Proven management practices hold the key

In this two-part feature Logiworx Supply Chain expert Henry Brunekreef provides some insights and recommendations for the Australian resource industry on how to create an agile, cost effective supply chain ...

It is widely recognised that the current Australian economy operates at two speeds – with the fastest speed driven by resource companies – in general and mining companies specifically.

Australia’s Black Coal Mining industry alone is expected to generate revenue of $57.32 billion in 2010-11 – an increase of 27 per cent from the previous year.

And the Iron Ore Mining industry is expected to generate revenue of $49.5 billion in 2010-11, fuelled by a growth spurt of 40 per cent compared to the year before (IBISWorld). Much of this growth comes from a sharply increased demand from Asia, the fast growing economies of China and India in particular.

Another resource strong growth industry is gas production, including coal seam methane. The combined Oil and Gas Production industry's revenue is expected to reach $34.8 billion in 2010-11, a growth of nearly 22 per cent revenue due to higher output and higher prices (IBISWorld).

To maximise return Australia’s resource industry must create an agile, highly efficient supply chain – a supply chain that is able to fully benefit from the current high demand and souring commodity prices.

Companies must reduce complexity

The supply chain must be ready to handle the inevitable point of market saturation with conditions the same as or worse than before the resources boom. This is vital for mining companies as well as oil and gas companies.

To achieve a cost effective supply chain, resource companies must reduce complexity and uncertainty.

The first step is to establish an effective framework to deal with vastly changing market conditions.

The framework should address:

• Dominant customer buying behaviours and its integration in corporate strategy
• Network/asset infrastructure
• Process, procedure and policy
• Information and computer technology
• Organisation
• Performance metrics and KPIs

Identifying customer buying behaviour is a key step toward creating a successful supply chain.

As with many other industries, even much more conventional ones, more emphasise has to be on the customer and the specific customer needs from a supply chain/logistics, marketing and even financial perspective.

From a corporate strategy perspective, primary focus on asset utilisation and throughput maximisation alone does not suffice.

You must know what customers want

It is no longer “sell what has been produced in order to optimise production,” but “optimising value for the entire organisation” by aligning demand, logistics/infrastructure and mine operations.

You must have a good handle and deep understanding of what the end customers require and how they behave.

This is the key to translate these insights combined with the corporate strategy directives into a supply chain concept.

Understanding the buying behaviours and demand patterns is fundamental in either deciding which infrastructure system to implement or how to optimise the system once established.

Within mining supply chains, the following two main infrastructure systems can be distinguished:

1. Cargo assembly system, whereby coal shipments are railed specifically to fulfil (a) customer order(s)
2. Stockpile port system, whereby stock is being held downstream at the port, allowing for even railings to replenish the port stockpiles.

Understanding buying behaviours

Understanding the buying behaviours and demand patterns is fundamental in either deciding which infrastructure system to implement or how to optimise the system once established. Both systems have their own specific dynamics and constraints. It is key to understand these constraints and to define the levers to influence and optimise them (ie. capacity management of CHPP, stockpiles, rail and port infrastructure).

In order to deal with demand uncertainty and variability and to still allow the optimisation of mine operations, it is recommended to de-couple mine production from mine logistics by establishing a strategic inventory point.

This strategic inventory position is the ROM stockpile, where mine production is scheduled to maintain the inventory level between pre-determined levels. In alignment with this the CHPP wash plan is optimised by washing (coal) or crushing (iron ore) pulled from the ROM stockpile and replenishing the clean coal stockpile again against pre-determined levels.

From the clean coal stockpiles demand is fulfilled against open customer (cargo assembly) or replenishment (stockpile port) orders.

In summary, inventory is to be used as a strategic buffer against variability and uncertainty.

In addition, strategic (and tactical) collaboration with end customer is recommended in order to agree maximum parcel sizes. Cargo assembly is generally more suited for smaller, but more frequent shipments, whereas stockpile ports could handle larger shipments due to the inventory buffer available at the port.

* Henry Brunekreef is Engagement Manager with Logiworx. Logiworx has proven mining supply chain methodologies across inbound supply management, mining strategy, planning & execution and mining modelling & optimisation. Don’t miss the Final Part to this two-part feature in our next newsletter. Henry will reveal the keys to achieving a successful mining supply chain.