Mine Value Chain Analysis – Part 2

This is a second article on Mine Value Chain Analysis, starting with Michael Porter's value chain framework and applying it in simpler ways and reduced scope focusing on the mine operations value chain analysis.

The value chain analysis is a concept from business management that was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance. (Porter, M. E. (1996). What is strategy? Harvard Business Review, November-December, 61-78.The value chain).  A value chain is a chain of activities for a firm operating in a specific industry. The business unit is the appropriate level for construction of a value chain, not the divisional level or corporate level. Products pass through all activities of the chain in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of added values of all activities. It is important not to mix the concept of the value chain with the costs occurring throughout the activities.  The value chain categorizes the generic value adding activities of an organization. The “primary activities” include: inbound logistics, operations (production), outbound logistics, marketing and sales (demand), and services (maintenance). The “support activities” include: administrative infrastructure management, human resource management, technology (R&D), and procurement. The costs and value drivers are identified for each value activity.(http://en.wikipedia.org/wiki/Value_chain).

Mine value chain analysis may be applied to a business unit or extend to an extended supply chain encompassing businesses such as suppliers, producers, and distributors  but a much more simplified approach for preliminary identification of business improvement opportunities is to focus on the operations  which a primary activity in the Porter value chain framework.  With this in mind, a methodology that is adapted to constraints and challenges mentioned in the first article in the author’s mine value chain analysis series is used.  What is then mine value chain analysis in this much simplified context? Mine value chain analysis provides information on gaps between potential metal in the mine plan and realized payable metal caused by constraints in value adding process.  More eloquently the mine value chain analysis may be described as below.

1. It is a rapid analysis technique that outlines of a mine core business activities.
2. It helps a mine operation produces a simple working model of the business.
3. It identifies the key steps (links) in each business activity.
4. It shows how to measure and control a mine operations value chains

Now that we have established what value chain analysis is what are the detail steps in value chain analysis?  It involves activity analysis, value analysis, and evaluation for each process in the value chain documenting the following:

1. Name - What is the name of this core business activity?
2. Description - How does this activity add value to the business
3. Value Chain Links - What are the  key steps in this activity?
4. Metrics - How will you measure the success of this activity?
5. Opportunities - What opportunities are there to improve this activity?

Value chain links are used breakdown the analysis of a complete value chain into manageable chunks and enables focus on each part of the activity within a value chain separately.  The value of activities in the value chain needs to be established and a ranking attached to allow reference of how important the process in reference to other activities.  Metrics are used to measure the operational efficiency of a mine operations in line with overall company’s objectives and attached to an acceptable range of performance or target performance.  This enables mine management of your company to detect deviations from the plan and rapidly initiate corrective controls.

Once the Business opportunities identify areas for improvement within mine operations processes, the structured analysis of each business opportunity enables the managers of your company to correctly prioritize action based on initial cost/benefit estimates.  As improvements projects are executed additional opportunities for improving business will be identified. These opportunities need to be effectively managed and feed back into the mine operations overall change management program.

The details document for the mine value chain should document for each chain: Input to the process, Description of the process in text, tabular and graphical formats, Output of the process, the process Current Ability, the value of  Estimated benefit and Estimated Costs of the identified improvements opportunities.  A generic rating that can be modified to suit each companies tastes is established to put quantifiable measures for selecting the appropriate business improvement focus.  There more ways to select the “right” focus given costs, resources, and technology constraints but a couple of examples are discussed for illustration.

The first example is to provide ratings for each process chain current ability (performance) with lowest value should be awarded to any link where the performance of the company appears to be exceptionally weak and highest value awarded to any link where the performance of the company appears to be exceptionally strong.  Then a measure of additional benefit should indicate how much additional benefit the company could derive by being better at this particular value chain link on a scale of choice from lowest to highest.  Lastly a Cost Rating should be assigned to indicate how much it is likely to cost to improve the performance of the mine operation at this value chain where the lowest value should be assigned to value chain links where improvements will have little or zero cost to the business the highest assigned to value chains where improvements will have major cost.  To easily illustrate the summary report for this approach see an example below.

The prioritization of business improvement target processes will be determined by a committee of management and technical experts in finance, technology, mining operations/engineering, and other support divisions with the mining operations division as the owner of the business improvement programs.  It is very important that management support and commitment be obtained to initialize projects and to enable sustained results through change management.  The incremental benefits with assigned DOLLAR VALUES of identified business improvement alternatives should be documented.

Value Chain Link	Current Ability	Benefit	Costs
Process 1	6	7	5
Process 2	6	8	5
Process 3	8	4	3
Process 4	8	8	6
Process 5	5	9	6
Process 6	7	7	5
Process 7	7	8	5

Further refinement to selection process is to consider a quantifiable value of chosen projects and assess the difficulty of the business improvement projects form the perspective of people, process, and technology.  Much thought should be given to change management of culture and organization supporting the re-engineered processes or introduced technology.  Here a thorough analysis should be done to arrive at assessed DIFFICULTY values to enable focus target project.  A simple visual tool will allow quick overview to the summary of the analysis that have been done in details previously as input for decision makers.

The above methodology is adopted from Michael Porter’s value chain framework to assists mining operations business analyst in determining what to focus on to improve productivity through business improvement programs.  There are many ways to Rome and certainly this is just one method that I have learned from mining and management literature as well as practical experiences as a consultant and later as a mining operator’s employee.  Next part will discuss a novel approach to view the mining value chain from the good ol’ Discounted Cash Flow perspective, using Time and Costs of mining to identify business improvement opportunities with the objective of realizing the cash sooner to reap the Net Present Value of potential cash when the price of commodities is good.  This approach will be effective only when the company resources are aligned to support mining exploitations acceleration projects affecting people, processes, and technologies.

<!–[if !mso]> <! st1\:*{behavior:url(#ieooui) } –> This is a second article on Mine Value Chain Analysis, starting with Michael Porter's value chain framework and applying it in simpler ways and reduced scope focusing on the mine operations value chain analysis.

The value chain analysis is a concept from business management that was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance. (Porter, M. E. (1996). What is strategy? Harvard Business Review, November-December, 61-78.The value chain).  A value chain is a chain of activities for a firm operating in a specific industry. The business unit is the appropriate level for construction of a value chain, not the divisional level or corporate level. Products pass through all activities of the chain in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of added values of all activities. It is important not to mix the concept of the value chain with the costs occurring throughout the activities.  The value chain categorizes the generic value adding activities of an organization. The “primary activities” include: inbound logistics, operations (production), outbound logistics, marketing and sales (demand), and services (maintenance). The “support activities” include: administrative infrastructure management, human resource management, technology (R&D), and procurement. The costs and value drivers are identified for each value activity. (http://en.wikipedia.org/wiki/Value_chain).

Mine value chain analysis may be applied to a business unit or extend to an extended supply chain encompassing businesses such as suppliers, producers, and distributors  but a much more simplified approach for preliminary identification of business improvement opportunities is to focus on the operations  which a primary activity in the Porter value chain framework.  With this in mind, a methodology that is adapted to constraints and challenges mentioned in the first article in the author’s mine value chain analysis series is used.  What is then mine value chain analysis in this much simplified context? Mine value chain analysis provides information on gaps between potential metal in the mine plan and realized payable metal caused by constraints in value adding process.  More eloquently the mine value chain analysis may be described as below.

1. It is a rapid analysis technique that outlines of a mine core business activity.
2. It helps a mine operation produces a simple working model of the business.
3. It identifies the key steps (links) in each business activity.
4. It shows how to measure and control a mine operations value chains

Now that we have established what value chain analysis is what are the detail steps in value chain analysis?  It involves activity analysis, value analysis, and evaluation for each process in the value chain documenting the following:

1. Name - What is the name of this core business activity?
2. Description - How does this activity add value to the business
3. Value Chain Links - What are the key steps in this activity?
4. Metrics - How will you measure the success of this activity?
5. Opportunities - What opportunities are there to improve this activity?

Value chain links are used breakdown the analysis of a complete value chain into manageable chunks and enables focus on each part of the activity within a value chain separately.  The value of activities in the value chain needs to be established and a ranking attached to allow reference of how important the process in reference to other activities.  Metrics are used to measure the operational efficiency of a mine operation in line with overall company’s objectives and attached to an acceptable range of performance or target performance.  This enables mine management of your company to detect deviations from the plan and rapidly initiate corrective controls.

Once the Business opportunities identify areas for improvement within mine operations processes, the structured analysis of each business opportunity enables the managers of your company to correctly prioritize action based on initial cost/benefit estimates.  As improvements projects are executed additional opportunities for improving business will be identified. These opportunities need to be effectively managed and feed back into the mine operations overall change management program.

The details document for the mine value chain should document for each chain: Input to the process, Description of the process in text, tabular and graphical formats, Output of the process, the process Current Ability, the value of Estimated benefit and Estimated Costs of the identified improvements opportunities.  A generic rating that can be modified to suit each company’s tastes is established to put quantifiable measures for selecting the appropriate business improvement focus.  There more ways to select the “right” focus given costs, resources, and technology constraints but a couple of examples are discussed for illustration.

The first example is to provide ratings for each process chain current ability (performance) with lowest value should be awarded to any link where the performance of the company appears to be exceptionally weak and highest value awarded to any link where the performance of the company appears to be exceptionally strong.  Then a measure of additional benefit should indicate how much additional benefit the company could derive by being better at this particular value chain link on a scale of choice from lowest to highest.  Lastly a Cost Rating should be assigned to indicate how much it is likely to cost to improve the performance of the mine operation at this value chain where the lowest value should be assigned to value chain links where improvements will have little or zero cost to the business the highest assigned to value chains where improvements will have major cost.  To easily illustrate the summary report for this approach sees an example below.

The prioritization of business improvement target processes will be determined by a committee of management and technical experts in finance, technology, mining operations/engineering, and other support divisions with the mining operations division as the owner of the business improvement programs.  It is very important that management support and commitment be obtained to initialize projects and to enable sustained results through change management.  The incremental benefits with assigned DOLLAR VALUES of identified business improvement alternatives should be documented.

Value Chain Link	Current Ability	Benefit	Costs
Process 1	6	7	5
Process 2	6	8	5
Process 3	8	4	3
Process 4	8	8	6
Process 5	5	9	6
Process 6	7	7	5
Process 7	7	8	5

Further refinement to selection process is to consider a quantifiable value of chosen projects and assess the difficulty of the business improvement projects form the perspective of people, process, and technology.  Much thought should be given to change management of culture and organization supporting the re-engineered processes or introduced technology.  Here a thorough analysis should be done to arrive at assessed DIFFICULTY values to enable focus target project.  A simple visual tool will allow quick overview to the summary of the analysis that has been done in details previously as input for decision makers.

The above methodology is adapted from Michael Porter’s value chain framework to assists mining operations business analyst in determining what to focus on to improve productivity through business improvement programs.  There are many ways to Rome and certainly this is just one method that I have learned from mining and management literature as well as practical experiences as a consultant and later as a mining operator’s employee.  Next part will discuss a novel approach to view the mining value chain from the good old Discounted Cash Flow perspective, using Time and Costs of mining to identify business improvement opportunities with the objective of realizing the cash sooner to reap the Net Present Value of potential cash when the price of commodities is good.  This approach will be effective only when the company resources are aligned to support mining exploitations acceleration projects affecting people, processes, and technologies.

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