The Role of Procurement Leaders in Bringing Metals and Mining up to Speed
Procurement plays a vital role in managing the fall-out of the COVID-19 crisis. Leaders who are assertive and resourceful can help mining companies address immediate concerns and prepare for a quick recovery after the pandemic goes away.
Covid-19 knows no boundaries and has already impacted the lives and livelihoods of people around the world.
In response, some governments closed their country’s border and imposed large-scale quarantines and physical-distancing measures to minimize the spread of the virus and avoid overwhelming their healthcare systems.
The safety and well-being of workers was the top priority.
However, companies must now turn their attention to the economic effects of the pandemic, which are quite apparent. Covid-19 caused the productivity and profit of many industries to decline, and this included the mining and metals industry.
Now is the time to make strategic choices to build cost resilience. Companies must prepare for their recovery and rethink operating models before things can get back up to speed.
Chief Procurement Officers (CPOs) are valuable as they are suited to handle such demands. We present four actions CPOs can do to help mining companies make the transition to the next normal.
During this pandemic a few metals and mining companies have shown growth during this turbulent time. Check out Aurcana Corporations performance during the pandemic. Aurcana Corp. is one of the Richmond Clubs stock picks for 2020.
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The Impact of COVID-19's on Metals and Mining
Since the pandemic started in early March, the metals and mining industry’s average share price has dropped by 10%. Individual companies have lost from 30 to 50% of their market value. The shutting down of sites or temporarily halting mining operations could lead to an industry production loss as high as 20%.
It is projected that the Metals and mining industry stands to lose $200 billion in 2020 compared to 2019 (this is before earnings, before interest, taxes, depreciation, and amortization (EBITDA). Cost competitiveness has never been more apparent.
4 Steps to Bring Mining up to Speed
Procurement Leaders will play an important role in these circumstances. They must find a way to mitigate supply-chain risks.
Protect cash and enhance productivity in operations, and make strategic choices to help the company bounce back, more resilient and more competitive.
The steps they take now can cement their position as critical creators of value and real strategic partners in the organization.
The following four steps can help to mine CPOs. These steps can build their companies’ cost-resilience, prepare it for recovery, and rethink the operating model in the next normal.
Step 1. The Importance of Building a Control-Tower to Safeguard Livelihood.
CPOs need work strictly with operations so they can quickly segment all spending into what needs to stop, stalled, shrunk, and sustained. Once they accomplish this, they can set up a Control-Tower Methodology to review and challenge all of the spending segments.
Control towers are successful when the procurement organization partners with Operations and Finance. Operations, to effectively challenge internal demand; and Finance, to ensure that the company’s cash position benefits from a reduction in spending.
The discipline instilled during the crisis to focus on controlling expenditure should have significant long-term benefits. CPOs should make this discipline continue and set targets and key performance indicators (KPIs) to ensure that it does.
For example, at the beginning of the COVID-19 crisis, a basic-materials company immediately set up a control tower. The objective is to monitor consumption by the procurement and operations group with support from Finance, which audited the impact.
In two week, this company had reduced demand by 15% through a combination of ceasing, stalling, or shrinking its spending.
The COVID-19 crisis created a commodities slump that created a quick source of funds in the form of cash. Most bulk, commodity, and logistics contracts incorporated a price-adjustment formula tied to products.
By leading a systematic review of contracts, CPOs can ensure benefits from price adjustments. This process may be manual for some mining companies since most contracts are not centralized and digitized. Give priority to digitalization according to the contract value.
A digitalization solution can be considered by the CPOs to allow for mapping, queries, and monetizing contract terms going forward.
For example, during a recent oil-price slump, one mining company captured a 5% cost reduction. They were able to enforce the downward fuel adjustments in their freight contracts.
It was done quickly and required no market reaction. It even prepared the company well for the negotiations that followed the expiration of contracts by resetting the power balance in the category.
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Step 2. Rethink the supply chain
Mining companies must focus on two sets of actions because crises inevitably bring to the surface vulnerabilities in the supply chain.
First, identify quickly and prevent vulnerabilities in the complexity of the supplier-network, logistics, and products.
Focus on supporting the operations and maintaining supply security by accelerating the onboarding of new suppliers. CPOs have to formulate a safe and efficient qualification process to do this.
Once the CPO have prevented immediate risks, he needs to build resilience in the supply chain. He needs to lead a comprehensive analysis of the entire supply chain life cycle, including a financial stress test of the supplier network.
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Give attention to sub-tier-suppliers’ visibility, and a review of organizational maturity.
Finally, a joint task force consisting of procurement and operations should use the outcome to systematically prevent, even eliminate procurement-related risks so the company can emerge more resilient.
Companies must focus on achieving risk-adjusted efficiency in the supply chain.
For example, at a global materials company that experienced COVID-19 disruptions in its location in Asia, CPOs mobilized its remaining regions and mapped vulnerabilities in the supply chain.
This comprehensive approach prevented the risk of disruptions in the company’s Europe and North America branches—and quickly resolved transportation and product complexity issues. The process ensured profit stability and efficiency in delivery commitment.
Advanced analytics also increases the success of hedging strategies to capture today’s rare opportunities in commodities.
This is also the best time to rethink approaches to bulk commodity purchases. Since the crisis began, commodity prices have significantly dropped.
Opportunities abound if the company’s cash position is strong enough, maybe even negotiate new contracts for vendor-managed inventories. These operations are typically quite lean and maintain as little inventory as possible.
Companies can also take advantage of low commodities prices to build their inventory. A CPO can lead revisions of the company’s risk management strategy, providing confidence in the demand forecasts in the near and longer-term.
Using advanced analytics will further increase the success of hedging strategies aimed at capturing the benefit of today’s rare opportunities in commodities.
Step 3. Shift capacity to creative thinking and planning
Working from home may create lower levels of productivity, but some teams might have excess capacity. Put this excess capacity to good use. CPOs can create cross-disciplinary teams (consisting of procurement, operations, and maintenance) and embracing agile delivery.
Example, procurement and operations teams usually have ideas about how to reduce waste or over consumption. They can also find out how to simplify fit-for-purpose specifications or search for alternative vendors with lower prices.
In order to not jeopardize asset uptime, a rigorous data-driven approach must first be applied before such thinking can result in decision making.
CPOs can invest in a team’s excess capacity and find opportunities to lower the company’s cost base structurally. In doing so, CPOs allow the company to out compete during the recovery, especially if input costs continue to rise.
For instance, a North American mining company assembled small, agile teams of leaders from procurement and the supply chain tasked with identifying savings opportunities.
The team successfully identified 7% average savings across categories by working in short sprints and maintaining existing service levels and quality.
After 2012 when commodity prices collapsed, mining companies demonstrated an ability to reduce costs. In the same breath, they also historically allowed cost rigour to slip during periods of rising commodity prices.
This trend is holding in the current cycle when commodity prices have increased since bottoming out in early 2016, but so too have costs.
CPOs now have the opportunity to differentiate thanks to the new mining cycle. Cost improvements made during the downturn from 2012 to 2016 can be preserved with procurement excellence. It can also bring on a new wave of value.
CPOs can also use the available time to invest in building a team’s capabilities since procurement functions seem to under invest in up skilling programs and creating a ceiling for the performance of employees.
Consider a short curriculum of high-impact modules. Look into concise curriculums on building business partnerships, should-cost modelling, advanced negotiations, remote negotiations, and data analytics to engage experts and motivate the team via training.
For example, non-operation employees from a metals company who were working from home identified the top three skill gaps of the team quickly.
The company set up virtual training sessions led by experts, and as the company prepared for its transformation, those who received training played critical roles in leading the change.
It is vital to ensure that the newly acquired skills and knowledge are applied.
Step 4. Reinforce the company's purpose in its community
Like other industries, metals and mining typically carry a sizable inventory of personal protective equipment (PPE). Knowledge of existing PPE supplies and worksite needs by CPOs and other procurement leaders can help identify a possible surplus.
Donate the excess to local health facilities. CPOs can help negotiate critical items for local hospitals if surplus supply is not available by using their leverage on their supplier base.
CPOs and Procurement leaders can also identify materials that may aid in the construction of crisis-relief facilities in their communities. A metals company in China did this—donating steel to build a permanent hospital in a region stricken by COVID-19.
Built-in record time, the hospital allowed the metals company to reinforce its corporate purpose of serving its community.
The COVID-19 crisis still has no clear end in sight. There is an opportunity for Metals and mining CPOs to make a difference in helping mitigate this crisis now.
CPOs can improve the effectiveness of the procurement function, and position their organizations to become more resilient after the crisis has passed.
Now is the best time for bold actions and assertive partnerships with other services in the company. Now is the time for purposeful leadership. Boost employee morale. And pave the way to winning in the recovery after COVID-19.