Mining smarter: Vertical integration in your business [Blog]

In an uncertain economic market, the collaborative vertical integration of mining businesses brings cooperation, clarity and competitive edge

In past years the resources sector has enabled independent entities such as mining, metal manufacturing and metal distribution businesses to run profitably and efficiently thanks to the foreseeable forecast of a stable market and steady demand.

However, like many industries before and the many that will follow, the mining industry has broadly speaking now become a victim of the global debt crisis and, in Australia at least, appears to have reached the end of its boom cycle.

An assortment of resulting barriers have halted economic growth for independent businesses operating in and around this sector including falling demand, tumbling commodity prices, high operating and capital costs and falling share prices.

The challenge now facing independent entities is the ability to negotiate the right pricing and work with rising costs.

While mineral ore prices have dropped by 40% since 2008, other significant costs for metal manufacturing companies such as energy and logistics have seen a major increase.

Metal distribution companies have also been feeling the pressure of the economic downturn, due to the rising fuel and other supply chain costs.

These challenges are now leading the industry towards different solutions to achieve their long term strategic goals and the collaborative supply chain is now integral to the ongoing profitability of businesses operating in the resources sector.

Realising the advantages of the vertical integration, which operates under a single management control solution, is the first step towards total cost optimisation. Under the verticalisation model, business entities such as mining, metals manufacturing and metals distribution are brought together under the same organisational umbrella to create single ownership, thereby simplifying and consolidating a stronger push towards the cost optimisation end goal.

This collaboration can be achieved through the complete union of upstream, midstream and downstream entities to create an extended enterprise supply chain structure that harnesses the benefits of integration and collaboration.

To realise the benefits of a collaborative verticalisation, it is important to focus on integrated

enterprises and the elements of collaboration. Companies need more insight into what drives collaboration among internal functions and among partners, both internal and external to ensure that process optimisation is targeted at the right places. Once the collaborative elements are defined, it becomes easier to take appropriate decisions to channel actions across the value chain.

This extended enterprise model based on collaborative supply chain planning is best realised by two categories of vertically integrated enterprises:

  • 1) Mining companies with Owned/3PL/4PL distribution networks; or,

  • 2) Metal manufacturing companies with Owned Mines and Owned/3PL/4PL distribution networks

As the biggest challenge is to accurately predict the demand and plan for supply and price fluctuations, a demand driven forecasting model with end market data captured as accurately as possible through the distribution network will help upstream operations to plan their production with least inventory holding.

Because adapting continuously to advances in mining/metals manufacturing technology changes involves huge capital cost in this industry, it is prudent to focus on supply chain cost optimisation in the short and medium term through a collaborative supply chain model (SCM).

While traditionally this is relatively easily for businesses with existing Enterprise Resource Planning (ERP) systems, including manufacturing resource planning (MRP-II) functionalities, in place; businesses without this type of system will need a business standardisation and process integration program for each of the entities under the single ownership. Once this is done a collaboration hub can be designed and implemented to allow each entity to exchange data seamlessly.

The potential of the vertical integration strategy is apparent in various examples of business entities ‘cutting out the middle step’ through practical integration.

For example, a global steel company with manufacturing bases around the world began its own distribution business through capacity building and acquisitions.

This effectively meant that its parent company minimised logistical and supply chain costs while managing to maintain and gain customers via channel and direct sales.

By leveraging key elements of collaborative vertical integration, the company was able to implement cost optimisation and increase profit.

As the resources industry continues to face strong economic headwinds, businesses that want to remain viable in this sector must consider re-structure and consolidation through integration to re-gain their competitive edge in a changing market.

*Girija Mahapatra is the head of Mining and Metals Industry Practice at Tech Mahindra, a leading global information, communications and technology (ICT) company. He has more than 20 years’ experience in Mining & Metals industry, Business Consulting, ERP Consulting, Business & IT Strategy Consulting & Supply Chain Management.

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