devised have d e a l t with sub-systems of the whole rather than the whole. Attempts have been made, and are being made, to produce more comprehensive models. The following chap-t e r w i l l o u t l i n e a pos s i b l e model that attempts to bring together a s e r i e s of sub-systems as a step towards the t o t a l systems model. 81. CHAPTER 6 OUTLINE AND DESCRIPTION OF A POSSIBLE MODEL OF THE FOREST FIRM Let us pause f o r a moment to review the developments so f a r . I n i -t i a l l y , the t r a d i t i o n a l methods of f o r e s t planning were severely c r i t i c i s e d f o r t h e i r inadequacies. Such strong c r i t i c i s m begged f o r an a l t e r n a t i v e to be proposed. I t was then noted that the planning process and the imple-mentation of those plans l e n t themselves to systematic a n a l y s i s . With a systematic d e s c r i p t i o n of these processes i t would be p o s s i b l e to recreate these systems i n the form of a simulation model, which i n turn, would provide the basis f o r a m u l t i - o b j e c t i v e planning model of the second generation type. As the f o r e s t f i r m l i n k s the natural and the socio-economic systems, and i t i s through the f o r e s t f i r m that most of the goods and services flow from the f o r e s t to the market place and, conversely, the f i r m i s the major impact on the f o r e s t environment, i t was argued that the f i r m was the n a t u r a l v e h i c l e f o r a model of t h i s type. The sphere of operations of the f i r m i s u l t i m a t e l y defined i n terms of the c o n s t r a i n t s which act within the two superior systems mentioned e a r l i e r and i t i s t o t a l l y i n t e r f a c e d with them. Also, supplementary to these bounds, which c o n s t i t u t e the external c o n s t r a i n t s , there are the i n t e r n a l bounds or c o n s t r a i n t s . These are due to the operation of the system which has inherent l i m i t a t i o n s brought about by the i n t e r n a l i n e f f i c i e n c i e s of the flows of information and goods. The f i r m i s also 82. l i m i t e d by the a s p i r a t i o n s and goals of the firm, employee groups or i n d i v i d u a l s . In t h i s chapter, the form of a model i s presented that i s designed to simulate the planning, operations and plan evaluation stages of a fir m that i s p r o f i t oriented or acts as a p r o f i t centre within a la r g e r organi-s a t i o n . The system d e s c r i p t i o n i s adequate to allow the -model to be programmed and implemented at the gaming phase (see chapter 3)_. A model of t h i s type, i f i t i s to be u s e f u l as a game or f o r planning must be i n a form that permits easy comprehension by those who use i t . This requires s e t t i n g the system i n a manner that r e p l i c a t e s , or reproduces, the de c i s i o n process and i s c l o s e l y i d e n t i f i a b l e with the r e a l system. Throughout t h i s chapter the term "management" r e f e r s to i n d i v i d u a l s or groups who act as players or experimenters with the model. The exoge-nous v a r i a b l e s that impinge upon the firm's a c t i v i t i e s must be set by a game or model supervisor, who i s r e f e r r e d to i n the text as "Guru"} The model has t e n t a t i v e l y been t i t l e d "Benefit Appraisal and Resource Evaluation: A R e i t e r a t i v e Simulation Experiment", f o r which there i s an acronym. 6.1 OBJECTIVE OF THE MODEL To give d i r e c t i o n and course to the model the objective must f i r s t be stated. The objective of the model i s : to p r e d i c t the e f f e c t of a productive system ( i . e . the f o r e s t firm) on the f o r e s t resource, to monitor the flow of goods 1 This may be taken as r e f e r r i n g to a Generally U n r e l i a b l e Regulatory Umpire. 83. and services i n t o the socio-economic system and to evaluate the responses of the productive system to changes i n con-s t r a i n t s a c t i n g on the system. The model whould be t i e d as c l o s e l y as possible to an actual f o r e s t f i r m to f a c i l i t a t e the use of that firm's data and to reduce the degree of abst r a c t i o n from r e a l i t y . 6.2 DESIRED OUTPUT FROM THE MODEL The obj e c t i v e as stated i s i n very general terms and needs some c l a r i f i c a t i o n and elaboration. The output information, i f t r a d i t i o n a l forms of evaluation are to be adhered to and the more abstract values accounted f o r by t h e i r i n t r o d u c t i o n i n t o the model as co n s t r a i n t s , w i l l include: 1) employment; 2) labour income; 3) c a p i t a l involvement (both f i x e d and mobile equipment); 4) annual cash flows (both p o s i t i v e and negative); 5) annual p r o f i t or l o s s ; 6) annual wood flows from the f o r e s t ; 7) reinvestment i n the f o r e s t resource; 8) changes i n the f o r e s t resource to a c t i v i t y by the fi r m . The output w i l l have varying degrees of v a l i d i t y over d i f f e r i n g p r o j e c t i o n periods. I t i s u n l i k e l y that p r e c i s e economic data would be v a l i d beyond a few years, and c e r t a i n l y ten years at the outside, but f o r e s t growth data may be u t i l i s a b l e over a much longer time span. The model as o u t l i n e i s designed to have a v a l i d use f o r p o s s i b l y up to ten years of experimentation, though r e i t e r a t i o n s i n t o the future 84. i n the game form are l e s s l i m i t e d but the educational value w i l l decrease as the player gains experience and the system state departs further from r e a l i t y . 6.2.1 LIMITATIONS TO THE MODEL OUTPUT The value of any output w i l l be l i m i t e d by -various f a c t o r s . F i r s t l y , there i s the degrees of realism that are incorporated i n t o the model. The more c l o s e l y the functioning of the model follows the actual workings of the f o r e s t firm, the more r e a l i s t i c the r e s u l t i n g outcome. The accuracy that i s demanded of the d e s c r i p t i o n w i l l depend upon desired accuracy of the output and the importance of the f a c t o r s i n f l u e n c i n g that output. This immediately leads us to the question as to at what l e v e l the f i r m should be simulated. The lower down the h i e r a r c h i c a l planning system the simula-t i o n i s attempted the greater the data requirements and the more specula-t i v e the output. However, as s p e c i f i c information i s required the model must be reasonably s p e c i f i c i n i t s operations and i t i s therefore proposed that the firm's l a t i t u d e of d e c i s i o n be simulated at the " t a c t i c a l " l e v e l with the operations based on d e t e r m i n i s t i c functions. The use of d e t e r -m i n i s t i c functions i s enforced f i r s t l y by the expected lack of data that would f a c i l i t a t e more complex functions, to avoid the complex an a l y s i s of s t o c h a s t i c a l l y generated data, and to reduce the computer time required to operate the model. Secondly, the output i s only as good as the input data. The more d e t a i l e d the model becomes the greater w i l l be the l i m i t a t i o n s i n terms of the a c t u a l existence and r e l i a b i l i t y of data. There w i l l not be a uniform requirement as to the data standards because some functions w i l l 85. be of r e l a t i v e l y l i t t l e importance, w h i l s t others w i l l be of considerable s i g n i f i c a n c e . T h i r d l y , the greater the time p r o j e c t i o n then the less r e l i a b l e becomes both the input and the output information. Inaccuracies i n the system d e s c r i p t i o n w i l l be compounded over time and with the r e p e t i t i v e -ness of the i t e r a t i o n s . Fourthly, the model w i l l assume that managers and planners act r a t i o n a l l y , and hence p r e d i c t a b l y , to a given set of information. There i s no way that the vagaries of human i n d e c i s i o n and err o r can be allowed f o r within the model, as i t i s presently conceived, below the t a c t i c a l l e v e l . A l l functions and operations at the operational l e v e l w i l l be on a d e t e r m i n i s t i c l e v e l and thereby obviating any d e c i s i o n l a t i t u d e . As the model that i s described has no f a c i l i t y f o r the evaluation of the long term e f f e c t s on the f o r e s t resource, the completely uncon-st r a i n e d cut that ignores the long term objectives of the f i r m would be u n r e a l i s t i c . This reduces the l a t i t u d e of experiment to some extent. 6.3 FORM OF THE MODEL The design i s such that the consequential e f f e c t s of managerial s t r a t e g i e s and t a c t i c s under a given set of constr a i n t s were given. There-fore, the s t r a t e g i c and t a c t i c a l planning phases must be e x t e r i o r to the model and are presented as a s e r i e s of pre-set d e c i s i o n v a r i a b l e s . The model w i l l react according to the programmed parameters and given v a r i a b l e s to produce a s e r i e s of system state p r e d i c t i o n s . 86. In i t s most simple form the model may be represented as: INFORMATION OUTPUT DATA STATUS OF MODEL DECISIONS FROM "GURU" MANAGERIAL ANALYSIS OF INFORMATION MANAGERIAL DECISIONS MODEL OPERATIONS ON DECISIONS MANAGERIAL DECISION ON DISCRETIONARY ALLOCA-TIONS OF PROFITS FINAL POSITION OF FIRM AND SYSTEM The model thus f a l l s i n t o a s e r i e s of d i s t i n c t phases. These phases are the gathering of data, the ana l y s i s of data, managerial d e c i s i o n s , implementation of decisions (which so f a r follows the structure o u t l i n e given i n chapter 4 abovel and the evaluation of the decisions i n the l i g h t of the objectives of the firm. The information and data that are required within the model are kept i n a s e r i e s of data blocks or data u n i t s . Each block w i l l contain a s p e c i -f i c type of data. These data blocks are described i n section 6,3.3 below. The phases i n more d e t a i l i n v o l v e : Phase I. The management c a l l s f o r the information as to the f o r e s t inventory data, the status of the fir m , the firm's competitive p o s i t i o n , productive p o s s i b i l i t y p o s i t i o n s , past production, p r i c e and demand trends, and o b l i g a t i o n s and r e s t r i c t i o n s to the harvesting or production, scheduling. 87. The inventory data w i l l be presented to the management i n the form of stock maps and summaries of the stock t a b l e s . Further s p e c i f i c i n f o r -mation w i l l be a v a i l a b l e from the data reserves as requested. The status of the f i r m e n t a i l s the information as to the equity p o s i t i o n of the firm, preference and common stock; the bond issues f o r which the f i r m i s l i a b l e with dates of maturity and i n t e r e s t rates; the t o t a l and sources of other debts by the company; the firm's l i q u i d assets; the outstanding debts; depreciation allowance; amortisation; depletion; the value of the f i x e d assets and mobile assets covered by the company. Under the section of competitive p o s i t i o n the management w i l l be given the information as to the productive capacity of the f i r m (the need f o r the d i s t i n c t i o n between the productive capacity and the value of the f i x e d assets w i l l be elaborated below under the section 6.8.3.2}., the p r e v a i l i n g production cost s t r u c t u r e , the orders received by the company, the expected orders, i n v e n t o r i e s , access to harvestable timber, areas to be replanted and f i n a l l y the l o c a l demand f o r timber, the expected supply and supply p r i c e . The production function may be achieved by a l t e r n a t i v e sets of c a p i t a l and labour combinations. A s e r i e s of f e a s i b l e combinations must be given to the management to enable the planning of future investment s t r a t e g i e s . This point i s elaborated on i n section 6.8.1.3 below. With the information as regards past trends of production, p r i c e and demands the management w i l l be i n a p o s i t i o n to make pr o j e c t i o n s as to the future demand and supply p o s i t i o n s f o r pulp, lumber and logs. The matrices of bond and loan data g i v i n g p e r i o d i c i t y , rate and maximum amount for each v i a b l e a l t e r n a t i v e w i l l be presented. Information w i l l be given also as to the'expected labour and labour cost trends. Further information 88. such as pr o j e c t i o n s as to house s t a r t s and pulp demands could be given to the company depending upon the s o p h i s t i c a t i o n of the data Bank that i s f i n a l l y deemed de s i r a b l e or can reasonably be gathered and stored. The o b l i g a t i o n s and r e s t r i c t i o n s w i l l be the regulations as imposed by the P r o v i n c i a l government, or under conditions of experiment, the experimenter and the game supervisor i n gaming s i t u a t i o n s , i . e . "Guru". The information covers f o r example tax and stumpage rates, harvesting l i m i t s , logging standards, s l a s h burning p o l i c y and r e c r e a t i o n a l p o l i c y . "Guru" w i l l a l s o set the maximum debt p o s i t i o n that the f i r m can e s t a b l i s h according to c r i t e r i a based on the market expectancy, assets and timber reserves. This would normally be a market enforced p o s i t i o n but-must become an e x p l i c i t c o n s t r a i n t within the model. Phase I I . During phase two the management has opportunity to analyse the information and data presented during phase one. The allowable cut, i f not given under f o r e s t inventory data, w i l l have to be c a l c u l a t e d . (The allowable cut w i l l be inwardly c a l c u l a t e d i n any case as a check against the management's proposals.) P r i c e and demand pro j e c t i o n s w i l l be made along with estimations of future c a p i t a l costs, labour a v a i l a b i -l i t y and wage r a t e s . Phase I I I . On the basis of the information given and the a n a l y s i s conducted by management, a s e r i e s of planning decisions must be taken. The d e c i s i o n process w i l l involve a s e r i e s of information feedbacks, plans and f e a s i b i l i t y studies u n t i l a s a t i s f a c t o r y compromise p o s i t i o n i s achieved and the production plan f i n a l i s e d . The planning horizons w i l l follow those set out i n section 4.4 above, though stages 4 and 5, the monthly and engineering plans, w i l l be included i n annual operational plan. 89. Under the f i r s t stage of the planning process the general areas of logging and other operations w i l l be o u t l i n e d . From the stock map held by the management and by- r e c a l l of compartment data the a n t i c i p a t e d harvest volumes by species can be estimated. The f i v e year plan i s a more d e t a i l e d elaboration of the previous stage. The f i v e year plan i s coupled to the sales and economic forecasts that have Been-made. The annual plan, sets out the operational Budget and the actual cut and construction ordered f o r the coming year. In a d d i t i o n to the production plans, the f i n a n c i a l plans as to the c a p i t a l to be r a i s e d , the production function that should Be aimed f o r , the new investment and the p o l i c y towards s t o c k p i l i n g , and maintenance, w i l l Be set. The planning process and d e c i s i o n .making phase i s discussed i n greater d e t a i l i n section 6.7 Below. Phase IV. The model w i l l then function according to the managerial decisions that have Been taken. The operational stages may Be seen as three d i s t i n c t steps. The pre-production phase e n t a i l s , i f necessary, the r a i s i n g of new sources of c a p i t a l By loans or the issuance of Bonds; the r e q u i s i t i o n of new equipment to replace that which has Been depreciated and, i f desired to B u i l d up the productive capacity; and l a s t l y , to employ the labour required to operate the equipment. During the production stage the model "b u i l d s " new roads and makes other f i x e d investments, "harvests" the f o r e s t , " t h i n s " the f o r e s t , "plants" and f i n a l l y makes an allowance to cover the cost of maintenance and over-heads incurred during operations. Following production the logs are "sold" or st o c k p i l e d , the revenues paid to the company c o f f e r s , the costs and required debt payments met, taxes 90. l e v i e d and the productive capacity depreciated. The sale p r i c e and f i n a l demand f o r logs that i s used w i l l be set by a mechanism independent of management. By managerial d i r e c t i o n , the d i s c r e t i o n a r y debts and dividends may then be paid and the excess kept within the fir m as reta i n e d earnings. Phase V. The model then ceases operations and gives the status of the system to the management. By management d i s c r e t i o n , the d i s c r e t i o n a r y debts and dividends may then be paid and excess kept within the f i r m as retained earnings. At t h i s p o i n t the manager notes any changes within the operating i n s t r u c t i o n s , or corrects any serious e r r o r s within the p r e d i c t i o n s . On the basis of these observations he may opt to continue h i s present plan or make changes. In the former case the cy c l e w i l l return to the beginning of t h i s phase and i n the l a t t e r phase III Cthree) w i l l be repeated. Phase VI. I f the r e i t e r a t i o n s of the simulation are completed then during t h i s phase the e f f e c t of the various conditions within the s o c i o -economic environment and the p o l i c i e s and constraints p r e v a i l i n g w i l l be evaluated. The success of management i n responding to these conditions w i l l a l s o be evaluated. The question of performance evaluation i s discussed i n section 6.9 below. 91, 6.3.1 PHASE CHART OF THE MODEL The model phases, f i g u r a t i v e l y , are as follows: Phase I Summary of fo r e s t inven-tory data given to management Competitive p o s i t i o n of the f i r m P r e v a i l i n g operational and fu n c t i o n a l con-s t r a i n t s from Guru Information as to present status of the f i r m Phase II Phase I II Phase IV Analysis of data and information im-p o l i c y decisions of f i r m [Operational decisions Decisions fed to mode.'1. -Yes No Pre-production a c t i v i t y 1. F i n a n c i a l p o s i t i o n of f i r m 2. Labour engagement 3. Productive capacity established JL Production phases 1. Fixed investment 2. Harvesting 3. Thinning 4. Planting 5. Overheads and maintenance 92, Past productive a c t i v i t y 1. Log conversion and s a l e s * 2. Depreciation 3. Post operations f i n a n c i a l p o s i t i o n Phase V Management pays d i s c r e t i o n a r y debts s Payment of dividend Phase VI ^ Note changes i n conditions within supervisor's system and decide as to operational changes Evaluation of the output from the simulation Figure 6.1 PHASE CHART OF MODEL In the context of t h i s model, log conversion r e f e r s to the expected saleable log output from a harvesting operation. 93. 6.4 ASSUMPTIONS OF THE MODEL The assumptions need to be p r e c i s e l y defined. The economic and production assumptions of the f i r m w i l l take the form of: a) the p r i c e s of the firm's products and factors are f i x e d and beyond the c o n t r o l of the f i r m . That i s the f i r m i s operating within v i r -t u a l l y a p e r f e c t market and cannot influence the f a c t o r s of produc-t i o n or goods; b) the firm's o v e r a l l objective i s to maximise p r o f i t , subject to the t e c h n i c a l c o n s t r a i n t s imposed by the production function; c) a continuous production function e x i s t s with non-zero f i r s t and second order p a r t i a l d e r i v a t i v e s which r e l a t e s the set of indepen-dent f a c t o r v a r i a b l e s to the set of dependent production v a r i a b l e s . That i s the production shows diminishing returns to c a p i t a l and the amount of the c a p i t a l employed i s the independent v a r i a b l e , being that which i s d i r e c t l y c o n t r o l l a b l e by the management. The production function i s characterised by: i ) a decreasing marginal rate of t e c h n i c a l s u b s t i t u t i o n ; i i ) a decreasing marginal product f o r a l l factor-product combina-ti o n s ; i i i ) an increasing marginal rate of transformation between any two products; d) the production function i s determined by managerial decisions under t e c h n i c a l and economic c o n s t r a i n t s ; e) the firm's f a c t o r s and products are p e r f e c t l y d i v i s a b l e (though f o r ease of computation and planning t h i s c o n s t r a i n t would be relaxed); 94. f) the f a c t o r p r i c e s , product p r i c e s and the parameters that determine the production function change over time; g) the parameters that determine the production function respond to t e c h n o l o g i c a l innovation and development, though t h e i r implementa-t i o n i s determined by managerial d e c i s i o n . These r u l e s may be changed or modified within a model as circum-stances warrant. 6.5 VARIABLES OF THE MODEL The v a r i a b l e s that are contained within the model may be c l a s s i f i e d i n t o two main categories, the exogenous arid endogenous v a r i a b l e s . The endogenous or dependent v a r i a b l e s are those over which the management has some co n t r o l or a b i l i t y to i n f l u e n c e . Those v a r i a b l e s beyond the c o n t r o l or influence of the f i r m are exogenous, or independent. In p r a c t i c e , the d i s t i n c t i o n between the categories of v a r i a b l e s i s not always c l e a r . Further, v a r i a b l e s may be i n e i t h e r category depending upon the p r e v a i l i n g r u l e s within the model. For example, the maximum cut i n any year may be set by "Guru", act i n g i n place of the B.C.F.S., whereupon the d e c i s i o n i s exogenous, but i f the cut i s unconstrained, then the planned maximum and minimum cuts become endogenous. We may term these v a r i a b l e s that are at the management's d i s c r e t i o n on occasions, s t r a t e g i c , and those always at i t s d i s c r e t i o n , t a c t i c a l . 6.5.1 EXOGENOUS VARIABLES The model i s an open system, that i s the system receives inputs and produces outputs to an e x t e r i o r , independent system. 95. We have already made several assumptions (section 6.4) as to the independence of the superior economic system to the a c t i v i t i e s of the f i r m and provided these assumptions are v a l i d , then feedback mechanisms that influence the data of the system as a r e s u l t of fir m a c t i v i t y are unnece-ssary. The f i r m must, however, react to states of the superior system within i t s own a c t i v i t y sphere. The t o t a l l y exogenous v a r i a b l e s are p r i n c i p a l l y the economic forces. These include the cost of c a p i t a l , the cost of equipment, labour costs and p r i c e s . The l i m i t to which the fir m can draw on the resources of the t o t a l system f o r i t s own a c t i v i t y i s normally l i m i t e d by market forces e x t e r i o r to the fir m . These forces w i l l be surplanted by the imposition of debt l i m i t a t i o n s by "Guru", who w i l l a lso decide which options of c a p i t a l sources are a v a i l a b l e . The sale p r i c e i s also independent of the firm, though the f i r m r e t a i n s the option of s t o c k p i l i n g or s e l l i n g i t s wares. There i s a market l i m i t to the sale that can be achieved at a given p r i c e . The market l i m i t s at a given p r i c e i n any period i s set by "Guru". Cutting l o c a t i o n , amount and evenness of harvest, type of operations, e.g. c l e a r f e l l i n g or patch logging, amount of repl a n t i n g , r e s t r i c t i o n s on road l o c a t i o n and type and waste d i s p e r s a l , e.g. slash burning, are tac-t i c a l d e cisions, and as such are o p t i o n a l l y exogenous or endogenous. I f they are of the former, then the decisions were made by "Guru", who may or may not apply current B.C.F.S. p o l i c y . 96. 6.5.2 ENDOGENOUS VARIABLES The endogenous v a r i a b l e s are not independent of the de c i s i o n i n actions of the firm. Their value, or rate of change, or both, i s i n f l u -enced by managerial d e c i s i o n or change i n another v a r i a b l e , which may be exogenous or endogenous. A l l those decisions necessary to the operation of the f i r m that have not been pre-empted from management are endogenous. 6.5.3 DATA The model as proposed w i l l require a great deal of data. The development of the model to the gaming stage should not present excessive data d i f f i c u l t i e s , however, as the system w i l l continue to junction with some degree of r e a l i t y provided the data input i s of the c o r r e c t scale of magnitude and bears a reasonable s i m i l a r i t y to r e a l system sta t e s . The use of f i c t i t i o u s or hypothetical data f o r data scarce areas within the model at the gaming stage w i l l have the advantage of i n d i c a t i n g the importance of that data and hence the need, f o r data c o l l e c t i o n and the accuracy required of that data when the d e c i s i o n to proceed to the operational phase i s made. The data may be sectioned i n t o various groups of data. The data groups and the p o s s i b l e sources of the data are now given. Data A. The f o r e s t inventory and land c l a s s i f i c a t i o n data are stored i n t h i s s e c t i o n . Because the operations are d e t a i l e d s p e c i f i c a l l y these data must be s p e c i f i c a l l y located. I f contiguous f o r e s t types, i . e . compartments, are mapped and located then the data can be point located with an a r b i t r a r y point by c a r t e s i a n coordinates within the com-puter along with area of f o r e s t types. 97. The land data w i l l comprise therefore: 1) l o c a t i o n ; 2) area; 3) s o i l type; 4) s i t e d i f f i c u l t y factor^"; 5) existence of stream. The s i t e d i f f i c u l t y f a c t o r i s included because costs vary with slope and e l e v a t i o n . The value of t h i s d i f f i c u l t y f a c t o r w i l l be deter-mined by f u r t h e r research. The f o r e s t inventory data w i l l comprise: 1) species within the compartment; 2) volume of standing timber by species per acre; 3) average diameter c l a s s of each species; 4) expected grades of logs. The d e t a i l e d information need only be stored for those areas which are p o t e n t i a l l y a v a i l a b l e f o r logging within the time horizon of the simulation. Other inventory data w i l l be required f o r the c a l c u l a t i o n of the allowable cut but t h i s may be stored i n a summarised fashion. I t i s envisaged that the data can be stored i n a s t a t i c form during the simulation as the change over the period w i l l not be s i g n i f i c a n t . This may r e s u l t i n an underestimate of r e a l volume production and of the value ^ Operations are a f f e c t e d amongst other things by slope, s o i l type, expo-sure, a l t i t u d e and rock outcrops. C l e a r l y , such extensive information cannot be stored within the data bank and used f r e e l y within the model. A more e f f i c i e n t way i s by the use of an index, here r e f e r r e d to as a s i t e d i f f i c u l t y f a c t o r . The development of a s u i t a b l e index w i l l un-doubtedly involve many problems, and i t i s u n l i k e l y that a s i n g l e index w i l l s u f f i c e . However, in d i c e s as proposed would have uses beyond the model f o r such things as stumpage ap p r a i s a l or p l a n t i n g grant assessment. 98. of same, but average error, over a ten year cycle w i l l be minus f i v e years which i s probably l e s s than the errors associated with costs and revenue p r o j e c t i o n s . Besides the storage of the data within the computer the data should also be a v a i l a b l e i n map form to give the management a d e t a i l e d perspective of the l o c a t i o n of roading and other a c t i v i t i e s . Assuming that an e x i s t i n g management area i s used then i t i s expec-ted that there w i l l be several sources of data. For the land data, a i r photographs, f o r e s t company records and Canada Land Inventory information w i l l be used where a v a i l a b l e . Land form, slopes, and elevations are a v a i l a b l e from topographic maps. The f o r e s t stand data w i l l come from the f o r e s t company records and B.C.F.S. In the e a r l y stages, i f an actual data bank were contemplated, the U n i v e r s i t y of B r i t i s h Columbia Research Forest could provide the d e t a i l e d stand data and be t i e d i n to the summa-r i s e d f o r e s t data of a Tree Farm License. The Research Forest data would be f i t t e d i n to form the expected area of a c t i v i t y . The data group would a l s o be required to carry information as to the access that i s a v a i l a b l e to the f o r e s t . The access and the type of access to each compartment w i l l be recorded. S a t i s f a c t o r y access f o r a given purpose can be based on r e l a t i o n s h i p s between the length and type of access, such as road q u a l i t y , and the area of the compartment. The exact l o c a t i o n could be stored within the computer, but i t would be much cheaper to record the information on the maps. The data could be derived from the f o r e s t company records and a i r photographs. Data B. This data group covers the i n i t i a l status of the f i r m . Access to company records would f a c i l i t a t e the easy completion of t h i s 99. s e c t i o n . However lac k i n g that fortune, the published annual statement could be used to e s t a b l i s h the o v e r a l l l i m i t s and scope of the firm's a c t i v i t i e s . D e t a i l s could then be i n t e r p o l a t e d from t h i s information. The basic information that i s required to be stored i s the stock, the cash assets, the l i a b i l i t i e s , the c a p i t a l investment p o s i t i o n , and the productive capacity. The stock p o s i t i o n i s the number of shares of any type that have been issued by the company. The cash assets involves the present l i q u i d i t y p o s i t i o n and the c a p i t a l loaned or invested by the company. Outstanding debts owed to the company are included i n t h i s s e c t i o n . The l i a b i l i t i e s are the loans and bonds held and the unpaid b i l l s of the f i r m . Several loans i n bonds at d i f f e r i n g i n t e r e s t rates and f o r d i f f e r e n t periods may be held. The c a p i -t a l investment i s the sum of the f i x e d and mobile assets. The productive capacity, that i s the p h y s i c a l p o s s i b i l i t y f o r doing work, w i l l a lso be recorded. The term capacity w i l l be elaborated and explained i n section 6.8.1.3 below. The trading p o s i t i o n must a l s o be stored containing information as to orders i n hand and the contract p r i c e , i f any, any expected or a n t i c i -pated orders and the reserves of timber held i n s t o c k p i l e by the f i r m . This information should be t i e d to a s p e c i f i c f i r m f o r an actual simulation, though f o r gaming input data based on reasonable values suggested by experienced personnel would s u f f i c e . Data C. The f i r m operating within the socio-economic system i s subjugated to the a c t i v i t y of that system. The a c t i v i t y within that system i s external to the f i r m and beyond i t s c o n t r o l (see sections 6.4 and 6.5.1). The exogenous v a r i a b l e s of i n t e r e s t to the f i r m are f i r s t l y the demand and 100. p r i c e trends; h i s t o r i c a l p r i c e and demand s t a t i s t i c s w i l l be made a v a i l -able to the management and w i l l be based on published data. Further, and of v i t a l i n t e r e s t to the firm's r e q u i r i n g outside fina n c i n g , i s the cost of c a p i t a l . The p r e v a i l i n g rates at any time, gi v i n g the p e r i o d i c i t y and discount rate of loans and bonds, w i l l be a v a i l a b l e . The cost to the company of c a p i t a l may be determined i n several ways. F i r s t l y there i s the prime lending rate of commercial banks which w i l l i n d i c a t e the minimum cost. Secondly, the records of the f o r e s t firm, which w i l l give the rate p e r i o d i c i t y of loans and bonds at i s s u e . The lending rate of bonds a v a i l a b l e f o r negotiation are published at the "ask" p r i c e and are a v a i l a b l e at the bond market or from l o c a l newspapers. Fur-ther information as to l o c a l i n t e r e s t r a t e s , which are appropriate to smaller firms, w i l l be a v a i l a b l e from I.I.P.S. Present labour costs by trade and s k i l l are a v a i l a b l e from the unions. P r o j e c t i o n s of labour supply are a v a i l a b l e from the I.I.P.S. study and, the Government of B r i t i s h Columbia (1969). Data D. The investment and operating costs of equipment, produc-t i v i t y , rates of production decline and a l t e r n a t i v e c a p i t a l : , labour com-binations information i s a v a i l a b l e from various sources. Besides the f o r e s t companies themselves there i s the a p p r a i s a l information from the Bureau of Land Management (1972) and the Department of Natural Resources (1970). Both s e r i e s of information w i l l have to be corrected f o r the higher c a p i t a l cost i n B r i t i s h Columbia. S i m i l a r a p p r a i s a l information i s a v a i l a b l e from the B.C.F.S. and the Council of Forest Industries (.19691. Smith et al. (1961), i f corrected for i n f l a t i o n , provided information i n d i c a t i n g the magnitude of costs as would the Vancouver Forest D i s t r i c t investment and 101. labour input f i g u r e s from the Department of I n d u s t r i a l Development, Trade and Commerce (Cartwright, 1972). Pr i c e information as regards logs i s published monthly by the Council of Forest Industries i n Vancouver. Information as to the expected d i s t r i -bution of logs b y s i z e and grade from a harvest would be based on Valg (1962), Sydney-Smith (1964), and Dobie (1966, 1970). Data E. I t i s proposed that t h i s data f i l e w i l l be reserved f o r "Guru", who w i l l set the r e s t r i c t i o n s as to where logging may occur Ce.g. no logging of compartments with slope over a c e r t a i n grade), the controls as to the cut (e.g. equal annual or annual or p e r i o d i c maximum and minimum harvests). Also contained i s the stumpage appraisal that i s to be charged and taxation, based i n part on information from the Federal and P r o v i n c i a l Departments of Finance. At the point of log sale a p r i c e must be charged and the revenue accredited to the firm. The actual p r i c e achieved w i l l be set by "Guru" and based on supply and demand pro j e c t i o n s from the same data base as presented to the management^ 6.6 INITIAL MODEL STATUS P r i o r to use of the model the basic model data storage must be set, the exogenous decisions made and the i n i t i a l value of the endogenous v a r i -ables decided upon. That i s , "Guru" must go through the s e r i e s of data groupings and i n i t i a l i s e a l l free v a r i a b l e s . As an a l t e r n a t i v e to "Guru", the model may be run with h i s t o r i c a l data but with only the information p r i o r to the year of simulation a v a i l a b l e to management, or p r i c e may be generated i n t e r n a l l y by a p r e d i c t i v e model. 102. In "Data A", the f o r e s t inventory, few or no decisions w i l l be required unless experiments i n v e s t i g a t i n g d i f f e r e n t resource bases are planned. Several a r b i t r a r y decisions w i l l be required f o r "Data B" unless ac t u a l company data are being employed. The s e r i e s of decisions that must be made are: 1) C a p i t a l 1.1 complete a rate/time matrix of outstanding loans; 1.2 repeat again f o r a matrix of bond issues; 1.3 complete the information as regards preference and common shares issued by the company; 1.4 set the values of the matrix species/grade f o r the logs stock-p i l e d by the company. 2) Production systems The following information must be stored f o r each of the production functions of the company: 2.1 c a p i t a l investment i n plant; 2.2 production p o t e n t i a l of that plant; 2.3 labour requirements f o r that sector; 2.4 expected operating costs per u n i t of production. The h i s t o r i c a l information of "Data C" w i l l be cut l a r g e l y during the data input stage. However, the information as to the amount and form of loan and bond c a p i t a l a v a i l a b l e to the f i r m must be set. Matrices of years of issue against rate f o r both loans and bonds w i l l require i n i t i a -l i s a t i o n . These combinations not a v a i l a b l e to the firm should be set to years and the others contain the maximum amount a v a i l a b l e . Labour supply and wage rates w i l l a lso be i n i t i a l i s e d , i f necessary. Changes within the p r o j e c t i o n s of equipment p r o d u c t i v i t y rates of depreciation may be made i n "Data D" i f desired. I t i s , however, within "Data E" that the greatest influence may be exerted by "Guru". The decisions made for t h i s data group are: 1) harvesting p o l i c y (even flow, no r e s t r i c t i o n s , e t c . ) ; 2) stumpage payment and basis f o r stumpage; 3) taxes (logging and company taxes); 4) r e p l a n t i n g regulations (acres per annum to be planted, e t c . ) ; 5) areas where harvesting p r o h i b i t e d (steep slopes, r e c r e a t i o n areas, stream sides, e t c . ) ; 6) logging standards (close u t i l i s a t i o n , e t c . ) ; 7) post-harvesting p o l i c y (e.g. s l a s h burning); 8) stream r e h a b i l i t a t i o n ; 9) other land use allowance by zoning (e.g. r e c r e a t i o n a l land use allowance); 10) a c t u a l log p r i c e s that are deemed to p r e v a i l at the time of s a l e . The annually made decisions such as "actual" log p r i c e i s stored as h i s t o r i c a l data as the model progresses through the annual operations. 6.7 PLANNING PROCESS AND DECISION MAKING This section r e f e r s to phases two and three of the model. They are being considered together because of the r e p e t i t i v e feedback i n t e r a c t between the data a n a l y s i s and f e a s i b i l i t y a n a l y s i s and d e c i s i o n making. The phases are entered i n t o following the information as to system states and p o l i c i e s being made a v a i l a b l e . 104. In the f i r s t i t e r a t i o n the management w i l l be responsible f o r making several p o l i c y d e c i s i o n s . These p o l i c y decisions may be r e v i s e d at any stage during model fun c t i o n i n g . The decisions w i l l be tempered to a large degree by the o f f i c i a l f o r e s t p o l i c y r e s t r i c t i n g the l a t i t u d e f o r these d e c i s i o n s . These p o l i c y decisions comprise: 1) the harvesting p o l i c y of the f i r m . The f i r m has l a t i t u d e within the c o n s t r a i n t s set, i f any, to vary i t s harvesting p o l i c y . I t may decide to operate i n a cost minimising way and plan f o r an even flow or carry spare capacity to take advantage of high p r i c e s ; 2) p o l i c y of depreciation, A p o l i c y that minimises tax payments or depreciates the equipment over i t s productive l i f e may be adopted; 3) c a p i t a l or labour i n t e n s i t y . The f i r m may attempt to reduce labour input or c a p i t a l input, depending upon i t s p r o j e c t i o n s of future costs and shortages.-On the basis of the operating c o n s t r a i n t s , the system state and i t s own p o l i c y decisions the production planning sequence i s c a r r i e d out. This sequence bears a r e l a t i o n s h i p to section 4.4 above. The general area of harvest development f o r a ten year period i s chosen from the inventory data and the stock map. The choice i s conditioned by the present access and the expected harvest y i e l d s f o r the period from a given area. The information i s more thoroughly analysed f o r the forthcoming f i v e year period and the plans l a i d i n more d e t a i l . The expected timber flows are noted and the investment requirement and p o t e n t i a l sales noted. The annual operations are the most d e t a i l e d . The f i r m must plan: 1) the t o t a l c a p i t a l investment needed; 105. 2) the operating costs expected; 3) the t o t a l budget f o r the year;' 4) the source and amount of new c a p i t a l i f needed; 5) the investment i n new equipment for each f u n c t i o n a l element; 6) the f i x e d investment i n terms of roads, distances and grades, to be b u i l t ; 7) the compartments to be harvested, the type of harvesting and the degree of u t i l i s a t i o n ; 8) the compartments to be thinned and the type and the amount; 9) the areas to be planted with the degree of s i t e preparation and the density of p l a n t i n g ; 10) the annual budget to each operating sector; 11) the allowance f o r contingencies and overheads; 12) the labour to be h i r e d by each operating sector. These decisions form the basis f o r the operating of the model f o r one production period. 6.8 DESCRIPTION OF THE ELEMENTS OF PRODUCTION In t h i s section, Phase IV, the a c t u a l functioning of the f i r m on the basis of the above de c i s i o n s , i s reviewed. Though i n r e a l i t y the operations of the f i r m are proceeding almost simultaneously, they may be conveniently separated i n t o temporarily d i s j u n c t a c t i v i t i e s without any insurmountable disadvantage. The operations may be viewed as being i n three steps, namely, the pre-production, the production and the post-production stages. 106. During the pre-production stage the firm attempts to match i t s a v a i l a b l e c a p i t a l resources to i t s planned investments and expenditures. I f the planned expenditure exceeds the a v a i l a b l e l i q u i d assets, then the firm must r a i s e c a p i t a l i n the loan and the bond market. On the basis of the t o t a l l i q u i d assets the functions of the various production a c t i v i -t i e s can be set by investment i n c a p i t a l p l a n t , a l l o c a t i o n of an operating budget and the h i r i n g of labour. The production stage i s then c a r r i e d out i n the sequence of the orders given and according to the set production function f o r each a c t i v i t y . Following production, the harvested timber i s marketed, the c a p i t a l equipment depreciated and the f i n a n c i a l p o s i t i o n of the f i r m e stablished to the end of the period. 6.8.1 SYMBOLS AND VARIABLE NAMES USED IN FLOW DIAGRAMS The symbols used during the following flow diagrams have been modified from Forrester (1961). i n s t r u c t i o n a l process conditioned decisions information flow 10-7. optimal information flow orders or i n s t r u c t i o n a l flow money flow goods flow personnel flow c a p i t a l equipment or produc-t i v e capacity d e c i s i o n functions source or sink a u x i l i a r y v a r i a b l e 108. | ) v-information take o f f data storage sources of U A X A A _ information 6.8.2 THE ACQUISITION OF FINANCIAL RESOURCES The fi r m may have adequate f i n a n c i a l resources f o r the production period i n question whereupon t h i s s e ction i s bypassed. These funds may have been accumulated from previous loans to the f i r m , bond or stock issues, retained earnings or from depreciation and ammortisation allow-ances. However, should there be a discrepancy between the expected cash flow f o r investment and operating costs and the cash reserves then new sources of funds should be found. The f i r m may r a i s e money from several sources. F i r s t l y , there are the invested assets of the f i r m which may be l i q u i d a t e d . The investments are most e a s i l y received as a r e a d i l y c o nvertible loan stock of known i n t e r e s t i n which the f i r m may i n v e s t or withdraw at w i l l . Bonds up to a s p e c i f i e d amount and at a pre-determined p r e v a i l i n g i n t e r e s t rate and issue period may be issued. Loans, again up to a maximum sum, may be d e a l t with simply by applying the bank's lending rate of i n t e r e s t . In both cases the i n t e r e s t rates may be v a r i e d according to the period and amount of the issue or loan. In a l l cases the maximum that may be r a i s e d from the market or borrowed from the bank w i l l be s p e c i f i e d by "Guru" as an absolute sum that may not be exceeded. 109. reduce planned expenditures, ensure expenditures and assets are balanced. I f yes follow A, else B PLANNED EXPENDITURES invest ^ \ ^  surplus \ MANAGEMENT planned sources of c a p i t a l y CONTINGENCY ( PLANS 0-I i i l i q u i d assets of f i r m f o r period c r a i s e loan >1 to labour a c q u i s i t i o n i f flow becomes zero before asset d e f i c i t r e c t i f i e d then follow A, else B DEBTS 0F_ FIRM Flow Chart 1 FINANCIAL RESOURCES 110. The cash flow p o s i t i o n of the f i r m w i l l be severely d i s t o r t e d by the simulation system as c u r r e n t l y proposed. This i s not important- as the s i t u a t i o n w i l l be r e c t i f i e d at the end of the simulation period. However, a r u l e must be made that a f i x e d proportion at l e a s t of the expec-ted expenditure must be held i n the form of each. This w i l l prevent the holding of u n r e a l i s t i c a l l y l e s s suras of cash to cover the firm's opera-t i o n s . 6.8.2.1 ENGAGEMENT OF LABOUR The operating and functioning of the f i r m i s dependent upon there being s u f f i c i e n t labour a v a i l a b l e and employed. The model w i l l h i r e the planned labour requirement unless the labour pool becomes l i m i t i n g where-upon that number a v a i l a b l e w i l l be h i r e d . Once the labour i s h i r e d the f i r m i s committed to f u l f i l l a contract that guarantees a minimum annual income to the labour f o r c e . The cost w i l l be at a standard rate though an allowance may be made to accommodate the d i f f e r e n c e s i n wage rates between d i f f e r e n t categories of employees. This may be done by the. use of a weighted wage charge to the f i r m that allows f o r the higher wage cost of s k i l l e d labour. Thus, a crew average wage i s charged to the firm, which accounts f o r i t s labour i n terms of average-man years of a c t i v i t y . By the separation of a c t i v i t i e s i n t o temporally d i s j u n c t e n t i t i e s , a problem a r i s e s when the f i r m wishes to respond to changes i n the demand fo r timber. The employment of a f i x e d labour force f o r the year implies only a minimum f i x e d sunk cost. Production below the normal productive c a p a b i l i t y of the f i r m i s dependent upon the v a r i a b l e cost not being met, and production beyond t h i s c a p a b i l i t y requires the more intensive use of the labour beyond the firm's commitment. This involves the use of over-time working, which i s a v a r i a b l e cost, and i s charged to the budget at a higher rate than the f i x e d cost labour. The amount of overtime i s l i m i t e d . No opportunity w i l l be given f o r the r e v i s i o n of the c a p i t a l invest ment plans, should the labour supply prove inadequate as the fir m would be already committed to a course of investment from which i t could not withdraw at t h i s l a t e stage. 6.8.2.2 SETTING THE PRODUCTIVE CAPACITY At t h i s point i n the pre-productive a c t i v i t y the fir m has a knowledge of i t s present productive capacity, which i t has retained i n a depreciated form the previous production period, labour a v a i l a b i l i t y , funds f o r new investment and the working budget. This information i s a v a i l a b l e f o r each of the production a c t i v i t i e s . A desired production output i s achieved by various combinations of labour, c a p i t a l and budget to cover operating costs. The p o t e n t i a l produc t i o n i s set i n the l i m i t by the f a c t o r r a t i o (quantity of c a p i t a l a v a i l a b l per person employed), which i s i t s e l f constrained by technology. The a l t e r n a t i v e s a v a i l a b l e to the fir m may be stored i n a -manner s i m i l a r to that i l l u s t r a t e d below with the actual p o s i t i o n held by the firm i n d i c a t e d . The i l l u s t r a t i o n contains example data f o r the harvesting routine with the f i r m presently having a combination of $500,000 i n i t i a l investment and ten (10) men employed. 112. c o n t i n u e from f i n a n c i a l r e s o u r c e s l a b o u r r e q u i r e m e n t Flow C h a r t 2 LABOUR ACQUISITION 113, Table 6.1 contains information as to the output that may be achieved, with and without new investment, the investment required to maintain the higher productive l e v e l , the average age of equipment and the book value. This information and i t s need i s explained i n the section that r e f e r s to depreciation (section 6.8.4.2). Other information presented r e f e r s to the associated running costs of t h i s p a r t i c u l a r labour and c a p i t a l combina-t i o n . The f i x e d cost i s incurred regardless of what a c t i v i t y occurs and the v a r i a b l e cost i s deducted from the firm's budget as the production occurs. Should areas of the matrix represent combinations that are t e c h n i -c a l l y or economically i n f e a s i b l e then the combination w i l l be precluded. The firm w i l l f i n a l l y be assigned i t s productive p o s i t i o n on the basis of the present productive p o s i t i o n and the new investment, within the constraints of the labour supply. I f investment i s made over and above that required to maintain the productive p o s i t i o n then the average age of the equipment w i l l be s u i t a b l y updated and the new productive p o s s i b i l i t y c a l c u l a t e d . The procedure o u t l i n e d has the disadvantage that the delays which may be incurred i n equipment purchasing have been eliminated. Further, by delaying the equipment purchase to the l a s t moment the uncertainty associated with p r i c e expectation i n the product market has been reduced and hence so i s that of the planning d e c i s i o n s . 6.8.3 PRODUCTION SYSTEMS The production systems carry out the operational programme f o r the firm. On the basis of the productive c a p a b i l i t y that the f i r m has set up \ c a p i t a l A Labour (man years) B 500,000 800,000 120,000 1. 1,000 1300 2. 960 3. 50,000 84,000 4. 30,000 40,000 5. 60 50 6. 20 25 7. 11 11 8. 4 -9. 100,000 800,000 10, .1.1 .1.2 3^ 4 * * * * Notation: 1. t o t a l production capacity i n thousands of cubic feet per production period i f investment i n new plant made; 2. present production capacity i n thousands of cubic f e e t per production period i f no investment made; 3. investment required to maintain higher production schedule; 4. f i x e d costs f o r the production period; 5. v a r i a b l e cost per thousand cubic f e e t extracted; 6. percentage extra output that can be achieved by the use of overtime; 7. v a r i a b l e cost at overtime rate 8. average age 'of equipment; 9. depreciated book value of equipment; 10. basic wage rate weighting f a c t o r . A. i n i t i a l purchase value of the equipment; B. labour required to operate the equipment ** s i g n i f i e s an i n f e a s i b l e combination. Table 6.1 PRODUCTION FEASIBILITY AND COST DATA 115. for the a c t i v i t i e s of f i x e d investment, harvesting, thinning and p l a n t i n g , the model f u l f i l l s the orders i n a d e t e r m i n i s t i c fashion. The i n s t r u c t i o n s to t h i s sytem have been s p e c i f i e d f o r each a c t i v i t y i n the sequence of compartments i n which each a c t i v i t y i s to occur. To allow for c o n t r a d i c t i o n s i n the orders a s e r i e s of r u l e s must be established to counteract them so that the model w i l l continue to operate despite bad planning. For example, should an area be scheduled for harvesting p r i o r to the construction of access the order would be ignored and the next acceptable scheduled area harvested. I t i s recommended that to s i m p l i f y the model and reduce storage requirements, any a c t i v i t y i n a compartment w i l l be completed regardless of a f a c t o r becoming l i m i t i n g . For example, should harvesting commence i n an area and the capacity exhausted before harvesting i s completed the harvesting of that compartment w i l l be completed and the costs allowed f o r as f a r as p o s s i b l e . The e r r o r that such a move incorporates into the model w i l l depend upon the s i z e of the compartments used, the inherent e r r o r s i n the data storage and the capacity d e s c r i p t i o n s . 6.8.3.1 FIXED INVESTMENT The f i x e d investment, that i s roads, bridges and camps, w i l l be made with the long term development plan i n mind and i n accordance with the s p e c i f i c r egulations. The plan that i s set for the model to complete w i l l have two elements. F i r s t l y , there w i l l be an objective and secondly a minimum f u l f i l m e n t goal. The f i r s t part i s what the management would l i k e to achieve and the second part i s what must be achieved i n order that the future planned a c t i v i t i e s of the f i r m are not hampered. 116. continue from labour set up the productive c a p a c i t i e s of each a c t i v i t y  continue to f i x e d investment s a t i s f y each i n turn i f not s a t i s f i e d , follow A, else B B production plans^-productive \ capacity J acquire new equipment a c t i v i t y budget r p o t e n t i a l p r o d u c t i v i t y for a c t i v i t y c a p i t a l investment p o t e n t i a l p r o d u c t i v i t y Data D Flow Chart 3 PRODUCTION FUNCTION 117. Camps may be d e a l t with within the model by assuming that they are contracted out and so the only charge to the firm, i s a cash charge. Roads and bridges are, however, the r e s p o n s i b i l i t y of the company and must be c a r r i e d out as a cash charge and as a resources charge. On the basis of the capacity set i n section 6.8.2.3 above, the f i r m has a capacity for a given number of miles of road. As t h i s information i s stored as a "standard miles" of capacity, the capacity may be depleted f o r d i f f e r e n t types or grades of roads, with an allowance and adjustment fo r , f o r example, slope, s o i l type and remoteness, etc., according to the data a v a i l a b l e from the inventory r,ap. Excess demands over capacity could be contracted out within the c o n s t r a i n t s of the f i n a n c i a l resources. The model operates according to the operating i n s t r u c t i o n s s p e c i -f i e d , unless an impediment a r i s e s , such as a depletion of the budget or productive capacity, whereupon the section w i l l terminate. The i n s t r u c -tions s p e c i f i e d are the compartments i n which the road .(or camp) i s to be b u i l t , the length (or s i z e of camp), and the grade of road and the number of bridges to be b u i l t . Unless s p e c i f i e d s o l e l y as access the model w i l l require a minimum length of road f o r each compartment, depending upon the area. I f the capacity i s exhausted before the minimum investment plan i s completed then overtime working may be permitted, but t h i s i s charged at the higher operating cost. The higher cost w i l l cover labour at overtime rates and increased maintenance charges. Should the budget be exhausted then e i t h e r more funds are voted to the operation from the company assets, i f a v a i l a b l e , or a d e f i c i t budget i s caused. The management may opt to c u r t a i l operations rather than incur a d e f i c i t budget. 118. In the functioning of the model the operations plan i s set out i n the order of p r i o r i t y to be followed. Labour and c a p i t a l , i . e . the produc-t i v e capacity, are applied to t h i s order and depleted according to: capacity consumed = f ( d i s t a n c e , grade, s i t e d i f f i c u l t y factor) where distance i s the length of road b u i l t grade i s the grade or type of road s i t e d i f f i c u l t y f a c t o r i s a composite of slope, remoteness, etc. based on compartment data. On the basis of the capacity consumed the budget i s depleted by making payments to wages and costs. When overtime capacity i s used the rate of cash payments i s increased to compensate the higher costs. From the road l o c a t i o n on the map i t w i l l be po s s i b l e to note the need f o r bridges. I f required the bridge may be ordered and the capacity depleted a f i x e d amount i n accordance with the road grade being construc-ted. This assumes that a l l bridges of a c e r t a i n load f a c t o r cost the same. On completion of the compartment road b u i l d i n g the f i x e d investment f i l e i s updated and a budget t r a n s f e r of d o l l a r s to costs and wages i s made. As the labour has been contracted f o r the operating period a t o t a l minimum wage must be met. When the operations are f i n i s h e d or the budget exhausted the opera-t i o n s are terminated and the next stage proceeds. The data on road i n v e s t -ment must be stored i n two sections. Those roads constructed s o l e l y f o r logging may be stored according to the compartment number, but f o r those required f o r access an estimate of the productive l i f e must be stored as w e l l . This information i s required by the depreciation sub-routine, section 6.8.4.2. 119. CONTINUE (^operating / i n s t r u c t i o n s Flow Chart 4 FIXED INVESTMENT 120. 6.8.3.2 HARVESTING As with the f i x e d investments, the fir m w i l l harvest on the basis of the productive p o t e n t i a l and the budget a l l o c a t e d to the a c t i v i t y . If harvesting has been scheduled then the appropriate f o r e s t compart-ment i s harvested. Harvesting i s c o n d i t i o n a l , however, on there being access to the compartment or there being no harvesting r e s t r i c t i o n order imposed, e.g. because the compartment i s adjacent to a stream. The e f f e c t s of t h i s a c t i o n are s e v e r a l f o l d . F i r s t l y , the productive capacity i s dep-l e t e d according to: productive capacity used = f(volume^ x average diameter^ x s i t e d i f f i c u l t y factor)"!" 1 where volume^ i s volume of the i t h species average diameter^ i s averaged diameter of the i t h species s i t e d i f f i c u l t y f a c t o r i s as before. A monitor regulates the harvesting cost, applying e i t h e r normal or overtime rates, u n t i l the capacity i s exhausted whereupon the harvesting ceases. Logging standards may be imposed by the requirement to harvest a c e r t a i n percentage from the standing volume and r e l a t i n g volume extracted to the capacity used. A uniform logging standard should be applied over the whole f o r e s t as the standard w i l l influence the log conversion f o r sale (see section 6.8.4.1). The harvesting function i s dependent upon the r e l a t i o n s h i p between the average d.b.h. of the stand and the cost of harvesting. See Adams (1967), B a s k e r v i l l e (1964) and Worthington (1966). For a complete discussion of problems associated with modeling a harvesting operation, see C o t t e l l (1967). 121. \^ continue -< fD X 0 1 •a fD 5^ l a Ch rt •' H- rt i rt ft C *i fD 1 cn *—' 1 1 , forest H compartment payments ( ^ ^ a g e s ^ ) I log inventory^) costs minimum wage ^ ) monitor on L productive | capacity j (exhausted) Flow Chart 5 HARVESTING 122. Secondly, the f o r e s t inventory data i s set to zero i n the compart-ment harvested and the standing timber inventory i s converted i n t o a log inventory. The log inventory i s updated by adding the volume harvested to a matrix of species and average diameter breast height. The use of productive capacity incurs a cost, and hence d o l l a r s are t r a n s f e r r e d , from the budget to wages and costs. A budget l e v e l remaining i s monitored and when depleted the operations cease, unless a p o l i c y as regards d e f i c i t has been prescribed. By s e t t i n g a p o l i c y of i n c u r r i n g a d e f i c i t the management may hold the termination order u n t i l the maximum d e f i c i t i s incurred or the capacity i s exhausted. The d e f i c i t p o l i c y may be c o n d i t i o n a l on, say, p r e v a i l i n g p r i c e . 6.8.3.3 THINNING The thinning operation may operate i n a s i m i l a r fashion to the harvesting s e c t i o n . The volume thinned, i f merchantable, w i l l be added to the log inventory though the diameter c l a s s i f i c a t i o n under which i t i s stored i n w i l l be assumed to be the average diameter of the stand, or computed as greater or l e s s , depending upon the i n s t r u c t i o n s f o r thinning. The change i n volume w i l l be recorded i n the f o r e s t inventory, but the average diameter w i l l remain the same i f the f i r s t option above i s adopted. As there i s no dynamic stand information i n the proposed f i r s t stage of development, the err o r i n inventory data following thinning i s inconsequential. 6.8.3.4 PLANTING Over the short term p l a n t i n g i s s t r i c t l y a cost to the f i r m (ignoring the pos s i b l e allowable cut e f f e c t s that may be associated with 123. increased p l a n t i n g e f f o r t ) and may therefore be viewed as a s t r a i g h t run down of the productive capacity procured. The p l a n t i n g must again be s p e c i f i e d by compartment and the produc-t i v e capacity run down according to the e f f o r t expended i n ground prepara-t i o n and p l a n t i n g . Each operation, such as s c a r i f y i n g w i l l require a c e r t a i n e f f o r t , and i f expressed i n terms of productive capacity, which i s again a function of the c a p i t a l and labour a v a i l a b l e to the firm, then the cost may be c r e d i t e d to the f i r m . As the process of p l a n t i n g i s a s e r i e s of d i s t i n c t o ptional a c t i v i -t i e s with widely d i f f e r i n g f a c t o r r a t i o s t h i s approach may prove u n s a t i s -f a c t o r y . If t h i s proves to be the case the whole operation may be put out to contract, or j u s t the pre-planting a c t i v i t i e s , put out to contract at a cost per u n i t area. As t h i s i s s o l e l y a cost to the f i r m over the time span of the -model, the area to be planted, e i t h e r as an absolute amount of proportion of area harvested, w i l l have to s p e c i f i e d by "Guru". 6.8.3.5 MAINTENANCE AND OVERHEADS The f i r m must maintain an i n f r a - s t r u c t u r e to coordinate and oversee i t s a c t i v i t i e s . This requires the involvement of c a p i t a l and labour, and hence lacks assets; though the exact measurement of many diverse and often t r i v i a l a c t i v i t i e s would prove an exacting, though generally uninformative task. However, throughout the model the costs and wages incurred by the firm have been recorded and hence the overheads can be charged at a propor-t i o n of the wages and costs. The jobs provided i n supervisory and coordina— 124. tory r o l e s may be taken as a r a t i o to the employment i n d i r e c t l y productive r o l e s , and hence, using an average wage rate, the labour income i s ascer-tained. 6.8.4 POST-PRODUCTION SYSTEMS Following the production systems several d i s t i n c t a c t i v i t i e s must occur. The harvested timber must be graded and sold, the equipment depre-ci a t e d to obtain the c a p i t a l investment and the production capacity p o s i -t i o n s , and pay taxes, debts and dividends. The a c t i v i t i e s may be d e a l t with i n a se r i e s of sub-routines, the log conversion and sale s , c a p i t a l depreciation and f i n a l f i n a n c i a l p o s i t i o n of the firm. 6.8.4.1 LOG CONVERSION AND SALES From the harvesting and thinning sections of the model the i n f o r -mation as to volumes harvested by species and average diameter of logs has to be stored. P r i o r to sales the logs must be graded. The grading may be c a r r i e d out within the model by the use of an expected d i s t r i b u t i o n of grades by diameter c l a s s and species array. Thus, i f i = diameter c l a s s j = species k = grade c l a s s V.. = volume i n i t h diameter c l a s s f o r j t h soecies IT. P_k = proportion of the i t h diameter c l a s s of i t h species to the kth grade c l a s s 125. where k V, . = volume of the j t h species i n the kth diameter c l a s s such that V. . x P. ., = V, . iD l j k k} The volumes (V .) which form the basis f o r stumpage c a l c u l a t i o n are k} then added to the s t o c k p i l e to form (Vt, . ) . A p r i c e must be established f o r each species and grade c l a s s . C l e a r l y , t h i s i s a p r o j e c t i o n , but f o r the sake of the game the omniscient "Guru" w i l l e s t a b l i s h the p r i c e s based on a s e r i e s of p r o j e c t i o n s s i m i l a r to that used by the management. The p r i c e f i n a l l y chosen may d i f f e r from the a n t i c i p a t e d p r i c e s given by the management, but a two p r i c e system i s required as the l e v e l of investment i s based on the management expectations of p r o f i t , p a r t i c u l a r l y where the management option i s f o r p r i c e responsive c u t t i n g . The stumpage and r o y a l t y payments present some d i f f i c u l t i e s under conditions of s t o c k p i l i n g . I f a l l the timber i s sold, then the stumpage may be c a l c u l a t e d on the d i f f e r e n c e between the t o t a l costs and the income. However, with timber s t o c k p i l e d or sold from s t o c k p i l e i t i s d i f f i c u l t to d i r e c t l y r e l a t e the costs and revenues f o r stumpage c a l c u l a t i o n . I t i s , therefore, suggested that the newly harvested timber be stored separately from the s t o c k p i l e d harvest, permitting the c a l c u l a t i o n of a p o s s i b l e income i f a l l timber was s o l d . The stumpage i s then payable or the d i f f e r e n c e between actual costs and p o s s i b l e incomes. The newly acquired harvest i s then added to the s t o c k p i l e f o r s a l e . The management has the option, out-side contracts, to s e l l how much timber i t l i k e s . The amount to be sold i s a management order (Vs . ) . The income to the f i r m i s therefore: y = n vs, . x s, . 1 1 k3 k ^ where i s the u n i t value of the kth grade of the j t h species. The management may have contracts f o r the supply of wood at a f i x e d p r i c e , which may d i f f e r from the p r e v a i l i n g p r i c e , and several p r i c e s might p r e v a i l f o r f i x e d q u a n t i t i e s within the market place. The management must meet i t s o b l i g a t i o n s and then set a s e r i e s of rules f o r the d i s p o a s l of the timber, bearing i n mind i t s l i a b i l i t i e s , the expected future trends of p r i c e s and the costs associated with maintaining an inventory. 6.8.4.2 CAPITAL DEPRECIATION The model encompasses the c l a s s i c i c a l problem that has vexed economists since the beginning of t h e i r trade. As stated e a r l i e r , the simplest n e o - c l a s s i c a l expression of output i s a function of labour and c a p i t a l , where c a p i t a l i s the sum of the i n d i v i d u a l machines used i n the productive process. The r e a l value to the f i r m i s the p o t e n t i a l earnings of that c o l l e c t i o n of equipment. However, such a value used by the f i r m i s of l i t t l e accounting use as i t merely s i g n i f i e s the worth of the assets i f s old to another party f o r a s i m i l a r use. Yet, within the model, such a measure i s required, using the poten-t i a l p h y s i c a l output rather than p o t e n t i a l earnings, i n order to f a c i l i t a t e the p h y s i c a l planning of future operations. The economic operations of the firm, however, d i c t a t e s that the cost of equipment be measured to permit the c a l c u l a t i o n of cash flows f o r the firm. This measure gives no i n d i c a -t i o n of the p o t e n t i a l earnings. 127. CONTINUE Flow Chart 6 LOG CONVERSION AND SALES 128. We are therefore forced to conclude that two depreciation rates must be c a r r i e d within the f i r m . F i r s t l y , there i s the f i n a n c i a l or book value, and secondly, the p o t e n t i a l productive capacity. These two rates may bear l i t t l e r e l a t i o n s h i p to each other. Let us now review the p o s i t i o n of the f i x e d c a p i t a l f i r s t . The road may have a c a p i t a l write o f f i n e i t h e r of two ways. E i t h e r the cost may be depreciated d i r e c t l y against the timber extracted over i t , or i t may be depreciated at the tax allowance r a t e . The former i s the usual manner and i s operated by a t t r i b u t i n g a "charge" per u n i t of wood extrac-ted. Making an allowance f o r the book value presents l i t t l e d i f f i c u l t y within the model as the road (and i n t e r e s t cost of invested c a p i t a l bet-ween construction and use) may be written o f f when the compartment i s har-vested. Access roads through areas not scheduled f o r logging present d i f f i c u l t i e s . Probably the simplest way i s to take the number of years of harvesting that w i l l be made pos s i b l e by the road, based on e i t h e r the f i v e or ten year plan, and follow a s t r a i g h t l i n e d epreciation. Once the book value or cost value becomes zero, the f i r m s t i l l r e t a i n s a very r e a l asset, p a r t i c u l a r l y with respect to the more major roads. The existence of the road may be retained within the model with l i t t l e d i f f i c u l t y , but for the sake of s i m p l i c i t y i t i s suggested that the productive contribu-t i o n of the road be assumed constant. I f the road i s being a c t i v e l y used the cost of upkeep may be allowed f o r i n the v a r i a b l e costs of logging or i n the maintenance and overheads s e c t i o n . Serious d i s t o r t i o n s would occur i f the assumption were extended over too long a period but over a time span of ten years the assumption should not prove disproportionate to others made and w i l l be quite minor i n nature. 129. Camps may also be retained as f i x e d e n t i t i e s i n terms of productive use but depreciated i n the books i n the normal manner as a percentage of the d e c l i n i n g balance. S i m i l a r l y , mobile assets are depreciated on a d e c l i n i n g balance (presently 30%) of the outstanding book value. Occasionally a s t r a i g h t l i n e depreciation (of about 15%) i s followed. The production c o n t r i b u t i o n w i l l decrease and f i n a l l y d e s i s t on a d i f f e r e n t schedule (see F i g . 6.2). The equipment w i l l normally be scrapped or replaced when the quasi-rent becomes zero. Two depreciation streams must be established within the model, one to second the book or f i n a n c i a l value and the other the production c o n t r i -bution. There must be a known r e l a t i o n s h i p between them, such that when new equipment i s purchased, the f i n a n c i a l and the production streams are appropriately updated. 130. I - productive values to f i r m II - percentage d e c l i n e on the outstanding balance When the average age of the equipment i s x^, i t has a book value to the f i r m of $B^ and a productive value of volume output e^. Figure 6.2 DEPRECIATION STREAMS OF MOBILE INVESTMENTS This must be achieved i n a manner that permits the expansion of production function as well as the holding of a continuous value, and may be done so i n the following way. The book value i s simply the outstanding investment l e s s the depreciation r a t e . 131. I, I I , I I I , production p o s s i b i l i t y f o r which there i s an appropriate labour input requirement. Figure 6.3 ALTERNATIVE PRODUCTIVE CAPACITY STREAMS For each year of operation that passes the productive capacity w i l l d e c line by a c e r t a i n amount. For example, using f a c t o r r a t i o n I I I , the aging of the equipment from X^ to X^ w i l l r e s u l t i n a de c l i n e of capacity from Y^ to h. The curve w i l l be of the form: 1 Y = P.C. x c.x. where P.C. = productive capacity c = constant x = average i n i t i a l age of equipment - years of simulation Should the year X^ be passed the productive capacity w i l l then become zero. In the case of f a c t o r r a t i o I, at yeat X , the capacity w i l l decline to f a c t o r r a t i o I I . 132. depreciation) allowance ( Flow Chart 7 CAPITAL DEPRECIATION 133. In order to maintain the p o s i t i o n or the productive p o s s i b i l i t y graph, an investment, based on the s t r a i g h t l i n e depreciation ( z^ x-j.' Z 2 X 2 ' Z^X^), 2^, 2^ and 2^, being the i n i t i a l cost values of the equipment combi-nations. To change the production function, a l l the f i r m need do i s pay the d i f f e r e n c e i n the i n i t i a l cost values of the equipment. That i s , i n the year X-^ X2' t * i e ^ r i t l t o m o v e f r o m H I to I I , i t must f i r s t pay $(Z^-Zj_), to maintain i t s p o s i t i o n on l i n e I I I , and then pay $(.Z^-2,^\ to change the production p o s s i b i l i t y . Thereafter, to r e t a i n i t s production p o s i t i o n i t must invest according to ( Z 2 X 2^" Following depreciation the information table (Table 6.1) i s updated. The method assumes uniform l i f e expectancy of equipment but allows f o r f l u c t u a t i o n s i n the investment p a t t e r n . The method was chosen i n preference to a r i s i n g v a r i a b l e cost curve as an equivalent sum i s involved i n order to maintain a constant production as the d i f f e r e n c e between present and i n i t i a l productive l e v e l s i s accounted f o r by overtime costs. The d e c l i n i n g production p o t e n t i a l i s r e g i s t e r e d within the model without the need to introduce a second accounting process. Rising p r i c e s may also be allowed f o r by changing the slope of the Zx l i n e , though these would be r e a l p r i c e changes as i n f l a t i o n should be ignored through the model as an appropriate allowance serves only to confuse and to complicate. 6.9 FINANCIAL POSITION OF THE FIRM As a conclusion to the p e r i o d i c operation of the model a simple accounting routine i s necessary to s a t i s f y the as yet unaccounted f o r expenses and incomes and the disbursement of p r o f i t s i n the payment of d i s c r e t i o n a r y debts and dividends. 134. The expenses p r i n c i p a l l y involve those associated with the cost of borrowing c a p i t a l , namely i n t e r e s t charges on bonds and loans. Mature bonds must also be s a t i s f i e d . A simple searching technique of the loan and bond matrices that c a l c u l a t e s the i n t e r e s t on the outstanding issues and appropriate sum deducted from the assets. The income not accounted f o r i s that obtained from the firm's investments, which i s simply a per-centage of the t o t a l investment. With the non-discretionary transactions complete the information i s a v a i l a b l e to allow the p u b l i c a t i o n of an interim statement of accounts (see Table 6.2). On the basis of t h i s information the management can act at i t s d i s c r e t i o n . I f the fir m has made a p r o f i t then the p r o f i t can be used to pay a div i d e n t , s a t i s f y non-urgent debts and r e t a i n some of the p r o f i t i n a n t i c i p a t i o n of future expenditures. The retained earnings may be held as cash or as investments. I f a loss has been incurred and the cash assets are r e g i s t e r e d as negative the f i r m must r e d i s t r i b u t e i t s t r a n s f e r a b l e assets, that i s the depreciation fund or the investments u n t i l the cash i s at l e a s t zero. I f several bonds and loans have been repaid i t i s to be expected that the cash assets w i l l r e g i s t e r as negative i n the i n i t i a l statement of accounts, but, because of the way i n which the system has been organised, t h i s does not n e c e s s a r i l y i n d i c a t e a weak f i n a n c i a l p o s i t i o n . A l t e r n a t i v e l y , the cash may be borrowed. Should the management foresee a period of continued p r o f i t a b i l i t y , then there i s no reason to prevent the payment of a dividend from d e f i c i t funds. 135. A f t e r the r e d i s t r i b u t i o n orders have been given to the model, then a revised statement of accounts i s published (Table 6.2) along with the table of dividends payed (Table 6.3). Income Returns from investments Gross sales Total income Expenditure Stumpage and r o y a l t i e s Wages Costs Depreciationand amortisation Overheads Interest payments Tot a l Net p r e t a x - p r o f i t Taxation Net p r o f i t Assets Cash (including net profit)" 1" Investments Accounts receivable Depreciation and amortisation C a p i t a l i s e d value of f i x e d and mobile assets Unsold stock T o t a l In revised state read Cash (ex-divided). L i a b i l i t i e s Bank indebtedness (Loans) Accounts payable Bond l i a b i l i t i e s T o t a l Table 6.2 INTERIM STATEMENT OF ACCOUNTS Dividend payment Preferred stock Common stock T o t a l Payment per share of common stock Table 6.3 DIVIDEND PAYMENT 138. 6.10 GAME EVALUATION If the model i s played as a game, some measure i s required to i n d i -cate the success achieved. The evaluation can be based on the planning and the operations phases of the model. A d e t a i l e d evaluation system obviously cannot be described at t h i s stage, but the following contains a few comments as to the points that should be considered when the manage-ment 1 s e f f o r t s are appraised. In the f i r s t case, the success of the plan i n terms of the s i m i l a -r i t y between the actual operations and the planned operations may be gauged. For t h i s purpose the actual wood income, investment and cost flows may be compared to the planned and p r e d i c t e d values. However, stress should not be overly placed on t h i s s ection of the evaluation as the plan i s merely a means to an end and not the end i n i t s e l f . There i s f a r more b e n e f i t to be derived by abandoning a plan, which i s only a s e r i e s of guidelines, when i t s use becomes in c o n s i s t e n t with attainment of the objectives than completing the enactment of a defunct plan. The a d a p t a b i l i t y of the plan to changing circumstances i s an important consideration, though the plan should not be so l o o s e l y termed and i n e x p l i c i t as to allow f o r confusion, anomalies and c o n f l i c t i n g i n t e r p r e t a t i o n s . Much of the e x p l i c i t n e s s i s derived from the c l a r i t y of statement of goals and o b j e c t i v e s . Should there be a change i n the goals and/or objectives the plan immediately becomes i n a p p l i c a b l e . More important to the player of the game i s the success achieved i n obtaining the goals. The o v e r a l l f i n a l p o s i t i o n of the company i n terms of accumulated p r o f i t , assets (cash, investments, c a p i t a l stock, s t o c k p i l e d goods, and debts r e c e i v a b l e ) , l i a b i l i t i e s (bonds, loans and debts payable) 139. and dividend payments. The f i n a l p o s i t i o n must be viewed i n terms of the evenness of the cash flow obtained over the year and the r e g u l a r i t y and s t a b i l i t y of thq dividend. The actu a l use of cash flow within the model would present some d i f f i c u l t i e s but the accuracy of the budget allowance and the actual time spent would provide an i n d i c a t i o n of the planning thoroughness and i t s accuracy. Further, the i n t e n s i t y of c a p i t a l investment, expressed i n terms of the earnings to investment r a t i o i s an important i n d i c a t i o n as to the e f f i c i e n c y of use of the c a p i t a l . I f the fi r m has become over-extended i n i t s operations then t h i s w i l l be in d i c a t e d by an unfavourable assets to l i a b i l i t i e s r a t i o . I f an allowable cut has been assigned to the f i r m then the adherence of the f i r m to these guidelines and the debt p o s i t i o n i s i n r e l a t i o n to the cut evaluation. C l e a r l y , the long term i n t e r e s t of the f i r m i s r e f l e c t e d i n the condition of the f o r e s t , i t s basic resource. Account should be taken of the unforested land within the area designated as p o t e n t i a l l y u s e f u l f o r second growth timber, with reference to the i n i t i a l status at the beginning of, and the cleared during the simulation period. 6.11 FUTURE DEVELOPMENT OF THE MODEL We have so f a r discussed the general format of the model along with the data requirements and the types of functions to be employed. The format has been elaborated i n t o a general system structure that emulates the flows of information, orders, goods and d o l l a r s . A f t e r programming the model f o r the computer, i t i s necessary that the a v a i l a b l e data and data estimates be presented i n a coherent assimi-la t e d form that i s compatible to the model. The appropriate functions 140. may then be derived to a degree of accuracy that f a c i l i t a t e s the operation of the model with i n t e r n a l r e l a t i o n s h i p s consistent with the r e a l system, to i n d i c a t e the v a l i d i t y of the simulating system d e s c r i p t i o n . The model w i l l undoubtedly require some t e s t i n g and modification p r i o r to i t s being considered a s a t i s f a c t o r y representation of the r e a l system. Once t h i s i s achieved, and despite the continued use of p a r t i a l l y hypothetical data the model may be used i n i t s gaming r o l e . Two paths may then be followed, e i t h e r separately or simultaneously. The f i r s t path requires the repeated use of the model to i n d i c a t e the c r i t i -c a l functions and data l i m i t a t i o n s . C r i t i c a l functions or data l i m i t a -t ions are those that have a s i g n i f i c a n t influence on the output data and there i s the p o s s i b i l i t y of improving the function on data input. The determination of the c r i t i c a l points of the model are necessary i f the accuracy i s to be improved s u f f i c i e n t l y to permit i t s use i n " f i e l d " s i t u a -t i o n s . The i n i t i a l " f i e l d " use w i l l be as a general industry i n d i c a t o r as the use of s p e c i f i c examples w i l l require the r e l a t i n g of the model to an actual f i r m and resource base. The second path involves the more d e t a i l e d and i n q u i r i n g i n v e s t i -gation of the system to improve the s o p h i s t i c a t i o n and realism. Such a path w i l l a lso f a c i l i t a t e the i n t r o d u c t i o n of a greater number of v a r i a b l e s and parameters, which i n turn w i l l r e f i n e and improve the output data as well as broaden the scope of the model. Some examples of improvements i n system d e s c r i p t i o n are: 1) reduce the period of operational evaluation to three monthly periods, which w i l l permit greater v a r i a b i l i t y i n the p r i c i n g structure and allow "lead i n " or "delay" times f o r company responses to market changes; 141. 2 ) i n t r o d u c e a r o u t i n e i n t o the model t h a t a l l o w s the f o r e s t d a t a t o be dynamic and t h e r e b y f a c i l i t a t i n g the i n v e s t i g a t i o n o f the l o n g term e f f e c t s on the f o r e s t o f s h o r t term economic d e c i s i o n s ; 3) t h e use o f p u r e l y d e t e r m i n i s t i c f a c t o r s as t h e b a s i s o f t h e model may be changed, whereupon g e n e r a t e d c r i s e s , such a s , f o r example, e x t e n s i v e wind throw on the company l a n d s r e q u i r i n g a complete r e p l a n n i n g o f t h e s h o r t term g e n e r a t i o n s , c o u l d be i n t r o d u c e d . The l i m i t s t o t h e model development a r e i n r ealms o f s c i e n c e f i c -t i o n and t h i s i s p r o b a b l y a t i m e l y p o i n t t o r e t u r n t o p r a c t i c a l i t i e s . 6.12 INITIAL AND POTENTIAL USE OF THE MODEL D u r i n g t h i s c h a p t e r we have d i s c u s s e d a t l e n g t h the form o f th e model t h a t a t t e m p t s t o a c c o u n t f o r the consequences o f many o f t h e d e c i -s i o n v a r i a b l e s o f the p l a n n i n g p r o c e s s . The i n c l u s i o n o f many f a c t o r s and v a r i a b l e s w i t h i n the model has i t s advantages and d i s a d v a n t a g e s . Though a model may adopt a c o n s i d e r a b l e degree o f r e a l i s m i n terms o f m i m i c k i n g , the system as the p a r a m e t e r s and v a r i a b l e s a r e extended a model, u n l e s s g r e a t c a r e i s t a k e n , w i l l t e n d t o become u n w i e l d y and r e q u i r e e x c e s s i v e amounts o f d a t a . In t h e e a r l y s t a g e s o f t h i s model, much o f the d a t a must o f n e c e s s i t y be based on " g u e s t i m a t e s " and i t i s t o be e x p e c t e d t h a t t h e r e l i a b i l i t y o f t h i s d a t a would d e c l i n e as the scope was extended. The c o m p l e x i t y o f h a n d l i n g and the i n h e r e n t u n c e r -t a i n t y o f the system and the d a t a base would a t some s t a g e outweigh the advantages g a i n e d by i n c r e a s e d r e a l i s m . P r e s e n t l y , the model i s c o n f i n e d t o m i m i c k i n g the a c t u a l f u n c t i o n s o f the f i r m i n a dynamic f a s h i o n and i s o n l y t i e d t o t h e e x t e r i o r systems 142. i n a very s u p e r f i c i a l way. The f o r e s t systems and the socio-economic systems are equally dynamic and prone to uncertainty. These systems have been subjugated i n importance by a se r i e s of assumptions. On the one hand, the f o r e s t has been assumed to be s t a t i c and influenced s o l e l y by the firm. The natural growth of the f o r e s t has been stopped and i t s destruction from f i r e and storm has al s o been halted. On the other hand, the socio-economic system has been conveniently c o n t r o l l e d and regulated by the cre a t i o n of a f i c t i t i o u s "Guru". Such brazen assumptions are nearly immaterial when the model i s used i n i t s gaming r o l e . I t makes no d i f f e r e n c e to the management i f the information feedback from e i t h e r system i s r e a l or concocted as they w i l l react so as to optimise the p o s i t i o n of the f i r m i n r e l a t i o n to the stated o b j e c t i v e s . What i s of i n t e r e s t i n t h i s case i s not the f i n a l p o s i t i o n of the f i r m but the manner i n which the management reacts to the data input and system responses to t h e i r d e c i s i o n s . The c r i t i c a l element i s thus the accuracy of the system d e s c r i p t i o n . In the planning r o l e , the emphasis changes from the system response mechanisms to the f i n a l status of the v a r i a b l e s . We may at t h i s point r e c a l l the adage "garbage-in, garbage-out". Unless the i n i t i a l status of the v a r i a b l e s i s known then the f i n a l status w i l l also be unknown. As to the system, i t i s , i n theory, i r r e l e v a n t whether a r e a l or h e u r i s t i c approach i s adopted provided the f i n a l status of the v a r i a b l e s can be predicted with the system as represented within the model. The value of the model f o r act u a l planning purposes w i l l remain i n doubt u n t i l the model has been constructed and v a l i d a t e d . Experimentation may then occur to in v e s t i g a t e the sorts of questions that may be answered. 143. We can, at t h i s stage, only hypothesize as to how the model w i l l even-t u a l l y be used but t h i s does not prevent us musing these conjectures. One of the major problems of resource use at present i s resource c o n f l i c t . R i v a l pressure groups are clamouring for a greater c o n t r o l over the f o r e s t and demanding that more a t t e n t i o n be paid to t h e i r own p a r t i -c u l a r whim. How might the model be used to , solve the c o n f l i c t between r e c r e a t i o n i s t s and f o r e s t e r s f o r example? Recreation may be allowed f o r within the f o r e s t by r e s t r i c t i n g the f o r e s t operations, other than say p l a n t i n g , to a p a r t i c u l a r area of the f o r e s t and avoiding areas designated as having p o t e n t i a l f o r r e c r e a t i o n , are of outstanding natural beauty or abut onto streams which are important f o r f i s h i n g . The d i f f e r e n c e s i n the f i n a l status of the f i r m under the unconstrained and the constrained status may then be estimated. The d i f f e r e n c e i s i n the cost to the f i r m of r e c r e a t i o n over the period of simulation. The cost w i l l vary depending upon whether the areas are per-manently or temporarily i s o l a t e d from the firm. In the former instance, the f i r m must r e c a l c u l a t e i t s allowable cut and i n the l a t t e r , a l l that may be required i s rescheduling of the operations and the model would pro-bably be i n s u f f i c i e n t l y s e n s i t i v e to the d i f f e r e n c e s i n cost, other than perhaps an increased cost of road b u i l d i n g . The information produced would be of l i t t l e value i n i t s e l f but would provide an input i n t o a cost b e n e f i t study. No f a c i l i t y e x i s t s at present f o r a d i v e r s i f i c a t i o n of the f i r m other than i t s investment i n convertible loan stock, but there i s , however, no reason why t h i s f a c i l i t y should not be expanded or the f i r m be given l a t i t u d e to s e l l i t s own land for r e a l estate development. I t would be 144. expected that the firm would invest the resources i n thenost p r o f i t a b l e e n t e r prise, and i f t h i s proves not to be f o r e s t r y then the firm would be ac t i n g contrary to the i n t e r e s t s of i t s shareholders to continue operating as a f o r e s t company. There i s no a priori reason why f o r e s t s should be propagated i n perpetuity. I f i t i s deemed s o c i a l l y d e s i r a b l e to do so, then several means of ensuring.the propagation, such as a tax on bare land, may be in v e s t i g a t e d . As a l a s t example, f o r though several further experiments could be proposed, to do so at t h i s juncture p r i o r to the construction of the model i s e s s e n t i a l l y an exercise i n the f u t i l e , l e t us review the use of the model i n the continuing saga of sustained y i e l d . The p r o f i t a b i l i t y of the f i r m and the harvest cut under unconstrained conditions can be compared with various i n t e r p r e t a t i o n s of the constrained y i e l d doctrine, which w i l l form the constrained system, and thus the opportunity cost of the p o l i c y may be estimated and the d i f f e r e n t investment s t r a t e g i e s estimated. Though the i n d i v i d u a l f i r m i s assumed to have no influence on the market p r i c e s , the whole industry c l e a r l y does, and hence the p r i c e structure used, because of the absence of a l t e r n a t i v e information, must be based on the constrained system s t a t e . This may lead to e i t h e r an under or over estimate of the cost, i f any. For the sorts of experiments and analyses discussed, other techniques and the accuracy and r e l i a b i l i t y obtained w i l l probably be equal to, or greater than, the information y i e l d e d by the model i n i t s present form. However, the s i n g l e objective techniques operate on a s e r i e s of assumptions with respect to extra-model st a t e s . The v i o l a t i o n of doubtfulness of the assumptions reduces the v a l i d i t y of the p r o j e c t i o n s . In this" context, the 145. multiple-systems model has the advantage that many of the system i n f l u e n c i n g states are i n t e r n a t i o n a l and are thereby established as system states or parameters and the i n t e r n a l process r e l a t e d to these system states. Cross and multiple impact analysis are made possible over minor and traumatic perturbations anywhere within the system. 146. CHAPTER 7 CONCLUSION In a t h e s i s such as t h i s , where the discussion has centred i n i t i a l l y on a review of the work to date and subsequently on the presentation of possible future course of acti o n , there can be no profound or concrete conclusions. The present models that are i n use for planning have been severely c r i t i c i s e d on account of the paucity of factors they consider, the "heavy-handedness" with which they approach the problem and, because of t h i s lack of subtlety, t h e i r inappropriateness for evaluating the e f f e c t s of minor p o l i c y , system, f a c t o r or product changes. In an attempt to overcome these shortcomings, models have been proposed, but the e a r l i e r models, which I termed " f i r s t , generation models", were c r i t i c i s e d f o r t h e i r s i n g l e o b j e c t i v e . The "second generation models" were a considerable improvement but they s t i l l possessed several u n s a t i s -f a c t o r y t r a i t s . The hypothesis was then advanced that what was required was a model that simulated the " t o t a l system". The presentation of an o u t l i n e , rather than the presentation of a working model, i s perhaps testimony to the idealism rather than the p r a c t i -c a l i t y of the concept. The development of an idea to the stage presented within t h i s thesis i s a r e l a t i v e l y simple matter, but the transforming of t h i s concept to a functioning, a l l singing and dancing model i s a quantum 147. leap forward. The stage achieved meets, to some extent, one of the objec-t i v e s of model b u i l d i n g ; that of understanding and comprehending the system more f u l l y . The use of such a model for planning i s s t i l l f a r from r e a l i t y . We must question as to whether the improvements i n planning tech-nique and d e c i s i o n making can j u s t i f y the e f f o r t and cost of making a t o t a l systems model f u l l y o p e r a t i o n a l . As to whether t h i s i s worthwhile i s n a t u r a l l y a function of the importance of the decisions pending, and the e f f o r t required, with consideration given to the objectiveness of the present d e c i s i o n a i d i n g methods. I t should be c l e a r l y understood that the model can never replace the human d e c i s i o n taker, but can merely be of assistance by providing l a r g e r amounts of more r e l i a b l e and diverse i n f o r -mation. The r e j e c t i o n of the t o t a l systems model because of the cost or the time required to bring i t to f r u i t i o n can lead to two courses of a c t i o n . E i t h e r the modeling concept may be r e j e c t e d e n t i r e l y , whereupon the d e c i -sion processes w i l l continue to place r e l i a n c e on the current d e c i s i o n a i d i n g methods, or, a l t e r n a t i v e l y , s i m p l i f y i n g assumptions as regards the system may be made. The former move i s a very r e t r o g r e s s i v e act where decisions of great consequence are concerned, and w i l l not be commented upon f u r t h e r . The l a t t e r course of a c t i o n has several advantages and disadvantages. The advantages of s i m p l i f y i n g the system are that the model i s produced sooner, with l e s s e f f o r t and at l e s s cost. Counter to t h i s i s the l o s s of realism, the p o s s i b l e i n t r o d u c t i o n of i n v a l i d assumptions and a reduction i n the marginal improvement over the present techniques. 148. The a r t of systems modeling, and here I continue to r e f e r to the s o c i a l sciences and management sciences, has perhaps reached a nadir and i s passing through a phase of s e l f - q u e s t i o n i n g and stocktaking. As an aid to d e c i s i o n taking simulation may not have been the g l o r i o u s success a n t i c i p a t e d by the e a r l y exponents but, the stage i s now set where simula-t i o n can begin to make v a l i d c o n t r i b u t i o n s . This i s not e n t i r e l y a statement of f a i t h but a b e l i e f that a favourable climate f o r simulation i s evolving, brought about by the in c r e a s i n g inadequacy of other approaches and methods and the improved c a p a b i l i t y f o r complex models through the accumulation of expertise, experience and t e c h n i c a l f a c i l i t i e s , and an acceptance by p o l i t i c i a n s and the general p u b l i c of computers and computer technology. 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