Balancing Uptime andWorking Capital:Maintenance and Inventory Strategies inMining

www.pwc.com

PwC

Session Agenda

•Introduction

•Overview of Maintenance Strategies in Mining

•Overview Inventory Management Strategies in Mining

•Balancing uptime and working capital

•Questions & Discussion

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Falling prices led to a focus on cost reduction...

…in order to offset squeezed margins.

…now productivity and working capitalare targets to help improve performance.

“Miners are having tocontend with rising costsin every facet of thebusiness, from the energyand materials they use tobuild and maintain mines,to the people andequipment needed towork them and the U.S.dollars to pay for them.Cost issues do notdiscriminate by themetal produced or thesize of the miner.”

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Performance is driven by the integration of SupplyChain, Maintenance and Operations

MaintenanceOperations

Supply Chain

HighPerformance

Operations needs torelease equipment toMaintenance whenscheduled.

Maintenance needs toperform repairs asplanned and scheduled forequipment reliabilityand respond quickly tobreakdowns.

Supply Chain needs toprovide the right partswhen needed in the rightplace at the right timewhile managing workingcapital requirements.

EquipmentUtilization

EquipmentAvailability

InventoryOn-hand

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The key question

How can we secure access to the right spare parts and consumables when they areneeded, where they are needed?

How can we optimally configure our activities to ensure uptime, at optimizedinventory levels to manage working capital?

How can we minimize maintenance and still ensure equipment reliability,availability and manage costs?

How can we manage our inventories of spare parts and consumables given thechallenging geographical locations that our mines operate in?

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Balancing Uptime and Working Capital

Overview of Maintenance Strategies in Mining

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Maintenance has far reaching impacts

• Maintaining plant, fleet, facility and equipment represents a major portion ofmining operating costs, typically from 30 to 50%.

• Break Downs and Un-Planned maintenance is 3x to 5x more expensivethan planned maintenance, this does NOT include the cost of process interruption,production efficiency or scrap - resulting in lost revenue.

• Many mining operations run at less than 70% operating efficiency because ofbreakdowns, idling production and other operational issues.

EffectiveStrategies

Availability

Efficientproduction

Utilization

Cost ofasset

ownership

$$$

Maintenanceimpact

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It’s all about efficient execution…

Identifywork

PlanWork

ScheduleWork

AnalyzeWork

Close outWork

ExecuteWork

Break Down

MaintenancePlan

Production Plan Financial Plan

Maintenance Work Management

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Tactical focus Strategic focus

… and effective tactical strategies

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1940 1950 1960 1970 1980 1990 2010

• Fix it when it

breaks

First Generation

• Higher plant

availability

• Longer equipment

life

• Lower costs

Second Generation

• Higher plant

reliability and

availability

• Maintainability

• Greater safety

• No damage to the

environment

• Even longer

equipment life

• Greater cost-

effectiveness

• Lower risk

Third Generation

• In the past, Asset Managementwas tactically focused

• Most recent shift has been to amore Strategic andManagement Systems focus

20202000

• Strategic

• Holistic

• Management

systems

• PAS55, 2004

(revised 2008)

• IS5500x, 2014

• Integrated with

operations

• Governing

organisational

objectives

considerations

Fourth Generation

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Effectiveness and Efficiency in Execution

• Asset standardisation• Asset investment

planning• Accurate asset

database and hierarchy• Technical content• Asset condition• Asset performance

Asset ManagementStrategy

• Asset criticality ranking• Reliability-based• Reliability-centred

maintenance on criticalassets

• Preventativemaintenanceoptimisation orMaintenance taskanalysis on less criticalassets

MaintenanceProgram

• People and skills• Processes and

structure• Permitting and work

clearance management• Systems and data

Work Execution

• Business intelligenceand reporting

• EAM balancedscorecard

• Dashboards and drill-down

• Push reporting• Role-based metrics

PerformanceMeasurement

Reliability-based right task at theright time

Asset Effectiveness

Wrench time: Lean and optimisedexecution of maintenance tasks

Asset Efficiency

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Example: Impact of Maintenance

Some key affects of reactive maintenance:

• Inappropriate skills or contractors used

• Other planned scheduled work is disrupted

• Downtime searching for required parts

• Expedite costs for required parts not

available

• Informal and intuitive work procedure

• Rushed or unclear verbal instructions

• Rough sketches rather than standard

drawings

• Ad hoc safety / risk issue coverage

• Overtime costs and worker fatigue

• Repeat repairs and job quality issues

• Incomplete records for analysis

Unplanned

Planned

55%

45%

$36.7 m

$20.o m

Current State – Maintenance Spend of $56.7 m

Improved Ratio – Maintenance Spend of $51.1 m

Unplanned

Planned

30%

70%

$20.0 m

$31.1 m

Improved Ratio – Maintenance Spend of $48.8 m

Unplanned

Planned

20%

80%

$13.3 m

$35.5 m

Opportunity14% reduction in Maintenance spendEquivalent to ~$8m in Opex

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Comparison table

Example: Impact of different tactical approaches

Invasive PMInspection

Condition BasedMaintenanceParameters

Maintenance Activities

Downtime of Assets

3850

9.3

3850

0.8

Labour hours ~36k ~3k

Repair hours if neededbased upon ConditionBased Maintenance

3.6k0

Total costs ~$66ok~$3.600k

81.6%

Maintenance time longer but alsoproduction time is lost (impact notincluded here)

Condition Based Maintenance -repair is only performed whenneeded, ~20% inspections find abad condition that needs to beaddressed

No invasive maintenance, onlymeasured condition, e.g VibrationAnalyzer

Break DownMaintenance

1540

4.6

~7k

0

~$700k

80.5%

Break down maintenance activities- costs here are only maintenancecosts, not production losses (maybe acceptable if capacity exists)

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It may not be intuitive but less is more!

Less Maintenanceactivities

Only focused onmaintenance where

needed based on actualcondition

IncreasedReliability

With increased focuson condition

measurementsreliability increases

IncreasedAvailability

Only intervening whenneeded based on

condition increasesavailability to

equipment

IncreasedProductivity

With increasedavailabilities of

equipment comesincreased productivity

Less is actually more with an improved tactical approach to maintenancefocused on Condition Based Monitoring.

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Balancing Uptime and Working Capital

Overview Inventory Management Strategies in Mining

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Spares Inventory is at the heart of Uptime

Assetavailability

Uptime

Preventive Maintenance

Break Down Maintenance

• Preventive Maintenance andCondition Based Maintenancedesigned to reduce the probabilityof failure

• Restoration to operational conditionfollowing failure

Overhaul(shut down)

Routine service

Diagnostic

Provide parts forrectification

Repair fault

Test for successfuloperational state

SpareParts

Inventory

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However, inventory strategies require a balancedapproach between performance, risk and costs

When focusing mostly onperformance, organizations tendto overstock all materials.

Focusing on risk usually over-estimates criticality of materials,impacting associated stock levels.

Few organizations focus on all threeareas of Performance / Risk /Expenditure in a balanced fashion,and excess MRO inventory is usuallythe result.

Risk

CostsPerformance

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Inventory strategies have to be refined yearly foroptimizing stock positions, and require historicalinput from:

Failuremanagement

Maintenancemanagement

Warehousemanagement

Procurement

Safety stock parts:• Criticality of failure effects• Likelihood of failure effects• Costs related to holding the inventory• Which parts to hold in stock and how much

Procurement input:• Time required to get the spare part• Costs related to getting the spare part• Reliability of the suppliers• Warranties

Reserved stock parts:• Maintenance schedules• Estimated number of parts to be replaced during

maintenance• Costs related to holding the inventory• Replenishment rules

Physical management of inventory:• Number and location of warehouses• Physical management of warehouses• Accuracy of inventory records• Time and costs required to get the material to

the mine site

Spare PartsInventory

Management

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Improper Material Management leads toabnormal levels of excess stock and un-usedmaterials for working capital mobilization

Key questions for effective MM:

• What is the inventory turn, if any?

• Are ABC classifications being used:

‒ Per moving type‒ Per criticality‒ Per cost

• Is stock allocated with respect to theseABC classifications?

• What is the zero-stock policy?

• Are cataloguing tools sharedthroughout the organization?

• When was the stock last reviewed forobsolescence?

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Performance starts with the integration of SupplyChain with Operations and Maintenance

Integration starts with Operations releasing equipment to Maintenance on time, andMaintenance performing as scheduled, with available Materials.

The first step to performance management is through acceptance of a joint responsibility,supported by mutual commitments – which can be documented with service level agreements

MaintenanceOperation

Supply Chain

PerformanceManagementFramework

Measure EnableKPIs

Dashboard

Visual

Individual

Planning

Reliability

CMMS

SLAs

With sufficient visibility on demand, Supply Chain can develop properstocking and inventory strategies.

Absence of SLAs often result in:

• Equipment abuse

• Delayed maintenance

• Rush orders

• Cancelled work orders

• Returned materials

• Excess stock and obsolete materials

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Developing stocking and inventory strategies is acomplex exercise involving Operations,Maintenance and Supply Chain

Our suggested high level approach involves Maintenance (steps 1-3), MaterialManagement (steps 4 to 8) and Procurement (step 5)

Define inventory levels

Define stocking strategy

Engage vendors on lead time and “VMI”

Cross reference Criticality, Service Level and ABC

Develop Material ABC classification (price & velocity)

Define criticality at the material level, and assign service level

Identify BOM

Map equipment and assess criticality1

2

3

4

5

5

7

8

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A successful inventory optimization exercise cantarget 15 to 30% inventory value reduction

The excess stock is often identified withoutimpact to service level (moving inventoryposition from to ).

The benefits are valued through inventoryreduction and working capital release.

Our typical approach is :

1. Perform diagnostic to identify root causes forperformance gaps & improvement opportunities

2. Determine target stock given current constraints& business requirements

3. Implement target stock & define processes tomaintain the optimized situation

4. Further improvement. Reconfigure SupplyChain Management (SCM) to improve servicelevel and/or reduce cost

Benefits realization depends on material type(fast mover or slow mover )

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Balancing Uptime and Working Capital

Balancing Uptime and Working Capital

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An inventory optimization exercise is always abalanced approach between production, cost andfinancial return

The objective should be to improve the overallservice level delivered by Supply Chain andMaintenance to Operations, while reducingthe amount of working capital mobilized.

Foundational elements include:

• Review materials criticality,

• Reliability-centred maintenance on criticalassets

• Condition-based monitoring.

• Analysis historical demand and supply,

• Revisit lead time with vendors,

• Define revised stock levels.

Service Level

OperationalExpenditures

CapitalEmployed

Inventory

Production

FinancialReturn

Cost

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Foundations for Balancing Uptime and WorkingCapital

• An Integrated Maintenance and Supply Chain Strategy that reflects andsupports the Vision & Mission of the organization.

• An effective mechanism to link strategy with maintenance and supply chainprograms and execution.

• Robust mechanisms to execute the program.

• Targets and Measures as part of the programs process.

• Data and Tools to measure performance.

• Reward/Recognition Programs to create an environment for “sustainableperformance” and driving the right behaviours.

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How effective are your Uptime and WorkingCapital programs?

Value “Killers” Value “Builders”

• Setting reactive and arbitrary targets

• Lack of transparency of key cost and valuedrivers

• Operations lack of understanding of theimportance of maintenance activities

• Maintenance lack of productivityprioritization

• Lack of communication and integrationbetween Supply Chain, Operations andMaintenance

• Managers receiving weak inventory,operational and maintenance information

• Incorrect tactical choices in Maintenanceactivities

• Strong direction from the C-suite forimproving uptime and working capital(roadmap)

• Defined asset management strategy withinvolvement from Supply Chain,Maintenance and Operation

• Effective and efficient execution of themaintenance program

• Clear ownership of uptime and workingcapital at the operational level

• Frequent analysis and communicationbetween operations, supply chain andmaintenance managers

• Culture of continuous improvement -challenge of the status quo

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Questions & Discussion

This content is for general information purposes only, and should not be used as a substitutefor consultation with professional advisors.

Thank you