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Alternatives to cost cutting for handling the next commodity downturn.

Weathering the next commodity downturn: With economic storm clouds gathering and some commodities starting to turn down, the pressure to conserve cash and maintain profit through cost-cutting is once again rising. TOC presents an alternative solution to cost-cutting and headcount reduction. Instead of focusing on getting more efficiency in all parts of the production system (through lowered resourcing of departments and cost-cutting), the focus should be on getting more production flow through the system. A recent post showed that a 20% output increase (with only variable cost associated increasing) for the top 40 miners in 2015 would have resulted in a 345% increase in EBITDA. The prerequisite is running the bottleneck department at +90% utilisation and having adequate protective capacity in the rest of the system. In the traditional cost accounting view, protective capacity is often seen as excess capacity, and efforts are made to cut the capacity in all departments until we end up with a balanced capacity chain. Now we start seeing moving bottlenecks and an effective output lower than the actual bottleneck's capacity. To great dismay, the cost per ton increases. So what can we do when the mine performance is under pressure? If we are not running our bottleneck at maximum capacity (a balanced capacity chain), we have, based on experience, about 10-30% hidden capacity available. And what about all our mine improvement projects? Suppose these projects add extra production tons (by increasing bottleneck capacity) at a throughput value that exceeds the increase in operational cost and with a good return on investment. In that case, they should be kept as part of the pipeline of projects. Those that do meet these criteria should be frozen. Reallocating capital from the latter projects may make sense to improve the bottleneck performance. Another beneficial outcome is that the lead time until delivery of these projects shorten drastically. With an extensive portfolio of improvement projects, scarce engineering resources are often overloaded and suffer from what TOC calls "bad multitasking". The continuous jumping from project to project means much expert capacity is wasted doing mental setup (the "where was I" problem) each time. The lead time of projects that deliver multiple times the value of capex is dramatically shortened, resulting in more cash generated and flowing in earlier. By adopting a Throughput approach over a Cost-centric one, mining has the opportunity to weather the storm when the inevitable downcycle arrives and to do this while showing its commitment to its most valuable asset, its people, making mining an attractive industry for new entrants. #mining #downturn #costsaving #throughput #toc #employeeengagment #capitalprojects


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