METS

Play it again, Sam

Miners are again showing a desire to drive growth, but is their profitability solid enough?

Play it again, Sam

This change in focus is understandable, among miners who believe that the worst of the industry's woes are likely over. But the shift may prove premature—and dangerous. For one thing, there's no telling whether—or when—the industry will suffer another round of hardships similar to those that struck after 2010. What's more, BCG analysis reveals that as much as 20% to 30% of miners' cost savings have derived from improvements (such as deferred SIB) that aren't sustainable, or from externalities that miners can't control (like favourable changes in foreign exchange rates or oil prices).

Given these circumstances, we believe that miners' growth efforts can succeed only if they first get their current operations up to world-class standards. If operations are shoddy, their growth drive will yield mediocre results, causing the too-early push for growth to backfire.  

Walk before you run ...

For this reason, we advise miners to ‘walk before they run'—by capturing next-generation operational excellence gains before ratcheting up their growth efforts. Rather than relying on what could be temporary tailwinds provided by price recoveries or externalities, miners should uncover and capitalise on the cost-saving opportunities lying dormant in their assets.  

True, many mining companies have successfully harvested the so-called low-hanging fruit—such as negotiating smarter procurement contracts and reducing headcount. But by walking before they run, they could establish a more solid foundation of profitability, from which they can then generate new growth that is sustained over a longer timeframe (see figure 1). Companies in a wide array of other industries—publishing, commercial aviation, consumer electronics—have managed this feat, offering lessons for miners seeking to engineer an effective turnaround.

... But do it bottom up, not top down

All this may sound reasonable, but how a mining company tackles this process can spell the difference between resounding success—and abject failure. The fact is, all too many players in this industry adopt a classical, top-down approach in initiating major change programs including those aimed at operational excellence. Because senior management defines key performance indicators and targets on those metrics, they end up having difficulty winning and sustaining managers' and employees' commitment to the change program. Consequently, any forward movement achieved in the effort soon loses momentum. 

To avoid this common pitfall, miners need to augment top-down change with bottom-up efforts aimed at promoting new behaviours on the part of managers and employees—namely, a willingness to identify and seize improvement opportunities. We're talking cultural change here—and while it may sound ‘fluffy' or ‘new age-y,' our client experience shows that it can generate measurable, and sustainable, gains on vital metrics like operating costs and mine productivity. 

The reason? A bottom-up approach enables people throughout the organisation to identify hidden improvement opportunities and generate the most insightful ideas for seizing them. And because people are driving these changes themselves, they feel personally invested in the effort and therefore remain committed to it—further boosting the odds of generating sustainable improvements (see figure 2). 

 

Indeed, once operational excellence has become engrained in a mining company's organisational culture through a bottom-up approach, senior managers won't have to keep pushing change on the workforce. And that frees up big supplies of managers' attention and mental bandwidth—so they can focus on returning their company to growth.  

But what does this fresh approach to sustainable operational excellence look like in action? Consider these examples, drawn from our client work:

• Tapping employees' ideas. An integrated base metal producer based in central Africa actively engaged employees in its operational excellence program, including creating a platform enabling them to share their improvement ideas. The company set up a system for encouraging employees anywhere in the organisation to offer ideas, recognised those who came forward, and provided financial rewards for those whose ideas were implemented. Ideas bubbled up from deep in the company and delivered impressive cost savings. For instance, the company was able to reduce fuel consumption in haulage trucks by as much as 12% and use less expensive but still high performing materials in some processes.

• Providing experiential training. A South American copper miner adopted a more effective tool for training people to bring lean practices into the organisation. Rather than relying on the traditional lecture format for the training, the company used a much more engaging, experiential learning approach. The approach featured hands-on simulations of mining and processing flows highlighting typical operational challenges. Trainees could use the simulations to experiment with improvement ideas. Employees found the experience interesting, and the insights they gained led to measurable gains for the company. To illustrate, thanks to the removal of stubborn process bottlenecks, the mine's throughput (volume of produced metal sold) improved by a whopping 15%, with no additional costs associated with the gain. Result: The improvement went straight to the miner's bottom line.

• Infusing flexibility into operations. An iron ore operator in southern Africa had an in-house, on-site reconditioning team of several hundred people that it was considering outsourcing as part of a restructuring effort. Instead, managers decided to carve out the team and set it up as an entity that could provide reconditioning services not only to its own organisation but also to other companies. The move delivered several valuable benefits. Before the carve-out, a significant number of employees in the group might be sitting idle at any one time, as the need for reconditioning ebbed and flowed. The team was thus underutilised. After the carve-out, team members were kept busy continually, as they served multiple companies. The iron ore operator saved money and gained flexibility, because now it used and paid for the group's services only when it needed them. And the team members all were able to keep their jobs. If the operator had not opted for the carve-out, it likely would have had to shut down the group.  

The uptick in commodity prices in 2016 may have miners thinking they can finally relax their operational excellence efforts and shift gears to recharging growth. They should think again. To lay the groundwork for a renewed growth push, miners must first establish a firm foundation of profitability. That means stepping up, not dialing down, operational improvements, including next-generation cost savings. The key to making improvements that will endure? Unlock creative ideas from the people best positioned to envision them: managers and employees closest to your core operations.    

*Frederic Geurts (Geurts.Frederic@bcg.com) is a partner and managing director, Daniel Feldkamp (Feldkamp.Daniel@bcg.com) is a principal, and Tycho Möncks (Moencks.Tycho@bcg.com) is a principal at The Boston Consulting Group.

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