Maximizing the Value of Your Operations - PwC€¦ · • Productivity improvement and waste reduction • Value driver models / Enhanced cost management Procurement & Supply Chain

Maximizing the Value of Your Operations

PwC Brazil Mining DayC l S l P C C dCalum Semple – PwC Canada

While there has been some recent recovery we While there has been some recent recovery, we believe there is a disconnect between mine company performance relative to commodity pricespe fo mance elative to commodity p ices

D J

1,2Global indices (January 2011 = 1) • Mining industry stocks

started strong in 2011, 11 March – Fukushima 5 August - S&P downgrades

FTSE 100

Dow Jones Industrial Average

1,0

1,1 • But, as the year progressed, significantly underperformed the broader markets

nuclear disaster US credit rating for the first time in the history, from AAA to AA+

FTSE 100

8

0,9

broader markets

• HSBC Mining Index fell by 29% over the year

26 September - US president

HSBC Global Mining Index

0,7

0,8 • The Top 40 did marginally better, falling by 25%

• Recent performance has

26 September US president, Barack Obama, says the debt crisis in Europe is "scaring the world" and that leaders in the Eurozone are not dealing with issues quickly enough Ongoing –Concerns of a slow-

down in China’s economic

0,6jan fev mar abr mai jun jul ago set out nov dez jan fev mar abr

improved, but fundamental issues remain

2011 2012

S Bl b

down in China s economic growth

PwCMaximizing the Value of Your Operations - Calum Semple

2September 24, 2012

Source: Bloomberg

and from historical earnings…and from historical earnings…

• In 2011 the Top 40 posted record profits of over $130 billion, an increase of 21% 2930

Top 40 price-to-earning ratios

from 2010

• Strong earnings, but a 25% drop in market capitalisation, drove Top 40’s PE

1920

25

ratio for 2011 down to 9

• Lower than the dismal PE ratio seen in 2008 during the global financial crisis

19

1415

20

10 9

5

10

Source: Capital IQ PwC Analysis

-2007 2008 2009 2010 2011

PwC

Source: Capital IQ, PwC Analysis

3Maximizing the Value of Your Operations - Calum Semple September 24, 2012

Typical client situations in MiningTypical client situations in Mining

• Our clients share common concerns around their performance

• Concerns around escalating costs

• Challenges in meeting production targets / inconsistent production results

• High levels of unplanned equipment failures resulting in low availability

• Missed budgets / failure to deliver anticipated financial results

• Failure to implement or meet internal improvement project expectations

• Cost over-runs on capital projects and/or projects that miss scheduled p p j / p jcompletion

• Lethargy with regard to continuous improvement initiatives

Potential loss of credibility with investors and analysts

PwC Page 4Maximizing the Value of Your Operations - Calum Semple September 24, 2012

Leading mining companies are respondingLeading mining companies are responding

• Enhanced cost management supported by an improved understanding of key Enhanced cost management, supported by an improved understanding of key cost drivers / behaviours

• Improved linkage and alignment between operations and finance in the l i t i di t bilit f lt d t planning process to improve predictability of results and more accurate

guidance to the “street”

• Alignment across the organization – from mine site to Corporate office – to common goals, objectives and key performance metrics

• More accountability / responsibility for performance integrated at all levels

B tt d i i ki i O ti b d t/b fit d th b t • Better decision making in Operations, based on cost/benefit and the subsequent impact on financial outcomes

• Better management of cash / investments in capital equipment

• Improved management information - transparency, speed, timeliness

• Training at the superintendant and supervisor role in business drivers and d i i ki


5

decision making

September 24, 2012

For today’s discussion operations improvement For today’s discussion, operations improvement opportunities focus on approximately 80% of typical mine spend

Freight1%

Other

2011 Operating Costs by Category

typical mine spend

Human Capital 20%

Other Costs

7%

%

Operating Material

Maintenance and Repairs

16%

p g19%

Contractors 18%

Energy 19%

Illustrative data

PwC 6Maximizing the Value of Your Operations - Calum Semple September 24, 2012

Common areas where most mining companies can Common areas where most mining companies can drive improved value

Operations:

• Productivity improvement and waste reduction• Productivity improvement and waste reduction

• Value driver models / Enhanced cost management

Procurement & Supply ChainProcurement & Supply Chain

• Spend analysis, sourcing, inventory etc.

• Supplier risk & performance management

Asset Utilization

• Enterprise Asset Management


The overall approach to operations improvement The overall approach to operations improvement has three phases that must be addressed

Keep the MoneyR i i

Find the Money• Understand current • Restructure organization

• Improve skill set

• Implement technology

enablers

• Understand current performance

• Identify gaps to leading practice

enablers

• Establish performance

monitoring

• Provide compliance Process Change

Get the MoneyMake changes to capt e sa ings

mechanisms

• Streamline process

• Align culture

Process Change

• Make changes to capture savings, move to new ways of working:

• Process• Organization

Technology


8

• Technology• People / Skills

September 24, 2012

Improvement initiatives should start with Find the Money

Improvement initiatives should start with developing an understanding of the current state / baselinebaseline

• Understand the key drivers of mine performance and assess current state operations:current state operations:

• Understand key drivers that impact cost and drive financial performance

• Review key financial and operational metrics and processes (e.g. productivities, maintenance, asset availability/utilization)

• Interview key stakeholders:• Interview key stakeholders:

• Validate initial hypothesis, conduct further analysis and discuss additional improvement opportunities.


9September 24, 2012

Value driver trees are a useful tool to understand Find the Money

Value driver trees are a useful tool to understand what factors are driving costs

Key Success Factors:Key Success Factors:

• Focus the mindset of management and staff on where the money is

• Disaggregate major cost types using a branch-like structure, helping to build an understanding of operating cost structuresoperating cost structures.

• Assist management and staff by helping them to financially quantify opportunities for quantify opportunities for improvement

• Highlight key operational metricsmetrics


Once the cost drivers are understood those factors Find the Money

Once the cost drivers are understood, those factors with the largest impact can be identified

Key Success Factors:Key Success Factors:

• Perform sensitivity analysis to identify the impact of each value driver on operating profit or mine production.o ope a g p o o e p oduc o

• Perform scenario analysis to:

o Quantify the trade-offs of different i i strategic options, or

o Measure the impact of potential improvements.

• Use variance analysis to explain the source of differences between modelled scenarios and baseline data.

• Maintain flexibility in managing mine capacity constraints to understand bottlenecks and improve performance.

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Spend Analysis typically indentifies significant Find the Money

Spend Analysis typically indentifies significant opportunities based on a review of spend data

Review of A/P and Procurement data: Tiered SpendingReview of A/P and Procurement data:

• Number of suppliers for each commodity type (spend aggregation)

Tiered Spending

• Distribution of spend to identify leakage (in the case where a strategic contract is in place) and/or volume/ vendor consolidation opportunities

Less than $1k15%

$50k to $100k8%

$100k to $200k6%

More than

$200k11%

consolidation opportunities

• Distribution of spend against transaction count and vendor count, for a given category to identify anomalies that

$1k to $5k23%

$5k to $10k$10kto $25k$

16%

$25k to $50k10%

category, to identify anomalies that would drive higher total cost of ownership.

11%16%

1. Only 11% of suppliers have more than $200K in spend directed to them

2. 17% of suppliers receive more than $100K in spend annually

PwC 12Maximizing the Value of Your Operations - Calum Semple

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3. 65% of suppliers receive under $25K annuallySeptember 24, 2012

S d Di ti

Find the Money

Spend Disaggregation

By examining the distribution of spend within a nutrient group allows users to identify leakage (in the case where a strategic contract is in place) and/or volume/ vendor

1. Total bearing spend for Div 1 is approx. $2.1M – of which Ann A bo I d s lies $997K de a

consolidation opportunities

Arbour Ind. supplies $997K under a strategic alliance contract

2. The next three vendors supply

Row Labels PHO POT Grand TotalBEARING 2,142,206$ 2,389,908$ 4,532,114$ APPLIED INDUSTRIAL TECHNOLOGIES 997 227$ 2 013 681$ 3 010 908$

Div 1 Div 2

Ann Arbour Industrial Supply

pp yapprox. $1.015M

3. Total bearing spend for Div 2 is approx. $2.4M – of which Ann

b d l d APPLIED INDUSTRIAL TECHNOLOGIES 997,227$ 2,013,681$ 3,010,908$ GIW INDUSTRIES INC 532,707$ ‐$ 532,707$ MOTION INDUSTRIES INC 391,299$ 391,299$ SOURCE ATLANTIC 309,646$ 309,646$ ELLIOTT COMPANY 91,348$ 91,348$ WEIR CANADA INC 66,581$ 66,581$

Ann Arbour Industrial SupplyNorthbrook IndustriesMotive IndustriesSource AlliancesWeitz & Co. W it & B

Arbour Ind. supplies $2.01K under a strategic alliance contract

4. Source Alliances supplies an unusually large amount of spend for ,$ ,$

WEIR HAZELTON INC 36,137$ 36,137$ WEIR MINERALS‐LEWIS PUMP 35,046$ 35,046$ NEW LOGIC RESEARCH INC 32,808$ 32,808$ FLANDERS ELECTRIC MOTOR SERVICE INC 25,634$ 25,634$

Weitz & Bro.Minacs Tool Co. Algorithmics Electric Inc. Fujitsu Motors

unusually large amount of spend for Bearings with an amount of $309K. Is this leakage off-contract or is it a case of Source supplying a site where Ann Arbour cannot reach?

PwC 13June 2012Maximizing the Value of Your Operations - Calum Semple

Spend vs Vendor Count vs Transaction Count Find the Money

Spend vs Vendor Count vs Transaction Count Requires the ability to examine and compare spend levels against transaction count as well as vendor count.

By examining the distribution of spend against transaction count and vendor count, for a given category, the user is able to identify anomalies that would drive higher total cost of ownership. In the case identified below, having to manage more than 200 vendors for less than 3% of total spend is not strategic.

60%

70%

250

300

% of Spend% of TransactionsVendors

1. For this category, % of spend and % of transactions is under 3% of total spend and transactions

40%

50%en

tage

150

200

of V

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2. For this same category, the number of vendors is > 200, a number that is significantly disproportionate to the overall percentage of spend

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3. For this category, % of transactions is more than 10% of total transactions while % of spend is less than 3% of total spend.

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504. For the same category, the number of vendors is >160, a number that is significantly high given the overall percentage of spend and transactions

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June 2012Maximizing the Value of Your Operations - Calum Semple

Assessing the opportunities within Maintenance Find the Money

Assessing the opportunities within Maintenance starts with understanding how work is done today

• Planned vs. Reactive work orders

• Better understanding of maintenance costs (more planned, less reactive) gives more predictability to costs – results in better forecastsmore predictability to costs – results in better forecasts

• Better able to anticipate and quantify impacts of changes to planned maintenance activities

• Allow trade-off between asset availability and investment in maintenance


Maintenance costs represent a significant Find the Money

Maintenance costs represent a significant opportunity to drive increased value

•The objective of Asset Management is to strike the optimal balance The objective of Asset Management is to strike the optimal balance between maximizing asset productivity while minimizing Total Cost of Ownership (TCO)

•Reduced maintenance spend from more efficient and effective use of maintenance resources

•Increased output/ capacity through increased equipment availability & •Increased output/ capacity through increased equipment availability & utilization

•Improvements in working capitalp g p

•Reduction in business risk and improved safety / environmental compliance

•Improved access to maintenance and spend data

•Enhanced Fixed Assets tracking


Once the baseline is understood opportunities are Get the Money

Once the baseline is understood, opportunities are developed to bridge gaps between current and leading practiceleading p actice

Mine Operations Maintenance Supply Chain

Leading Practices

Formal integrated planning

Unplanned Work < 10%Focus on availability and

Documented Supply Chain strategy Integrated KPI’s

Rolling structured Life of MineIntegrated risk planning

Maintenance / Development / Mill /

reliabilityIntegrated inventory

managementTotal Productive

Maintenance Preventative

Strategic sourcing for 100% of spendFull use of top tier Enterprise

Resource Planning (ERP)Utilization of e-commerce

Vendor management system in useDevelopment / Mill / OperationsUtilization >95%Plan compliance >95%Integrated performance

Maintenance, Preventative Maintenance, Reliability Centred Maintenance (RCM), Condition Based Maintenance etc in use

d i

Vendor management system in useFocused on cost reductions

throughout the supply chainJust-In-Time supply / consignment

inventory set up with vendorsmanagementCost performance targets

reviewed for ability to exceed

Integrated Enterprise Asset Management (EAM) / Computerized Maintenance Management System (CMMS)Integrated planning &

y p

Integrated planning & schedulingIntegrated performance

managementRoot cause investigation

i l d

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routinely used


Savings opportunities are significantGet the Money

Savings opportunities are significant

• Operations Improvement• Operations Improvement

• Cost Reduction / Cost avoidance typical savings 5%-15%

• 10% -20% improvement in productivity10% 20% improvement in productivity

• Sourcing savings typically yield a 10%-20% reduction in cost for sourced commodities

I i ti f l d i t d i t t • Improving proportion of planned maintenance can reduce maintenance costs by 5% - 15% and improve asset availability 5% - 10%


18September 24, 2012

Typical Procurement SavingsGet the Money

Typical Procurement Savings

Sourcing and Supplier Management:• Unleveraged spend

Quality and Safety:• Visibility into materials and Unleveraged spend

• Purchasing leverage• Supplier consolidation• Vendor rebate management

• Visibility into materials and services being consumed

• Visibility into Supplier spend and volumes

• Product standardization• Vendor integration

Compliance

• Quality is a total cost of ownership component

Inventory Reduction:Compliance:• Off-contract spend reduction• Consequences applied for non-

compliance

Inventory Reduction:• Track how much is bought, vs.

how much is consumed, vs. how much is stocked, vs. how much is l t t t

p• Compliance and monitoring for

overcharges, service levels, etc.• Budget compliance

lost to waste• Visibility to frequency of use and

order cycle time leads • Enhanced demand managementg


Typical Opportunities to reduce Maintenance CostGet the Money

Typical Opportunities to reduce Maintenance Cost

• Improve collaboration between Maintenance, Operations & Finance

• Need to align goals and performance measures of these teams based on Need to align goals and performance measures of these teams, based on common corporate objectives

• Align financial and operational metrics to link asset performance to overall t bj ticorporate objectives

• Provide visibility into all aspects of the asset lifecycle in addition to having real-time information about asset conditions

• Invest in analytics and dashboards to provide role based visibility to the workforce for effective decision making

P id hi t i l d l ti t f d t t l f • Provide historical and real time asset performance data to employees for efficient decision making

• Integrate plant floor and business systems

• Connect EAM with business applications to increase responsiveness and provide ability to make quick and intelligent business decisions


Balanced Scorecards are often used to establish Keep the Money

Balanced Scorecards are often used to establish performance targets and accountability

Cascading KPI hierarchy example - Mine

•Emphasis on focusing on the ‘right’ KPIs

•Starts with the strategic objectives as the basis for defining the ‘right’ metrics for

Six key “level 1” cost metrics for each key mining value chain process beneath the total Mining ($/t ) metric.

the Corporate level (e.g. Cost per ton, cost per oz) based on business drivers.

•KPIs are then cascaded down through

Three key “level 2” metrics driving Drilling ($/m) – one financial, two operational.

the organization to individual sites / operating departments

•Provides opportunity to drive

Three primary “level 3” metrics driving Operating Costs ($/hr).

accountability to all levels of the organization, while integrating all staff to common objectives

In mining, operational metrics frequently drive cost outcomes – this linkage is critical when reporting operating cost outcomes to management levels that have the ability to ‘influence”.


Optimize use of Balanced ScorecardKeep the Money

Optimize use of Balanced Scorecard

• Once a set of scorecards has been established, set appropriate targets for

fi, pp p g

each metric; define the ending point (long-term target), then the short- and medium-term mileposts that need to be achieved along the way

4. Define Mitigation Projects /

Action Steps

3. Determine Causes of

Major Variances

achieved along the way.

• Targets should be aggressive but achievable. 5. Monitor

and Track 2. Identify

Major • Set appropriate tolerance levels for

metrics that alert management when metrics are on track, when action is required as well as provide trending of

and Track Progress of

Action Steps

1. Collate and

Major Variances

Against Plan

required, as well as provide trending of performance.

and Analyze Monthly Results

Leading practice KPI reporting and f i i i i performance management in mining companies

is a virtuous cycle focused on developing, monitoring and tracking action steps to improve performance on a monthly basis.


Changes need to be embedded in a continousKeep the Money

Changes need to be embedded in a continousimprovement program

An effective continuous improvement program within a mining company includes the 14 design principles listed below.


Sustainability depends on change managementKeep the Money

Sustainability depends on change management

Formulating best fit change management approach • Develop a compelling vision for change f h h d b ll i t d

Organization Design

for change, shared by all impacted stakeholders.

• Gain broad stakeholder engagement

Project & program management Talent

management

g

Change impact & readiness

through communication

• Engage leaders, define their change leadership roles and equip them to

Transition and Adoption

CommunicationLeadership Alignment

p q pbuild commitment

• Ensure consistent messages are delivered.

Skills and knowledge transfer

Cultural changesStakeholder engagement

Program vision and case for

change

delivered.

• Develop an efficient and effective training delivery approach

• Ensure that the performance management system supports the changes that are being driven by the

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program.


Thank you

Documents

Maximizing the Value of Your Operations - PwC€¦ · • Productivity improvement and waste reduction • Value driver models / Enhanced cost management Procurement & Supply Chain