Abstract An approach to developing a wood pellet supply chain (SC) which selects among several sources of biomass feedstock is proposed. The approach is based on a downstream to upstream analysis of the SC and includes five phases: (1) Identifying potential markets and projected demands. (2) Determining feedstock types, locations, and available quantities. (3) Evaluation of raw material and final product transportation options, potential plant location, and logistics components that can be integrated with existing forest products SCs. (4) Cost estimation of raw material supply, production, and final product delivery. (5) Utilizing a spatially explicit optimization and generic model to determine the optimal operational conditions under which the wood pellet SC is profitable while taking into account economies of scale. The model selects the best feedstock locations and determines the optimal quantities to supply as well as the optimal production capacity. The associated ROI is calculated to assess economic feasibility. To show the value of the approach, we applied it to a real case study proposed by a regional development agency interested in developing the wood pellet sector in Eastern Canada. The results show that implementing a 100,000-tonne plant using biomass harvested in the forest as the sole feedstock is profitable. However, harvesting costs must be shared among the pellet mill and other forest companies and the government must provide financial support. The use of sawmill residues in the mix of feedstock allows implementing a highly profitable 50,000-tonne plant without any government support or harvesting cost sharing mechanism. Under a high wood pellet selling price, harvesting cost sharing and government support, the production capacity can reach 150,000 tonnes/year. An important finding is that government support is not necessary for ensuring profitability in all cases. Government support has a significant impact on profitability in the case where sawmill residues are not available as a feedstock for manufacturing pellets or the selling price is high enough to allow operating a profitable plant of large size.