Americas School of Mines - PwC Brasil · Mining supply chains have fewer products, but significantly greater operational complexity September 2010 Slide 10 Investing in LatinAmerica

14th Americas School of MinesInvesting in LatinAmerica

Supply Chain TransformationAlfredo Remy and Chris Melck

14th Americas School of Mines

Contents

• Industry challenges

• Supply chain objective and key drivers

• End-to-end supply chain

• The journey

• Case studies

• Looking to the future


Industry Challenges


Pricew aterhouseCoopers

• Operating costs of the Top 40 onlydecreased by 6% against a revenuedecline of 15% in 2009.

• A significant portion of the decrease incosts was attributable to a decline in thecost of energy. Another portion of costsavings resulted from efforts to increaseoperational efficiencies.

• The move to cut costs was driven, initiallyat least, by necessity. While the reaction ofthe industry was swift—it was just that—areaction.

Global trend in the mining industry (2003 – 2009)PwC Mine Publication 2010

September 2010Slide 4

Investing in LatinAmerica

Industry Challenges



• How to realize sustainable marginimprovement and cost reductionminimizing the cost per unit of output atthe operational level.

• How to develop high-performingprocesses aligned with the businessobjectives.

• How to balance risk and growth in acomplex world

• How to realize and sustain value frommergers, acquisitions and divestitures

Understanding your challenges



Industry Challenges

• How do I meet the demands fromoperations?

• How do I control the escalating supplychain costs?

• Is my supply chain a necessary burdenor a competitive advantage?

• How can technology help me to gaininsight and analyze waste in my supplychain?

• How lean should I be, and how do I getthere?

• Why should I integrate or collaboratewith my supply chain partners?

Industry challenges Supply chain challenges



• No documented supply chain strategy and alignment with corporate strategy.

• Lack of a strategic sourcing approach for most of the spend.

• Poorly organized warehouses.

• Lack of certification of suppliers with agreement.

• Lack of clear measures of supplier performance.

• Poor utilization of e-commerce tools.

• Fragmented inventory planning, not centralized.

• Infrequent review of safety stock by Stock Keeping Unit.

• Parts often missing when maintenance work is required.

• No demand forecasting for materials/parts; only min/max used.

Despite best efforts, mining companies are experiencing somecommon supply chain issues that are contributing to cost escalation



Industry Challenges



• A recent survey of mining executives by Newport Consulting identified:

− Cost control and management as a clear focus area for 2010-11 with more than50% of interviewed mining executives saying that they are focusing onreducing or closely managing their organization's cost base.

− Furthermore, 44% of survey respondents indicated they will be placing acentral focus on operational efficiency, through increasing production andutilization of resources, and reducing downtime and waste at mine sites.

• Approximately three-fourths of mining executives position their supply chains ascritical to cost containment for their overall businesses.

Cost reduction and operational efficiency are key issues for miningindustry leaders, with a strong focus on their supply chains



Industry Challenges

“ Today, senior management is looking for the Supply Chain Organization to delivermore than just efficiency – it is being asked to deliver innovative cost reductionstrategies to help grow their company and present a market strategy differentiator. ”

AberdeenGroup, Supply Chain BI in Process Industries



• Companies are developing more agile supplychains to mitigate risk and boost competitiveadvantage.

• Companies are forging close partnerships withsuppliers to leverage expertise, ensurecontinuity.

• Companies are re-evaluating global sourcingstrategies

• Companies are reducing their supply chain’scarbon footprint

• Companies are taking advantage of technologyto enhance supply chain visibility

Effective supply chain management has emerged as a strategicimperative for mining companiesTrends



Industry Challenges

“A well-managed supply chaindelivers the essential benefits ofconsistently controlled costs,reliable movement of inboundsupplies and outbound products,and satisfied customers whoseexpectations are met with an endproduct's quality, availability, andspeed of delivery.”

PricewaterhouseCoopers

Supply chain trends and best practices –Managing to achieve strategic benefit



• Build an agile system of resource allocation

• Position sourcing for strategic benefit

• Investigate supplier candidates against stringent criteria

• Cultivate value-based partnerships with suppliers

• Elevate environmental responsibility as an essentialcriterion for suppliers

• Evaluate the environmental impact of process actions

• Create a delivery excellence culture

Managing to achieve strategic benefitLeading practices



Industry Challenges

• Consolidate logistics operations

• Use technology to enhance the performance of deliveryoperations

• Adopt lean practices to reduce logistics costs



Some of the complexities include:

• Operating in remote areas, long lead times

• Lack of local supplier diversity and resources

• Lack of skilled human resources in localoperations

• Infrastructure and capital investmentconstraints

• Limitations on communication and informationtechnology

• Community and environmental constraints

• Local requirements and regulations

Mining supply chains have fewer products, but significantly greateroperational complexity



Industry Challenges


Supply Chain Objective and Key Drivers



The mining supply chain is at the heart of the operations and businessstrategy



Supply Chain Objective and Key DriversS

upplie

rs

Inbound Mine operations

Custo

mers

Singleormultipleassets

Outbound



• The primary objective of supply chain management is to fulfill internal andexternal demands through the most efficient use of resources.

• For example, for inbound logistics…

The objective of every supply chain is to maximize the overall valuegenerated




Identification ofneeds

Sourcingstrategy

Negotiating thebestdeal

Contractexecution andmanagement

Businessfulfillment

Activity and resource planningin response to business needs

Developing a long termapproach to key supplymarkets

Creating and capturing valueSupply of goods & servicesand payment for supplies

Ensuring compliance andcontrolling performancemanagement



The linkage between financial performance and the supply chain hasseveral underlying areas for value creation potential




ShareholderValueCreation

Su

pp

lyC

ha

inV

alu

e

Supply ChainPlanning

ContractManagement

ProcurementOptimization

OrganizationalDesign

Inv entoryManagement

TransportationManagement

Optimize coststructure

Improv esupplierrelations &agreements

Reduceprocurementcosts

Improv eOperationalEffectiv eness

Improv eCapitalProductiv ity

Reduceworking capitalrequirements

Improv e asset

utilization

Potential value creation levers

• Improved product/service availability

• Improved order fulfillment capability

• Price premium

• Improved material flows

• Enhance warehouse productivitythrough process improvements

• Setup tax optimized supplychainstructures

• Streamline logistics network forimproved warehousing andtransportation management

• Improve number of stocking pointsfor individual SKUs

• Reduce inventoryplanning andreplenishment times

• Increase use of consignmentstocks

• Reduce inventorybuffers

• Improve payment terms withsuppliers

Supply chainFinancial performance Key drivers



End-to-end business improvement journey




Time & Maturity

Pe

rfo

rman

ce

Process basicsWritten processes for regulatory& HSE compliance, peopleretain most process knowledge

Process controlProcesses documented, someauditing, different standards &multiple variations

StandardizationElimination of duplicateprocesses and unnecessaryactivity, visible owned processes

ImprovementContinuous and breakthroughimprovements focused on runnerpriorities and value add activities

Waste FreeComplete understanding ofvalue & elimination of waste,flow and pull, perfection

Zero VariabilityElimination of variability inresults, predictability & perfection

Business process re-engineering

Lean

6Level of people andresource involvementin improvement



Lean thinking – seven types of waste (plus one)




• Unnecessary movement

• Extra handling

• “Mov ing inv entory”

• Inef f icient definition and lay out of warehouses

• Lack of proximity to supplies

• “Chasing” approv als

• Waiting f or approv als

• Supplier response time

• Long lead times

• Inadequate planning and replenishment rules

• Purchasing f or the sake of it

• Ignoring business needs and objectiv es

• High number of “urgent” requests

• Unnecessary processing steps

• High ov erall lead time

• High number of returns

• Dissatisfied internal customers

• Missing deadlines

• High material stocks

• Excessiv e space requirements

• Redundant activ ities

Motion

Waiting

Overproduction

Overprocessing

Defects

Inventory

Transportation

Supply Chain Environment

People• Untapped Human Potential

• Lack of motivation to make improvements


End-to-End Supply Chain



There are many opportunities to support the business strategy andobjectives through the supply chain activities




Inbound

What’s the best way to mitigatemy supplier risk?

Is third party logistics(3PL) outsourcing av iable option?

How well is internal demandunderstood and shared?

Hav e I f ully leveraged andmanaged my external spend?

Is my safety stock aligned?

How collaborativ e is myrelationship with suppliers?

Do I manage productand asset lif ecycle?

Do I hav e the rightproducts through theright channels at theright time?

How insightf ul is myf orecast and marketintelligence?

How are our serv icelev els?

Are the processesintegrated enough torespond adequately todemand v olatility?

Is inv entory optimized?

What portion of my itemsshould I keep in stock?

Does my supplychain design createcompetitiv eadv antage?

Can I manif estinnov ation as acompetitiv eadv antage?

What is the best wayto lev erage supplychain inf ormation?

Is my supply chainagile to deal withsupply /demanddisruptions?

What is the lev el ofcommonality amongcomponents, platforms andassets?

How do I mangeprocurement programcompliance?

How do I deal withunderperf orming suppliers?

What f unctions should Icentralize v ersusdistribute across mysupply chain?

Is there a way to reducecomplexity and cost for myinbound logistics operations?

Outbound

Strategic sourcing and procurement

Product management

Organization, sy stems infrastructure and other stakeholders

Supply chain strategy and v ision

Suppliers Customers

Operations

Hav e I properlyconsidered taximplications?

Do my processesconsider the ef f ect onthe env ironment andcommunities?

Will my organizationbenef it f romimplementing AP&Stechnology ?

Inbound

How do wemanage returnsand rev erselogistics?



An agile and responsive supply chain pays dividends across theenterprise




1.Efficientand reliable processes

2.Core foundational elements support aneffective supplychain

1.Supplychain strategy must support the business strategy

2.Robust implementation and change roadmap in place

3.Enterprise-wide view ofcurrent and future operations

1.Enabling technologyto support business strategy

2.Address share/stakeholder value and riskmanagementand compliance as guiding principles

3.Analyze critical suppliers’ financial and operationalmetrics to develop leading risk indicators

Operational

Tactical

Strategic

Operationsstrategy

Demand Forecasting

S&OP

Inventory Planning

Operations Planning/Scheduli ng

TransportationManagement

Warehouse

ManagementSourcing &

Procurement

Network Design &Optimization

Tax Effective Supply Chain



Operationsstrategy

Demand Forecasting

S&OP

Inventory Planning

Operations Planning /Scheduling

Transpor tation

ManagementWarehouse


Procurement

Network Design&Optimization


Focused on:

• Defining how the supply chain should operatein order to meet both internal demands andshareholders needs (including warehouses andthe role of 3rd party providers).

• Identifying the operational infrastructureneeds, the level of integration with operations,core competencies to fulfill the internal demandsand support of the business strategy.

• Identifying and understanding the keyelements of the supply chain and the mostrelevant metrics suitable for the overall businessobjective(s).

• Balancing supply chain efficiencies with taxplanning in order to achieve maximumefficiencies while minimizing taxes.

The supply chain strategy must support the business strategy,transforming operations to enable real strategic change andcompetitive advantage




Strategic



Operationsstrategy

Demand Forecasting

S&OP

Inventory Planning


Transpor tation

ManagementWarehouse


Procurement



Focused on:

• Better establishing the parameters withinwhich the supply chain will operate. It’sabout the determination of a set of policies andprocedures that govern the operation of asupply chain.

• Planning to deliver higher operation levelsand efficiencies, including: demandmanagement, forecasting and planning.

• Improved resource planning and assetutilization through collaborative planningforecasting & replenishment (CPFR) with sales,operations and maintenance.

Tactical supply chain decisions focus on adopting measures that willproduce cost benefits for a company




Tactical



Operationsstrategy

Demand Forecasting

S&OP

Inventory Planning


Transpor tation

ManagementWarehouse


Procurement



Focused on:

• Assessing and understanding transport andlogistics costs and performances, usingbenchmarks and leading practices to identifyimprovement opportunities.

• Developing sourcing strategies and buildingsupplier relationships in order to reduce thetotal cost of ownership for products and services,increase quality and service, optimize the supplychain and inventory levels and build theorganization's competitive position throughsustained cost and supplier improvement.

• Understanding and integrating operationalaspects such as warehouse management,consignment inventory, reduced order quantity,JIT, technology, reverse logistics, handlingequipment, and fleet management.

Operational decisions are made with awareness of the strategic andtactical decisions that have been adopted within a company




Operational



• Supply chain synergies should be consideredfor mines located in the same area

• Corporate agreements should be leveragedwhenever possible to increase the purchasingpower from volume discounts

• Consignment stocks should be consideredwhenever possible, to reduce working capital,lead times and safety stock levels

• Transportation may also include tracking ofoutbound shipments of mineral product (e.g.metals concentrate)

Additional considerations for a mining supply chain



Industry Challenges


The journey



Change is situational, transition is a process…



The Journey

Change is situational: the new site, the new boss, the new teamroles, the new policy. Transition is the psychological processpeople go through to come to terms with the new situation.

—William Bridges



Organizations awaken when people awaken…



The Journey

All organizations learn when they adapt as the worldchanges around them… some faster than others.

A Learning Organization is the one that “can create theresults and the future that they truly desire.”

—Peter Senge



Three states of organizational change



The Journey

• old process

• comfortable

• familiar

• controllable

• letting go of old

• taking on new

• changing tasks and demands

• may be unpredictable

• coping with sense of loss and/orgain

• new process

• new expectations

• new skills

• unknown or unfamiliar

• risky

MachineMachine

- Controlled

- In charge

- Stable

- Interactive organism

- NOT business asusual

TRANSFORMATION

Unfreeze Transition



Supply chain transformation approach



The Journey

Structure

Strategy

Process

People

Technology

ProgrammeDeliv ery

ChangeManagement

Driv

ing

Change

Deliv

ering

Change

Assess Design Construct Implement Operate &Rev iew

CreateTransformationBlueprint,Detailed Designand QuickWins

Build NewWaysof Workingand PlanRollout

Rollout NewWays ofWorking andEnsureBenefits areRealized

Operate NewOrganisationandImplementContinuousImprovement

Create “Casefor Change”,Initial TargetOperating Modeland ScopeInitiatives



Supply chain transformation – assess



The Journey

Assess

Tasks

A. Define transformation objectives

B. Create transformation baseline• Our holistic approach reviews the entire supplychain with a

focus on those elements thatdrive costs and impactworking capital; including inventorylevels and cash flow.

• Assess linkage between financial performance and supplychain management.

• Assess qualityand cadence ofplanning process, includingqualityand visibility of spend data.

• Review of costand complexityof supplychain.

• Assess coordination and support of information system tothe supplychain processes.

• Assess buying power and contract compliance/leakage,including comparison againstpeers.

C. Create case for change• Conducta cost/benefit analysis for identified opportunities.• Evaluate, selectand prioritize opportunities.

• Develop transformation business case.

Generally 1 – 2 weeks

Drop, postponeor re-assess

Priority Screening

Note: Size of circle represents total category expenditure

Relative Ease of Implementation

MoreDifficult

Easier

Busin

es

sIm

pact 10

8

6

4

2

Wave 1

Opportunity

Opportunity

Op.

Opportunity

Op.

Opportunity

Op.

Wave 3

Wave 2Opportunity

Opportunity

Opportunity



Supply chain transformation – design and construct



The Journey

Generally 2 – 3 weeks

Tasks

A. Design transformed organization• Set the vision, scope,direction,and design requirements for the organizational transformation

B. Construct changes (depends on the identified opportunity)• Planning: integration with operations and maintenance, including planning, scheduling,and forecasting processes.

• Sourcing: supplier integration and strategic partnerships.

• Inventory: inventory stocks and turnover

• Warehousing:materials handling equipmentand picking process, labour requirements.

• Transport: end-to-end lead times and transport costs.

• Technology:qualityof data and information flow integration necessaryto make informed decisions.

C. Develop implementation plans

Structure

Strategy

Process

People

Technology

Design / Construct

Wave 1

Wave 2

Wave 3

Priority Screening



Supply chain transformation – implement



The Journey

Implement

Impact

• Better alignment of supply chain with business strategy

• Sustainable cost reduction solutions for direct and indirect materials and services(often10% to 30% in savings)

• Total value from suppliers and optimized relationships (in terms of quality,responsiveness, value, etc.)

• Transparency and centralized control of external expenditures, through improveddata quality and spend visibility

• Minimized risks associated with financial controls and compliance management

• Realignment of procurement resources to focus on other strategic opportunities

• Streamlined procurement processes and innovative management solutions

• Managed acquisition of goods and services to achieve the lowest total cost ofownership

• Decreased or eliminated redundancy and bottlenecks in the procurementsystems

• Optimized vendor base to achieve cost and efficiency advantages; strengthenrelationships with vendors to create “partnering”/alliances

• Restructured procurement organization, processes, policies and systems

Timing depends on the identified opportunity

ShareholderValueCreation

Improv eOperationalEffectiv eness

Improv eCapitalProductiv ity

Financial performance



• Increase procurement spend savings through implementation ofstrategic sourcing principles (dependent on type of materials andservices)

5% – 25%

• Reduce operating costs through logistics network optimization, andapplying lean principles

15% – 30%

• Reduction of inventory carrying costs through increased inventoryturns and safety stock elimination

8% – 15%

• Reduce lead times through improved planning, process efficienciesand controls, technology support and supplier integration

12% – 35%

• Labour savings through the elimination of redundant data entry 5% – 15%

• Increased equipment utilization through better planning, timelymaterial delivery, and reduced idle time

10% – 30%

• Reduce transportation costs through improved planning, processefficiencies and controls, technology support and supplier integration

8% – 16%

“What you believe, you can achieve”



The Journey


Case studiesHow have we been adding value in the resources supply chain?



Rail network nearing capacity and government planning to sell assetsThe opportunity for vertical supply chain integration arises



Case Studies

2011Capacity

2015Capacity

0

50

100

150

200

250

300

350

400

2000 2005 2010 2015 2020 2025

An

nu

alR

aili

ng

sM

tpa

Actual Forecasts

System Mtpa Railed Kilometres Mines Utilization

Goonyella |||||||||||| 83.6 ||||||||||| 924 |||||||||||| 24 76%

Blackwater |||||||| 54.4 |||||||||||| 994 ||||||| 15 95%

Newlands || 14.7 || 203 | 3 92%

Moura | 11.3 ||| 301 || 4 71%

• The coal rail network of central Queenslandservices the coal-rich Bowen Basin.

• It is divided into 4 distinct systems, comprising justless than 2,500km of track, railing just under200 Mtpa, servicing close to 50 individual minesites and terminating at 5 different coal terminals.

• The belowrail network is owned by QR National –currently a government owned corporation.

• Above rail operations are conducted by QRNational and Asciano.

The 4 CentralQueensland coal rail networks

The coal rail network is close to capacity

• The rail networks are beginning to reach theirmaximum capacities.

• This environment presents interesting challengesand opportunities to the coal miners operating inthe area.


Client : QCIRG Consortium memberProvision of industry knowledge and financial acumen

Client challenge

Our client was part of the consortium bidding$5.1bn AUD for the below rail coal network of QRNational.

They lacked the resources and knowledge toneeded to understand the value of their portion ofthe bid and to engage a broad number ofstakeholders.

How PwC helped

Through secondment , we provided much neededvaluation knowledge and mining experience.

We represented the client on several consortiumlevel work streams and we prepared thecommunications for the CEO and investmentcommittee.

This helped our client make an informed decision .

Case Studies

A dividend can bypaid out from theConsortium’snet profit after tax

The tariffs are recognisedas revenue in QCIRG

Client Consortium

Client

Consortium Revenue

$1,000 m

less

Operating ExpensesDepreciationAmortisation

Finance CostsOther Expenses

($900m)

equals

Net Profit Before Tax

$100m

less

Tax Expense

($30m)

equals

Net Profit After Tax

$70m

Dividends($7m at 10% share)

Client Expense (Tariffs)($100m)

Client pays tariffsto access the network

Client receives dividends as aportion of their investment


Client : Queensland Rail Coal DivisionCoal Contracting Improvement

Client challenge

QR had multiple contracts (19 mining companies,50 coal mines) representing $1.5bn AUD revenueper annum.

QR were not aware of the true lifetime value of thecontracts or the commercial risk present for bothparties.

How PwC helped

We evaluated all the existing contracts based onlifetime NPV and risk factors. This allowed QR toidentify which contracts added value and at whatrisk.

We developed a new coal contract template for newcontracts and for renegotiation of existing contracts.

The template included detailed policies coveringdual party benefit from improved performance,tonnage variation and the impact of customeroperation performance. Metrics to measureperformance were also determined.

Case Studies


Client : Queensland Gas Company / BG GroupLandholder Education Material

Client challenge

Acritical success factor for a CSG/LNG project is land access for prospecting or pipelines. QGC had to dealwith large number of land owners as well as make sure that QGC contractors newhow to deal withlandowners appropriately and consistently.

How PwC helped

We developed a series of flyers written in plainEnglish and using engaging illustrations, explaininghow QGC’s operations may impact landholders.

We also developed induction material for QCGcontractors. This covered the land access function,expected behaviours, communication guidelines andhow best to deal with disgruntled landowners.

Case Studies


Client : Queensland Gas Company / BG GroupLandholder Segmentation Tool

Client challenge

Acritical success factor for a CSG/LNG project is land access for prospecting or pipelines. QGC had to dealwith large number of land owners and needed to determine how to prioritise their negotiations.

How PwC helped

We developed a landholder segmentation toolto assist in planning and enable greaterefficiencies in the land access process.

The tool segmented the landholders based onthe expected ease of access and the businessof the access to that holding.

This helped QCG to prioritise their land accessnegotiations appropriately.

Case Studies


Client : Anglo Coal AustraliaOperational review of marketing and logistics function

Client challenge

Anglo Coal were convinced that operational inefficiencies existed in their marketing and logistics functions.They needed to identify the problem areas and improve the processes through better design.

How PwC helped

We worked closely with the Anglo team to redesign the core processes to address what had been identifiedas the priority operational inefficiencies. This led to the development and implementation of a neworganisational structure for the Marketing and Logistics team.

Since implementing our recommendations, Anglo has realised significant improvements in operationalperformance and productivity.

Case Studies


Client : Xstrata CoalDevelopment of Pit to Port procedures manual

Client challenge

Xstrata lacked confidence in their logistics reporting, were too reliant on spreadsheet reports and did notshare information between mine sites and business units.

They decided to implement CoalMan Logistics as their new pit to port production system to manage theirlogistics, planning, management reporting and information storage. This presented a significant change totheir existing operating methodology.

How PwC helped

We worked with Xstrata to develop uniform daily and monthly procedures for the newsystem. The newprocedures improved compliance, served as a learning tool and allowed the stakeholders to gain confidencein a new system.

Case Studies


Looking to the future



It is essential that lessons from the past are learned and thatorganizations prepare for the next wave of change



Looking to the Future

• All evidence points towards long-term demand fundamentals remaining.

• But a weakening US dollar, stable labour costs and increasing parts, consumablesand energy prices present a real risk of further cost pressures.

• Increased globalization, cost volatility and risk are accelerating the pace of change.

• Supply chains will need more visibility and advanced decision-support analytics andoptimization to improve planning and process standards, interconnecting silo-based operations

• Supply chains will have a bigger role in reducing the overall company’s carbonfootprint, as an obvious target to reduce emissions and waste.

• Mining companies need to develop more agile supply chains to better insulatethemselves from potential downturns during this cycle. Successful execution willhopefully move the conversation from surviving in the new metals economy tothriving in it.

Questions and Answers

©2010 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Documents

Americas School of Mines - PwC Brasil · Mining supply chains have fewer products, but significantly greater operational complexity September 2010 Slide 10 Investing in LatinAmerica