Cost reduction

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Cost reduction

Creating sustainable and long-term value

During the mining boom, miners saw costs escalate in some cases by over 200% (such as fuel, energy and people). Initially higher commodity prices masked these costs, but as prices have fallen, these embedded higher costs have been impacting bottom lines. Miners started eliminating costs from all areas of the business, including reducing capital expenditure and labor. However, there are still a lot of opportunities to remove costs from the business.

Miners need to maintain a focus on building a long-term sustainable cost base while making certain that cost reduction activities do not contribute to value erosion.

EY - Navigating Volatility: Cost reduction

Four key ways to achieve effective cost reduction:

  • 1. General expenses

    It is important that every activity in the business is challenged as the “long tail” of smaller costs are often overlooked in traditional cost cutting approaches. Even small costs should be pursued because, combined, they are significant in number. For example, challenging the need for travel, and instead considering increasing the use of WebEx and telepresence for meetings can save millions.

    We have also seen one company place their safety equipment in vending machines accessible by staff cards, allowing for a better “think before use” approach. This approach has accounted for several million dollars in annual savings and has resulted in safety equipment usage cuts by as much as 50% at some sites.
  • 2. Low cost country sourcing

    Miners should consider low cost country sourcing of direct and indirect materials such as maintenance repair and operating (MRO) supplies given that, with some emerging markets, there is an increasing range of goods available that are of equal quality but at cheaper prices.

    Recent contracts for one mining company has seen a 50% price reduction on track pads and 40% price reduction on truck trays when compared to the original onshore supplier. In addition, by reducing reliance on original equipment manufacturers, miners can achieve more competitive pricing by having a broader supply base.
  • 3. Offshoring/outsourcing support functions

    Many miners have offshored support functions such as finance, IT, procurement and human resources to low-cost countries. There are two broad delivery models:

    • Leveraging a captive shared service center that is owned and operated by the parent company
    • Outsourcing to a third party service provider

    From Australia or North America every role offshored generates savings in the range of US$40,000–50,000 per role. In addition to labor arbitrage, service providers are offering 20% to 60% productivity over the life of a five-year contract. Outsourcing has moved beyond the typical support function with many technical areas now being delivered from offshore. These newer areas include:

    • Maintenance scheduling
    • Seismic/geological data analysis
    • Engineering and technical drafting
    • Spare parts catalogue management
    • Strategic sourcing
  • 4. Procurement

    Miners have had a strong focus on procurement in the last three to five years. However, the pace of reform has not been fast enough and there are still a number of areas they can consolidate and transform to achieve far greater value.

    It is time to consider next generation procurement technology, where the business case is strong.

    Opportunities exist within three main areas:

    1. Automation and consolidation of operational procurement

      Many miners are yet to fully institute and realize benefits of the simple automated solutions that are readily available in their existing systems. There are a number of simple low-cost solutions to shift manual purchasing to “hands off” channels that can be easily executed with a viable business case.

      Increased automation in the buying process will enable further consolidation of operational procurement activities. Many miners still have high touch onshore buying personnel, who purchase site specific goods and services with little leverage across geographical regions. There is an opportunity to adopt a revised model whereby base activity (that has not been automated) is centralized/offshored allowing greater visibility and further consolidation of common goods and services.
    2. Strategic procurement

      Many miners have had a strong focus on cancelling existing contracts and renegotiating new arrangements. However, it is evident that letting go of the old mindset and procurement strategies has not been easy or quick enough for some. Payment terms, for example, are still too generous in some markets and alternative supplier strategies are not being aggressively pursued. This focus should continue, with much greater speed, and more discipline around outcomes in set timeframes and accountability for the implementation of new arrangements. Much of this activity could be outsourced.
    3. Next stage innovation and procurement service

      Now is the time to aggressively explore innovations that can further streamline procurement activities and enable greater visibility and control of spend.

      Associated benefits include:

      • Increased leverage and buying power
      • Reduction in maverick spend
      • Reduction in scope creep
      • More control over services and consulting expenditure

      Availability of smart technology and mobility solutions can further accelerate the automation of many basic ordering, buying and procurement activities.

      Digital solutions around automatic replenishment and guided buying are becoming more readily available.

      Digitization of information also creates the right environment to areas such as Smart Contracting, to automate the contract and vendor management processes.

The generous conditions of the past no longer reflect market reality today. In the boom times, miners were the price takers and now they need to be the price makers.