Productivity

Profit margins in the mining industry, frequently healthy and attractive, face high risks when market prices are low. Mining operations have never fit the historical model of cost plus margin equals selling price. In their case, market price minus cost equals margin. Without control of the selling price, cost is the only variable in this equation for a mining company to focus on and breakthrough productivity the path to address it. Lowest cost and highest efficiency is the key to a “last man standing” strategy when market prices decrease.

Operating in a culture accustomed to challenge value creation, the mining industry knows by heart that what used to work well yesterday in their operations will not be enough to deliver value (and healthy margins) tomorrow. In spite of being persistent and resilient organizations, mining operations continue to see breakthrough productivity as a strategic imperative in the current environment of low commodity prices.

Over the last several months, tremendous macro-economic and market pressure has been faced by the mining industry, creating a need to challenge things further. While some of the factors affecting the productivity of mining operations are not directly controllable, their negative consequences in profit generation and investor confidence are of immediate concern. Among some of the factors that are currently affecting mining operations across the Americas we can find:

    +Commodity and metal prices at lowest levels in several years (i.e. copper, silver, iron, coal);
    +Slower demand (construction, industrial activity) in China and Europe and overall slow-down of economies in the Latin America cluster, that in 2014 grew at lower levels than other OECD countries;
    +Deteriorating head grades, inflation and increasing cash costs in key mining operations across Peru, Chile and Brazil;
    +Tightening regulations, environmental requirements and sustainability oversight.

While a gradual recovery of the U.S. economy and lower fuel prices might be perceived as a hint of light at the end of the tunnel, the combination of all the other factors demand immediate action. Future outlook of key mining products such as gold, silver, coal and base metal prices do not anticipate a short-term recovery in top-line revenue thus creating intense pressure on costs and therefore on margins.

Mining operations have consistently captured major sources of cost improvement such as capital investment, project closures or divestitures, and labor reduction. New opportunities to generate breakthrough productivity might not be as obvious.

These conditions create a need to re-assess opportunities. First, the entire value chain of mining operations within scope, second a more strict criteria to quantify financial benefits and finally a plan that enables both short and long-term improvements. 

Boundaries of the value chain need to be examined with an end-to-end approach, and opportunities exposed in areas that are not typically available to other companies. The overall analysis should include:

    +Core Processes – Exploration, mine development, mining operations, processing (recoveries) and delivery.
    +Supply Network Design – Supply network complexity, logistics and transportation operations should be encompassed as part of the entire mining value chain. 
    +Support Business Processes - The efficiency and effectiveness of key business processes such as procurement of equipment and materials, demand forecast, project management, production planning, transportation scheduling, order to cash (order management, invoicing and account receivables) need to be analyzed, as they all affect the flow of materials, information and cash.
    +Other Value-Added Services – Mining operations are impacted and therefore have opportunities that aren’t available to other companies. Most major mine operations directly provide hospitals and medical care, transportation, housing, food, sewage, and other services to people who are on-site. When these services are provided to several thousand individuals simultaneously, the efficiency of how this is done definitively has an impact on the total cost and the bottom line. 
Focus on Entitlement 

The productivity bar needs to be high first, to then start a transformational journey. A zero-loss analysis must be performed across all core processes of the value chain, and non-conventional operations, by quantifying what the costs should be if things were perfect. The currently known laws of science should be the only limit to quantify the magnitude of possible improvements. As examples:

    +Zero downtime or overtime in major assets such as crusher operations increasing throughput in several tons per hour;
    +Perfect truck utilization reducing time and number of trucks needed in haulage needed to move tonnage required for production;
    +A demand and supply network redesigned with only the minimum number of touches and movement to deliver mining products to final customers;
    +Defect-free operation of key health care, housing and other employee services focusing on delivering “more with less.”

With the “entitlement” opportunity visible to all, and properly quantified with help of financial experts, an improvement roadmap that balances short and long-term benefit capture can be developed.

Self-Funded Improvement

With all key opportunities quantified and the right priorities defined, improvement efforts should be implemented in short periods of time. This allows breaking the opportunities in viable projects balancing the right scope, complexity and short-term value creation that make the overall improvement efforts sustainable and funded from within. 

Engaging Others

Finding new opportunities to generate breakthrough productivity requires the collaboration and knowledge of everyone in the organization. Productivity and efficiency initiatives might be perceived as a threat to job security, thus making improvement efforts selective. Thinking that sustainable improvements can be obtained without the proper engagement of the organization will be naïve. This might actually be one of the biggest challenges to realize breakthrough productivity, even beyond the limits posed to process improvement by the currently known laws of science.

Do it Again

Current economic conditions generally faced by mining operations might put the perceived survival of more than a few operations at risk. The industry knows well that an improvement strategy must be continuous. By generating short-term wins across the entire value chain, relief can be delivered to operating margins. This will also create the momentum created to enable a long-term transformational change. Success must be celebrated with candor to then reset the bar higher and begin the improvement process again. 

gary cone, mike carnell and alex figueroa represent Global Productivity Solutions, a consulting firm focused on productivity and supply chain operations .

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