Greater efficiency and productivity needed to withstand volatility [opinion]

Volatility will be an ongoing challenge for mining and metals companies for the foreseeable future. Fluctuations in commodity prices have become more rapid and frequent as commodity demand has become increasingly unpredictable. The longer-term economic outlook is also volatile, leading to the possibility of substantial revisions to long-term metal price forecasts and making it hard for mining and metals companies to plan for the future.

The impact of China and emerging market demand is also difficult to understand or predict. So as prices fluctuate and there is limited pricing or demand visibility, as a result management is struggling to plan operations and capex.

Mining companies need to adopt a different mindset to successfully navigate this ongoing volatility. They must move faster and think differently to generate cash, strengthen balance sheets and develop plans for long-term profitability.

The key to success is to be agile. This requires a productive, well-managed and cost-effective end-to-end value chain. Our analysis and work with mining companies has identified six key areas that companies should focus on to strengthen the business and manage ongoing volatility – cost reduction, working capital, productivity, capital effectiveness, portfolio strategy, and financing.

While this article focuses on just one of these levers – productivity – all six levers are important and need to be considered concurrently.  EY’s latest report, Navigating volatility: do you change your business or the way your business works?, looks in detail at the actions that can be taken to utilise all six levers.

Productivity – finding the next 10-20 per cent

Productivity remains the number one operational challenge in the mining sector, with many still struggling to make an impact. Many of the gains to date have been realised via tactical short-term solutions, but to really achieve sustainable gains, the focus needs to be on the long term.

Most of the obvious opportunities across operations have already been addressed — it’s finding the next 10–20 per cent of productivity savings that can be difficult and complex.  To do this, mining companies need to challenge themselves on best practice and they must learn from other sectors, particularly the manufacturing and industrial products sectors.

It’s no longer good enough to rely on conventional wisdom and expertise from within the mining sector, the net must be cast wider and outsiders’ experience sought out to deliver that next productivity and efficiency boost.

Focus on the assets: an end-to-end view

To achieve the next level of productivity improvement, mining companies need to move beyond point solutions, and adopt an end-to-end solution to transform the business.

We heard many anecdotes from participants in our 2014 survey, Productivity in mining: now comes the hard part, about the lack of communication between the functional departments and how a silo mentality has crept into the management of mining companies. Analysis and mapping of communication networks by researchers at the University of Queensland show how severe these problems have become at some mines.

Integration is a key challenge for improving productivity and requires an approach that breaks down these silos and adopts an end-to-end perspective. Optimising an operation now requires a more complex balance of four core dimensions: safety, costs, productivity and license to operate.

This may end up with operations investing more in enabling capabilities to drive system reliability to drive productivity to deliver shareholder value. To achieve end-to-end focus, mining companies need to consider:

  • An integrated governance structure across productivity initiatives.
  • Optimal asset utilisation via loss elimination analysis and practices.
  • Data analytics to provide quality information to support effective decision-making and productivity gains — the increase in availability of computational power and agility combined with the lowering of the unit cost of technology means that miners can now use predictive analytics to identify where equipment failures or plant bottlenecking is likely to occur and react before production is impacted. This focus on asset performance together with other targeted areas such as fuel analytics has enabled some miners to achieve an overall reduction of up to 25 per cent in opex spend.
  • Engaging the whole workforce — ensuring targets drive the right behaviours.

Most mining companies have already adopted an end-to-end approach for back office functions such as finance or procurement, but not for service functions like asset management or core functions like mineral processing. Yet we believe that using a process model to achieve and sustain an end-to-end approach is where the true enablers of productivity gains can be achieved.

Relentless pursuit of loss

 Loss needs to be transparent, understood and acted upon. Reasons for loss fall under four major categories:

Reliability — eg equipment and material supply losses

Utilisation — eg labour supply and integration losses

Throughput — eg payload and rate losses

Quality — eg ore quality and ore to waste losses

There is evidence of significant productivity improvement and value creation through the adoption of a manufacturing mindset. This changes the focus from traditional productivity efforts to establishing the capability and environment to enhance materials flows and equipment effectiveness. This is supported by productivity metrics, in particular the use of OEE to drive throughput. Production uptime can quickly be increased by up to 5 per cent, and revenue enhancements can typically be delivered in the range of 10–20 per cent without significant investment.

Through stable and predictable operations, productivity, particularly around operations and maintenance activities, is also increased. Operations would spend less time firefighting, creating opportunities to support continuous improvement efforts. As a result, this approach also translates to improved safety, better forecasting and advanced integrated activity planning.

Many sectors outside of the mining sector have been extremely successful in eliminating loss by embedding manufacturing excellence across the organisation. Procter & Gamble (P&G), for example, is leading this space through their Integrated Work System (IWS) from which it has made manufacturing operations a competitive advantage. IWS uses a set of operational reliability-entered methods, tools and advanced analytics to identify and eliminate losses in operations and create a predictable and stable operating environment. This approach has proven highly successful in eliminating loss, and has enabled them to achieve y-o-y savings of US$1.2b over the past three years.

Focus on leadership and culture

Productivity is an issue on the CEO’s agenda and needs a CEO solution to be resolved. The productivity journey requires a change of mindset, enabling and empowering operations to pursue losses. Leadership plays an important role in making this happen. The critical role people will play in the productivity transformation cannot be overstated — productivity improvement is the role of everyone in the organisation. Relentless pursuit of loss can transform the business entirely.

There are three key areas miners can focus on to address integration and in turn improve productivity:

  1. Engagement: Visibly felt leadership and significant investment in culture and capability are critical to reach the next level of productivity. Productivity improvement is the role of everyone in the organisation — embodied by relentless pursuit of loss — and it can have a significant impact on transforming the performance and capability of the business. Telling people what’s important is empowering — people need to understand the importance of improved productivity and the role they can play in achieving it. The integration challenge can be met head-on by increasing connectivity, emphasising the importance of communication and fostering an end-to-end view across the organisation.
  1. Measurement and reward: What gets measured gets done — mining companies have the opportunity to measure and reward the actions of their staff to improve productivity and the way people go about delivering this. Productivity improvement through loss elimination is further driven by relevant and timely team metrics. Mining companies should therefore gauge their teams on true measures of productivity such as heightened output, improved safety and loss elimination. It is equally important to recognise and reward teams and leaders who collaborate well across business units, keep other groups informed and involved and break down the silos.
  1. Ongoing talent management: Managing talent post the super-cycle is a major consideration for mining companies. The “war for talent” has not ended just because labour market conditions have eased. There is a greater need than ever before for “systems thinkers” who can manage complexity and see improvements across the whole value chain, similar to the different skills and experiences that will come with greater gender diversification. In addition to emerging and lateral talent bringing new ways of thinking, retaining the wise, senior and experienced talent will be a key competitive advantage. They have the right skills to realise productivity gains considering they were in the sector pre-boom and therefore have the experience of a leaner, more efficient operating model, culture and mindset.

CEOs are in the unique position of being able to drive and lead end-to-end solutions and transform a business, in a way that functional general managers cannot address. But to truly integrate, the entire leadership team needs to be engaged.

While the business’s objectives may not have changed, a refresh or review of the operational strategy can be an excellent tool in not only changing the focus of the business, but also in initiating a change in culture. A new operational strategy is a great way to drive a common sense of purpose and unity within a leadership team and focus it on resolving the critical issue of integration to transforming a business.

 

 

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