Productivity decline in the mining and metals industry, which began over a decade ago, is still an unfortunate reality for companies to this day. This
drop-off is the result of companies in the sector choosing to pursue production growth and headline revenue during the commodity price boom. Counteracting
this challenge first requires understanding productivity and what is driving this decline.
Productivity is often ill-defined as more output for fixed input or the same output for less input. But that does not always tell the complete story.
Productivity gain should be measured as a form of optimization (i.e. the highest ratio of output to input), which can in fact mean achieving higher
productivity with lower input.
Economists typically measure productivity across a range of factors referred to as multifactor productivity (MFP). The most common factors of MFP include
labour, capital and materials. The Australian Bureau of Statistics, measuring MFP as output per unit of combined inputs of capital and labour in
conjunction with other technological and organizational factors, found that labour productivity in Australia’s mining sector has declined by roughly 50 per
cent since 2001. The picture is equally as discouraging closer to home. Labour productivity in the U.S. coal sector fell by an overall average of 27.5 per
cent between 2009 and 2012.
Capital productivity – the output of goods and services compared to the input of physical capital – has also been on the decline over the past decade, as a
result of long lead times between investment and production. Australia’s mining sector has seen a drop of 45 per cent in capital productivity since 2000,
compared to 22 per cent across all industries.
From 2000 to 2012, during the recent high commodity-price supercycle, many mining and metals companies adapted their processes, performance measures and
corporate culture to favour growth. These companies are now coming face to face with the consequences including significant gaps in skills, labour costs
that exceed the rate of inflation, ineffective portfolio management, issues with capital allocation and poor project execution, to name a few.
Companies have attempted to address these challenges through conventional cost-cutting exercises. But renegotiating with contractors on rates, reducing
support staff from back office, delaying or suspending projects, selling off underperforming assets and implementing continuous improvement programs is not
enough to turn the problem around. These issues run too deep for standard solutions, which can even be counterproductive by moving the problem along the
supply chain. Instead, miners must drastically transform their business models if they want to reverse the decade-long drop in productivity.
Real and sustainable productivity requires a holistic and top-down approach that aligns productivity activities to their strategic value and contribution.
Undertaking this end-to-end business transformation includes five steps. The first is setting a clear strategy based on a broad set of value drivers. Next,
a company must create an operating model that is aligned with the corporate strategy. Then, it must integrate and align across the value chain through
process integration and standardized work procedures. Finally, the mining company should align planning, budgeting and performance measurements.
Productivity needs to be planned and executed in a coordinated way across the value chain. In short: To be effective, companies must commit. This is not as
easy as it sounds. Good data is needed to understand how to measure good performance and good productivity. Awareness of all the systems, processes,
interfaces and interlinks is crucial to making informed decisions when it comes time to consider broad business transformation.
Recapturing ground lost over the supercycle, recovering competitive advantage and counteracting rising real wages are key motivations for improving
productivity. Companies that commit to a broad business transformation program benefit from enhanced shareholder value, improved margins, better
competitive positioning and increased ability to pursue strategic investments.
Bruce Sprague is partner in Ernst & Young’s Tax Services Practice
and the leader of the firm’s Canadian Mining & Metals. He is based
Ernst & Young, in collaboration with the University of
Queensland in Australia, conducted in-depth interviews with senior
mining industry executives
from around the world. These
conversations formed the basis for the recent report,
Productivity in mining: A case for broad transformation, which outlines
the productivity challenge and how mining and metals companies can
get back on track. For more information, visit ey.com/ca/mining.
The downward trend in productivity has been too long in the making. It is time for companies to take action and address this problem with the attention it
demands. It is not enough to make short-term adjustments. Competing in today’s global mining and metals industry requires that companies be at the top of
their game, and that is where broad business transformation comes in.
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