Asset Optimisation (AO) is a structured approach to optimise business operations by identifying, defining, planning and implementing initiatives that will unleash significant value improvement potential from current assets.
This value improvement could come from, for example, increased productivity, enhanced efficiency and capital spend optimisation. AO considers all aspects of the mining value chain from ore resources and reserves to the marketplace in pursuit of value adding opportunities.
The AO strategy aims to improve the value performance of assets and drive Anglo American towards best in class by adopting a systematic internal and external benchmarking approach, enabling an understanding and quantification of the 'value-at-stake gap' between current assets and processes relative to best practice.
The AO programme will be supported by a fully integrated and auditable project management and value tracking system. Successes to date and future targets are discussed in the Best in class section of this report.
There are three elements which form the Group's approach to AO.
Structured asset optimisation (SAO) identifies the key value levers of the business by analysing the whole value chain of a process, from ore in the ground to the markets for products. Supported by the benchmarking process, such levers allow for the assessment of the value at stake which can be unlocked through deliberate intervention. An integral aspect of the SAO programme, aligned with the 'One Anglo' philosophy, is the development of systems and structures which will allow for the rapid cross-divisional sharing of identified opportunities and best practices.
A number of significant value adding opportunities in this top-down process have been identified and are at various stages of deployment, from project definition to value delivery. Across the Group, improvements are being made in several areas, notably longwall and continuous miner productivity in Coal's operations; mineral recovery projects at the Platinum and Base Metal operations; and in outbound logistics at Ferrous Metals.
Continuous improvement (CI) focuses on the generation of value adding ideas from all levels within the organisation, as well as finding new ways to do things quicker and more efficiently. CI applies to everything from processes to projects and is typically an enabler for the SAO programme.
The Group's employees have identified many CI opportunities. Those already adding value to operations are in the fields of conveyor availability, fuel management, tyre life and reagent addition initiatives in all business units. All ideas, big and small, are evaluated for their value adding potential, and where value exists, are implemented.
The 'One Anglo' Supply Chain is a procurement project which focuses on working more closely as a single, integrated 'One Anglo' organisation and is tasked with managing the organisation's spend in a more coordinated manner.
Work being undertaken under each of the AO categories is illustrated below by reference to specific projects.
In February 2008, the Group set out a programme aimed at transforming Anglo American's Procurement and Supply Chain operations globally, with the ambitious, but achievable, target to become the industry leader and global benchmark for supply chain value creation. At the heart of this strategy is working more closely together as a single, integrated organisation.
The new 'One Anglo' Supply Chain function will consolidate expenditure to manage it in a more strategic, holistic manner in order to deliver an overall expenditure reduction of 10% and benefits of $1 billion by 2011. A team of global, cross-functional specialists were mobilised into Strategic Sourcing teams early in 2008 and are on track to deliver the $1 billion in committed value by 2011.
There are three elements to the transformation plan within the 'One Anglo' Supply Chain:
The Strategic Sourcing teams are making good progress and have started a series of initiatives in 2008 relating to specific categories of spend or commodity. Significant benefits have already been achieved, with Anglo American's Supply Chain organisations realising over $200 million of benefits in 2008.
Under the AO umbrella, value is being achieved as the collective skills and strengths of the Anglo American Group are brought together. The Company's suppliers also play a vital role in this process. Accordingly, teams are encouraged to tap into the capabilities of the supplier base, recognising expertise and collaborating with suppliers to identify value and assist with initiative implementation.
Initially the teams focused on nine categories including heavy mining equipment, tyres, fuels and lubricants, explosives and temporary labour. Category strategies have been completed and over 90 value initiatives identified, of which the top 20 represent 80% of the expected value. These initiatives are both commercial and technical in nature, including operational improvements as well as contracting benefits that will be realised over the short, medium and long term.
A further ten categories are now being reviewed for various short to medium term opportunities. These include continuous mining equipment, draglines, transport and logistics and structural steel. Teams are progressing well on category analysis and shaping value creation strategies.
The implementation of these initiatives will address more than 40% of total spend and those started during 2008 and through 2009 are expected to realise value in line with the Group's targets.
Although the present economic environment has created challenges for all of the Group's operations, additional sourcing opportunities are arising as a result of changing conditions and price declines for many commodities. Anglo American continues to work with its suppliers to ensure that reductions in many input costs are quickly reflected in its purchasing price structures. Furthermore, global demand has reduced for some strategic categories such as heavy mining equipment, tyres and construction services, alleviating the recent security of supply concerns. This provides a potential opportunity to enter into longer term agreements with key suppliers.
Closer engagement with suppliers will continue as a priority through 2009. In November 2008, the Group's first annual global conference for its high performing supplier partners took place and this will become an annual event.
2008 was a strong year in terms of value delivery. Results to date have been encouraging and further categories are due to be reviewed for value delivery potential in the second quarter of 2009, covering a further 25% of total expenditure.
The Group's financial performance in the year and the KPIs used to measure it are discussed in the Group financial performance section.
A global strategic plan for the temporary labour services category was completed in 2008. Its first benefit initiatives, regional tenders in Australia and South Africa, were recently concluded and will deliver significant value across the Group. Suppliers were initially selected based on best practice qualitative criteria with a focus on their capability to improve business processes and maintain professional service levels. This approach aimed to facilitate sustainable and strategic supplier partnering in an effort to improve demand forecasting and efficient resourcing within the category. Once the desired qualitative criteria were satisfied, commercial considerations were negotiated. Teamwork between HR management at mine sites, business unit supply chain and the strategic sourcing team was integral in achieving these significant benefits. In addition to achieving cost savings, on-site employment conditions have been standardised and improved, while suppliers have potential for increased business.
The fabricated structural steel category represents approximately 5% of the total invested capital value of Anglo American’s expansion projects. Recent reductions in raw steel commodity prices and indirect fabrication and transport costs are being realised for current projects where the negotiation of prices has led to a reduction of between 15% and 20%. Aggregating demand across Anglo American’s businesses and regions has significant potential to positively impact the project value far beyond the purchase price of the fabricated steel.
An additional benefit realised is the application of a consistent review of the material standards to enable lower cost country sourcing supply. Low cost country sourcing represents a potential purchase saving of up to 35%.
The strategy is to provide selected suppliers better assurance of demand to support the future security of supply in each key region of operation and to drive savings from consolidated demand and global competition.