Quantifying business benefits in the Australian Mining Sector
It could be well argued that Australia is a world leader in the mining sector particularly when it comes to the adoption of innovative geological surveying techniques, the development of mining software or the establishment of international standards in respect to ore reserve/resource recognition. However, leadership in these areas has historically been offset by a high degree of volatility in the return on shareholder funds (ranging from less than 2% with 10 yr averages at 9%) proving that leadership in specific functions is necessary but not sufficient to deliver the consistent returns that long term investors demand.
When you consider and then compare the traditional business model with that which applies to mining, there are some stark differences which prove that the mining mindset needs to be transformed if the industry is to survive the increasing pressures of globalization and technological innovation.
The three particular assumptions are:
|Mining business model assumptions||Traditional business model assumption||Implications for mining|
|Physical units are a key measure of financial performance||Dollar returns on products sold are the measure of financial performance||Financial returns are sub optimized because
mining over simplifies the message into tones produced, hiding the fact that some products are sold for more than others and cost more or
less than others to produce.
|Keeping everyone busy producing multiple and simultaneous improvement projects add to bottom line performance||There is typically only one constraint in any production
process that exists at any one
point in time. It is this that
determines a businesses ability to increase financial returns rather
than local optimization initiatives
|The business operates as a series of independent operations which set their own standards and appear to be busy and over worked, always with excuses as to why results are under expectation|
|Capital investment is the first response to an increase in demand||Exploit what you already have and subordinate other activities to achieving the demand before investing||Unnecessary capital investment resulting in cyclic pressure for increases in financial returns|
Maintenance vs Asset Management
When considering the traditional vs mining assumptions that underpin management’s thinking in the mining sector, it is unsurprising to find that equipment maintenance is overlooked as a significant area of influence in the quest for improved and sustainable financial performance.
However, only a brief and cursory review of the traditional maintenance function in mining would reveal the following characteristics:
a) whilst equipment design capacity (engineering) may be seen as a confirmation of what has been purchased through capital investment, product produced (operations) can only ever be a subset of the level of equipment availability (maintenance) provided
b) Maintenance expenditure can represent between 25 –50% of annual total operating expenditure but is often hidden and neglected as an area of focus. Furthermore, any ambition to optimize the timing (and therefore the cost) of any repair/replace decision on equipment is only as good as what forethought was given to how, when and where that historical information should be captured,retained and delivered
c) There are significant statutory obligations imposed by mining regulators on the operators of equipment in the mining industry that demand a high degree of detail and accuracy in respect to inspections and servicing that if not properly managed could have implications on the owners license to operate
d) The implications of poorly managed maintenance radiates beyond the function into many other disciplines (supply, finance, hr, engineering) with both significant and quantifiable implications to business performance
These characteristics demonstrate that the traditional maintenance function needs to step up into a much broader and deeper asset management role and take responsibility for design through to retirement in respect to capability, reliability and effectiveness of the capital investment decision. Maintenance excellence needs to give way to a focus on synchronizing availability with market demand coupled with quantifiable and verifiable information that supports the repair/replace (or redesign) decision.
Where to look
The quest for business performance improvement is an ongoing activity, but often plagued by an inability to quantify benefits against the all too real costs of change delivery.
Our experience suggests that the quantification of benefits should focus in the following areas:
a) Capital deferral/elimination – the identification of instances where proposed capital expenditure is in a part of the process where existing design capacity is well above current utilization levels. This will not only legitimize the question why further investments in design capacity is required, but also raise questions about what is limiting utilization (material starvation, product stickiness, poor batch management)
b) De bottlenecking – is the activity of removing constraints from the production process, but the process often overlooks policy or procedural constraints that can have as much influence on equipment availability as physical characteristics
c) Planned vs unplanned activity – with industry metrics indicating a cost ratio of almost 3:1 in maintenance activity when comparing unplanned to planned, there is some significant dollar savings to be achieved.
d) Asset/equipment/material alignment – The financial (and perhaps statutory) implications of acquiring, operating and then retiring equipment independently of any alignment with the asset and material registers can be a recipe for significant lost opportunity to reduce the cost of business finance
These four examples of benefits flowing back to the organization are only a subset of those that exist in reality and would be discovered during a detailed current state analysis of any given operation.
How to get there
Once the benefits have been quantified, conceptual design commences in exposing and defining the key elements of the solution. Don’t limit your thoughts to current technologies or processes or particular functional thinking. To do so will predefine destiny. The solutions sought are not incremental but rather transformational and as a result require radical thinking that will invariably involve people, process and systems. Success will hinge on an ability to elevate the project from what might initially be seen to be a maintenance improvement project into a business wide benefits project supported by a robust project execution plan identifying an appropriate balance of resources from both within and outside the business.