Instilling the skills and operational mindset to meet the new production-focused environment in the mining industry
Switching gears through the mining super cycle requires new thinking and skills
As mining companies move from the construction phase to the production phase of the commodity super cycle, management teams must ensure their organisations’ skills and focus are geared toward delivering the right outcomes.
From 2003 to 2015, most mining companies focused on the expansion of existing projects and the construction of new projects. Accordingly, over the past ten years, miners have become proficient at managing and delivering complex projects.
However, the majority of these projects have now been delivered and we must now consciously re-orientate our focus to deliver ‘efficient’ production as opposed to ‘on plan’ construction.
The commodity super cycle
We all know that commodities typically follow a demand and supply-driven cycle. There are many examples of individual commodities following such a course at different points in time (eg the copper boom of the early 1970s, or the more recent surge in lithium).
However, commodity super cycles, where multiple commodities concurrently experience the same cycle, are less frequent and typically driven by major global demand shocks such as the 1950-51 Korean War inventory build-up, the 1973-74 agricultural material shortages, the OPEC oil market management crisis, and the unprecedented Chinese growth-driven super cycle of the last decade.
Commodity super cycles typically exhibit three distinct phases that can be measured through their relative GDP contribution (Figure 1).
- Phase one is price driven – as demand shocks to a limited supply base, prices rapidly escalate and add to GDP growth directly through increased $/t commodity value.
- Phase two is a supply response – as suspended and new production options are committed to meet the heightened demand levels, significant capital investment is expended to bring increased capacity online.
- Phase three is the utilisation of the increased production capacity – as the cycle transitions into a longer and extended production phase, the risk of oversupply and downward pressure on commodity prices is heightened.
Evolving with the cycle – from construction to production
At their core, construction and production capabilities require fundamentally different skills, resources and management approaches. Figure 2 illustrates the transition from construction to production.
Construction typically focuses on delivering a one-of-a-kind product using loosely linked process flows where management’s attention is centred on bidding, delivery, product design, quality and flexibility in output volumes and price.
On the other hand, production focuses on delivering very high volumes of standard products (ie commodities) using continuous, automated and rigid flows and tightly linked process segments.
As the inevitable price decline that accompanies increased supply materialises, companies must evolve with the cycle to remain competitive. In order to exploit the benefits of the investments made over the construction phase, we must instil the skills and operational mindset to meet the new production-focused environment.
Mining labour productivity lags industry peers
Labour productivity is one of the key and most comparable benchmarks of production efficiency. It is useful to compare the mining industry’s labour productivity levels with those of other industries. Figure 3 illustrates the labour productivity of the mining industry against the power, automotive, wholesale and retail trade industries.
With mining labour productivity at the bottom end of industry benchmarking, we’ve drawn a number of conclusions that are concerning:
- The mining industry is experiencing its lowest level of productivity today when compared to other industries, and in particular the automotive industry, which traditionally has had a strong focus on process efficiency, automation and productivity gains.
- During the rapid increase in demand for minerals and metals, the mining industry focused on expanding production without a corresponding focus on efficiency. This has resulted in a significant drop in productivity.
- As the production phase began to increase supply, demand for commodities wavered, leading to declines in both prices and profits. The natural response was deep cost cutting in an effort to drive up productivity.
- This productivity slump, combined with the disruptive impact of technology and digitalisation – which affects every sector of the economy – means that if mining companies don’t respond they risk being left behind.
Honing people, process and technology capabilities to shape up
So how can mining companies catch up with other industries? For mining companies to achieve efficient production, an uplift in capability is required across the three domains of people, process, and technology.
During the construction phase of the super cycle, the mining industry has focused on the accelerated construction of once-off projects of mines, processing plants, rail and ports. We have become skilled at managing our portfolios of construction projects, facilitating rapid delivery and disciplined vendor management. We have adopted robust quality management systems and employed sound commercial management. But the focus has been on delivering projects on time and on plan with limited emphasis on future production efficiency.
To achieve efficient production, we must shift focus from building low volume, one-of-a-kind assets to producing high volume, standard products. This requires the capabilities and skills to standardise products, automate processes and institute consistent and integrated business processes.
The most effective way to establish these new capabilities and skills for lasting benefit is through the adoption of disciplined business process management across the whole organisation. Business process management is an inclusive methodology across teams at all levels of the organisation to continually improve, refine, manage and control essential business processes.
A business process management framework would typically include:
- current-state business process analysis – documenting and analysing how a business currently executes its processes
- value-based analysis – analysing and improving business processes based on quantifiable metrics
- future-state process design – designing how a business will execute its processes in the future
- process improvement and implementation – changing how a business executes its processes from current-state to future-state
- process monitoring and controls – observing how business processes are executed in the real world and having controls in place to ensure adherence.
There are many process improvement methodologies that can be applied to identify and realise tangible benefits. For example, Lean manufacturing methodologies can target and eliminate inefficiencies in business processes. Lean manufacturing is a discipline that continuously improves the way a company and its staff execute business processes by eliminating non-value adding activities (waste) and optimising value-adding activities. Another process improvement discipline is Six Sigma, which involves standardising business processes and eliminating any variability to that standard to reduce the probability of errors and mistakes.
The Lean manufacturing and Six Sigma concepts are heavily used in the manufacturing and automotive industries and have been a key success factor in driving the efficiency improvements cited in Figure 3. While there are examples of Lean manufacturing and Six Sigma being used within the mining industry, these methodologies are not yet fully embraced or instilled as operating norms. Achieving process excellence cannot be developed overnight; business process management requires continuous and consistent focus.
Technology disruption (eg robotics, mobility, automation) has been observed in nearly every industry over the past decade, with some industries such as the automotive industry embracing its benefits more than half a century ago. By contrast, the mining industry is still at a relatively early stage of exploring, understanding and adopting the potential benefits of new technologies (eg driverless trucks). However, for the mining industry to close the production efficiency gap, technology-enabled transformations must be considered.
The low hanging fruit
We have identified five key areas that have delivered significant gains in business efficiency and productivity.
1. Resetting the cost base
The escalation in commodity prices drove an industry-wide response to produce more to meet the boom in demand, often elevating the cost base. As demand has waned and commodity prices declined, margins have reduced. We have already seen significant removal of discretionary costs in response to this contraction. However, there is still opportunity to reduce fixed or institutionalised costs, such as reviewing the insourcing-outsourcing composition to tackle labour costs. In the face of falling demand, mining industry suppliers have been forced to adjust pricing expectations that present opportunities via contract reviews and spend analysis to negotiate better terms.
2. Challenge ‘the way we do things’
The need to adopt new methods, approaches and practices is paramount in driving the cultural change required to underpin efficiency improvement. We need to be nimble and brave enough to challenge the ‘way we do things’ in order to adopt more efficient processes and work practices.
3. Extending original equipment manufacturers (with appropriate monitoring)
Maintenance and the replacement of specialist mining plant and equipment is core to the mining industry’s cost base. During the mining boom, original equipment manufacturers (OEMs) were set up to routinely replace or repair equipment parts based on theoretical or perceived reliability lifecycles. Due to the specialised nature of mining equipment, high costs are incurred each time maintenance work is conducted. By having more stringent and regular monitoring procedures instead of regular maintenance inspections, companies can run equipment for longer periods without increasing the likelihood of breakdowns.
4. Deal with onerous ‘take or pay’ contracts
During the mining boom, take or pay contracts were established, which required miners to pay a fixed amount to rail and port operators to transport goods regardless of whether the service was used or not. Take or pay contracts allowed miners to lock in key rail and port access, which worked in their favour during times of growth and expansion. However, as the market price for logistics capacity has now been largely reset, we must find ways to renegotiate or exit these contracts to help drive costs down.
5. Revisit worker shifts and productivity
Traditionally, most mines have operated 24/7 and been covered by various shift arrangements, ranging from two lots of 12-hour shifts to three lots of eight-hour shifts. The cost of employing staff on long continuous shifts can be relatively high, particularly for 12-hour shifts, and can impact productivity. There are opportunities to explore ways to reduce operating hours from 24 hours to around 18 hours without significantly reducing output. By having shorter working shifts, staff can be more productive and efficient and so comparable levels of output can be achieved at a reduced cost.
Our consulting team was invited to lead a business improvement program with a global resources business. Our client had started implementing a business improvement framework to promote continual improvement at sites and to provide support for a number of ‘deep dive’ projects targeted at specific elements within the coal production process. The deep dive projects focused on improving the load and haul waste performance to ensure the site is able to maintain its high rate of coal production in spite of the site’s rapidly increasing strip ratio.
This project, like many others, involved specialists in business process improvement, Lean manufacturing, Six Sigma, operations analysis and project implementation working closely with site personnel in order to:
- conduct rapid diagnostics to identify potential areas for improvement across the sites
- tailor and deliver the newly developed business improvement framework to the sites and train production staff to help foster a business improvement culture
- carry out detailed production process analyses to identify current state issues and to develop solutions to improve performance
- define, plan and deliver a set of improvement initiatives that could be owned and sustained by site personnel
- create a set of best practice materials and processes to share with other sites as part of the business improvement framework roll out.
Our goal was to create a ‘high reliability organisation’ and help transform existing business processes and capabilities. Some examples of how this was achieved include:
- Improving the asset utilisation ratio of fixed plant, by moving towards its maximum demonstrated rate. This can be achieved by minimising down time, specifically through:
- optimising major shut-down cycles, maintenance planning and scheduling
- introducing discipline and maturity in reliability management and condition monitoring (for example, focus sessions and training on root cause analysis and criticality reviews).
- Improving productive time by reducing wait time for trucks and loaders. This can be achieved by identifying potential bottlenecks through proper analysis and modelling of ore and waste movements and their relationship with building inventory stockpiles.
- Reducing cycle times through optimising the fill, swing and dump process and assessing the impact of the type of buckets, swing angle used and operating procedures.
These (and other) improvement initiatives delivered over $500 million of annual benefit. Deep dives were conducted into mining operations across the east coast of Australia, and once a benefit was delivered at one mine, it was replicated across other sites. This program ultimately delivered $1 billion in banked benefits over five years.
With the continuing evolution of the current super cycle, the need to rapidly expand through construction and expansion has been replaced with the need to be highly productive and efficient. The mining industry severely lags other industries in operating efficiency, which highlights the need to adopt new skills, along with leaner and more productive ways of working, to remain globally competitive.
Just as we have learned to embrace safety as a culture and a mindset as we strive to eradicate injuries from the workplace, we need to be prepared to recognise the need to relentlessly apply ourselves to reviewing, refining and implementing improved processes, day in, day out to deliver continual improvements in production efficiency.
The changes in mindset, skills and capabilities are not easy and will not occur overnight. For the best chance of successfully embedding a productivity mindset, we need to target specific areas within our business to improve and upskill before we move on to the next. This is important to not only obtain business confidence and buy-in, but also to embed new ways of working and drive the ability to be self-sustaining through this critical production phase in the mining cycle.
Campbell Jaski is a partner and mining industry leader with PPB Advisory based in Melbourne, and Chintan Ganatra is a partner with PPB Advisory’s consulting division, Litmus Group, and is based in Singapore.
Feature image: tcly/Shutterstock.com.