Logistics and Supply Chain in BHP Billiton - Case Study Example

LOGISTICS AND SUPPLY CHAIN IN BHP BILLITON (AUSTRALIA) Name Course Professor (Tutor) Institution Date Table of Contents Introduction 3 Corporate Organizational Structure – BHP Billiton Mine Management Company 4 Strategic Growth Priorities 5 Distribution Systems 9 Supply Chain Structure 9 Process Management Systems 10 Lean Manufacturing and Six Sigma Manufacturing 11 Forecasting and Inventory Management System 12 Conclusion 14 References 16 Introduction BHP Billiton Limited is one of the incorporated companies in Australia with its headquarters in Melbourne (BHP Billiton Limited (2010). The company was integrated way back in the year 1885 and registered in line with the then existing state laws of Australia - ABN49004028077(BHP Billiton Annual Report, 2013). Since then, the company has played a leading role in the exploitation and management of global mineral resources with presence in over 21 countries across the world. This coupled with over 130 locations and a human resource capital of at least 123,000 people effectively projects the company as a formidable force among the largest producers of minerals world over. According to BHP Billiton Profile (2014) the company has already made serious inroads in the production of oil, gas, energy coal, iron ore, copper, iron, nickel, silver, uranium and aluminum. Further, the company aims at enhancing its already unrivalled portfolio to maximize opportunities for quality growth as well as ensure continued customer satisfaction even in emerging economies. According to BHP Billiton Report (2014) the company’s major customers are the Japanese with whom a strong partnership stretches for more than 50 years ago when the first consignment of iron ore was shipped out. Jointly, BHP Billiton owns and operates high-grade manganese ores on Groote Eylandt Territory on the North. It is worth noting that since June, 2001, the company has continued to operate under what is commonly referred to as Dual Listed Company (DLC) Structure. Under this exceptional arrangement the original companies namely, BHP Billiton Limited and its sister BHP Billiton Plc execute their core mandate as a single economic unit. This entity is run by an amalgamated Board and management panel. Though BHP Billiton has also managed to ground its credit rating and plough back excess capital to the shareholders, its main objective remain the mission to reduce both capital and exploration expenditure (Macleod,2013) . Corporate Organizational Structure – BHP Billiton Mine Management Company According to Macleod (2013) the operating model adopted by BHP Billiton describes the organizational structure of the company by setting out the interrelationships between marketing, group functions and businesses. Additionally, it manages the supply chain processes from assets to the market and vice versa with regard to suppliers. I Group functions – this is under the control of the Group Management Committee with locations in Melbourne, Singapore and London. II Businesses – Operations, assets and interests are classified into five major business units. Such units are iron ore, copper, aluminium, coal and manganese III Marketing – this department takes care of product purchases as well as the acquisition of the major raw materials. Strategic Growth Priorities To sustain the operations of the company and by extension see to it that the company executes its strategy, a number of priorities have been singled out and subsequently executed (BHP Billiton Annual Report, 2013). These priorities combine both the corporate social responsibility and corporate growth strategies. First, over time, the company has sought to fashion itself as a more prolific organization by simplifying its business model in a manner that promotes capital efficiency. The simplicity has been realized through reorganization of the management structure and provision for a direct communication line between the company’s businesses and the Chief Executive Officer. According to BHP Billiton Limited (2016) report such an initiative has helped foster a culture of productivity among the people by imparting the right on-job skills. In addition, the company has sought to continually improve its productivity and sustain competitiveness in the global economy. Over time, the report observes, hard work has been delegated to the machinery asset as the workforce slowly but steadily changed tune and started to work smart in line with the company’s drive to expand its scale of production. Employees have had a better approach in executing their every-day activities and consequently helped maximize the value for shareholders and capital assets. Further, the BHP Billiton Group has chosen to deliberately spend on high-return development ventures throughout the economic phase as part of the wider capital management priority (BHP Billiton Annual Report, 2014). The company has also managed to effectively ground its credit rating and plough back excess capital to the shareholders. To augment this, the group’s objective has been to reduce both capital and exploration expenditure considerably from the whooping US$21.7 billion in the 2013 financial year to US$10.2 billion for the FY2016.The company projects the reduced capital expenditure to boost its quest to achieve a more sustainable growth margin on its incremental investments (BHP Billiton Limited, 2014). Nevertheless, BHP Billiton group has also gone ahead to reinvent the management of its portfolio as it shifts focus and concentration of its efforts towards world-class sinks. It is in this sector where the company has easily continued to enjoy economies of scale unparalleled competitive advantage against the backdrop of harsh global economy (BHP Billiton Limited, 2014). The shift has seen the group narrow down to Iron Ore, coal, Petroleum and Copper for optimum diversification to be realized. Since most of the company’s projects are naturally Brownfield, it has been possible to significantly lower the associated risks. Owing to the successful implementation of divestment program whose total transactions amounted to US$6.5 billion, shareholders, in 2010 overwhelmingly embraced a proposed restructure in the operations of the company’s businesses (BHP Billiton Annual Report, 2013). Besides, BHP Billiton, has trained its eyes on improving and integrating further the prescribed labor relations in its operations to align with the requirements of the world’s Labor unions (BHP Billiton Limited, 2014). By so doing, the group, aimed at addressing the issues that were occasionally raised by worker’s unions touching on individuals’ rights and responsibilities. The company was able to craft workable and realistic collective bargaining agreements to safeguard the rights as well as the welfare of its employees. This was made possible by engaging directly with the respective unions. All prospective employees were also to be made aware of their right to choose a union of their choice and even the individual or collective work arrangements at their disposal before joining the company as noted by Heslin (2008). Another critical aspect that the company has already warmed up to, according to Heslin (2008), is embracing selective acquisitions and divestments. With a close reference to the performance data dated back to the year 2009, in which the company divested from Yabulu Nickel & BMS Suriname with overwhelming positive results, similar decisions have in the recent past been made and implemented. Though in March 2010, the company completed the acquisition process of Athabasca Potash Company, no substantial material impacts have been made thus far as its core activities are constrained to practicability studies and examination. However, this hasn’t been a deterrent to the group especially bearing in mind that, BHP Billiton, has kept its eyes trained on long-term investments that have the capacity to offer value to the shareholders (Samy, 2009). Moreover, the company has considered its level of engagement with governments and regulators in the countries of operation –starting from the local, to regional, then national and even international levels as circumstances have occasionally demanded (Samy, 2009). The group of stakeholders in the company appears to have had a keen interest in regulatory and policy frameworks at all these levels in the life cycle of any project making use of natural resources. Of significance also, has been the access to the market, stewardship of the product, performance of the environment, and social policy besides the economic regimes pertinent to the natural resources mining sector. According to Samy (2009) BHP Billiton Limited has already articulated its views to various levels of governments on matters that affect the interests of the group and its operations. In this, the company was after conducting its affairs in a manner that upholds the highest principles of ethics in compliance with the rule of law and devoid of political coercions. Being the large global organization, that BHP Billiton is, the company has extended its tentacles to not only boost local enterprises but also regional businesses by enhancing their capacity to develop (BHP Billiton Annual Report, 2013). It is in this same vein, that the company consistently supported long-term growth of its suppliers from within the respective host communities. No doubt, the projected and far-reaching economic involvement through capacity building has brought about the much needed entrepreneurial revolution. Moreover, the company’s procurement plans have been realigned to provide a chance for financial participation of locally incubated small-to-medium ventures. As expected, this measure has bridged the discrepancy between capacity of the locals to deliver and the company’s supply requirements (Brenna, 2014). Importantly, the contribution to the livelihoods of the locals has been enhanced and so has been the license of the company to continue with its operations (Bryman & Bell, 2007). According to Brenna (2014) various mentorship and tutoring programs by BHP Billiton Company are well underway to improve access to quality education among the host communities. One of the successful initiatives thus far has been, El Plan de Apoyo Educativo, through which thousands of students have been offered scholarships to pursue secondary and also training in tertiary institutions in Colombia. The educational plan initiatives are wired to benefit the low-income and vulnerable backgrounds in the company’s places of operation. Such programs have been extended and successfully implemented in various continents including Africa where the company has made inroads to South Africa through Hotazel Learner Incubator Program (Brenna, 2014). One key area in making sure that the company lives up to its commitments has been through deliberate attempts to not only improve but also guarantee the health and safety of the people involved in its operations. According to Heslin (2009), BHP Billiton Company envisions making this component a reality by consistently ensuring that the working environment of the employees is kept free from all forms of potential causes of injuries or illnesses. To stamp the company’s commitment to healthcare, BHP Billiton has offered to train healthcare staff in all countries from which it operates-this is meant to suppress cases of maternal and child health issues. In partnership with an Australian based society, Royal Life Saving, the company has ensured water safety through a programme dubbed “keep watch”. Further, the company has moved to identify and manage all forms of material risks, geographical location of the workers and surrounding communities notwithstanding. According to Mac Leo (2006), the company has also managed to prop up sustainable progress of its host communities. To guarantee this, the group had to carefully revise its operations to provide for long-term and amiable relationships with the hosting people. Through its social arm, Sowing Seeds of Success, the company managed to re-establish biodiversity values among the people thereby promoting conservation of ecosystems. The bottom line of this undertaking was to make a constructive contribution in the lives of not only the individuals who reside near the company’s location of operations but also to the society at large. As component of this noble commitment, BHP Billiton has, over the years, on its own free will channeled about one per cent (1%) of the gross pre-tax profit to community projects geared towards enhancing the quality of life. The company has established a joint initiative with the local community christened-Arid Recovery –to restore the productivity of lands within dry zones in Australia. Further, the group has been engaging the locals in identifying the best way through which the stalled projects can be implemented to the fullest and in the best interest of all the stakeholders (BHP Billiton Annual Report, 2013). Distribution Systems The BHP Billiton Company has sought to establish one coherent network out of the existing two separate distribution chains (BHP Billiton Review, 2016). The report explains that this will be key now that the company is undergoing robust growth and there is need for centralized product distribution network. Further, if lean Six Sigma production processes are to take root as envisaged by the management during the 2015 financial year, operating costs along the distribution chains, as occasioned by uncoordinated shipment, will be considerably reduced. At the same time the company will seek to biotech processes using table expertise to facilitate quick processing of minerals at the proposed subsidiaries (Mac Leo, 2006). Supply Chain Structure In the quest to stimulate the creation of formidable suppliers, BHP Billiton, in close association with Codelco, are already in the process of developing a World-class program for their suppliers targeting a minimum of 250members by the year 2020 (Ferdousi & Ahmed, 2009). Being a two-pronged approach, the company will start by identifying and presenting an operational challenge to its suppliers rather than settling on the existing and standardized solutions. Secondly, the suppliers will be granted access to advice from senior experts so as to aid ground their operations. The good thing with the joint approach is that the quest for innovation will be articulated by a source whose purchasing power is strange (BHP Billiton Review, 2016) - this is as opposed to the current programs that are centered on the supply side of the innovation process. Consequently, the use of resources will not only be efficient but the process will be better aligned with the prevailing market needs. Moreover, the critical element of this new program will lie in the changes effected by BHP Billiton on some of the internal processes like procurement (Gemmell, 2012). As at December 2012, the program comprised of 5,000 employees and 36 suppliers with a whopping US$ 400 million in sales only. In addition, the program’s Net Present Value stood at US$ 121 million being direct savings in input costs for BHP Billiton. On the other hand, the suppliers will stand to benefit from not only the increased efficiency and innovation but also the new income generating opportunities and greater access to diversified markets and finance. Faced with the increased demand for its minerals, The BHP Billiton group outsourced the services of BedRockMg to develop a formidable IT strategy that would effectively serve its integrated and growing chain of both suppliers and customers (Saunders et al., 2009). According to Xie (2012) the aim of BHP Billiton was to have in place simplified supply chains on basis of cost optimization, speed of delivery and product choices that maximized values to respective customers, while, at the same time, aligning all internal functions to adequately execute against the existing vision. This was necessitated by the upward trends across the global markets with regard to iron ore demands. The BedRockMg group adopted and automated an end to end supply system that was meant to transform the business culture at BHP Billiton. Additionally, the BedRockMg group came up with an IT Operating Model that sought to identify and establish a future for IT in the mining industry at large. Luckily, the ITOM methodology seemed to set out improvement priorities against the then expected IT roles by way of exposing inherent capability gaps. Through a collaborative approach involving the BHP Billiton human resource department on one hand and BedRockMg IT leadership team, the ball was set rolling for the creation of a robust organizational model in line with ITOM. The new model included accountability maps detailed departmental processes as well as role profiles for the different teams. However, for smooth transition in automating the supply chain solution, a detailed operating model will have to be included and tailored to suit the diversity reflected by the teams involved. Governance as well as change regimes will also be key to take care of the different stakeholders regardless of the time zone across the globe. Arguably, a common point of accountability will consequently be established incorporating all key IT capabilities. As a result, BHP Billiton will boast of formidable support models that integrate multi-vendor supply chains. Process Management Systems Production processes remain part and parcel of any manufacturing entity. The complex web involves heavy logistical work including but not limited to shipping of raw materials, distribution of finished products and even managing the overall workforce (BHP Billiton, 2012). It therefore, follows that optimum utilization of the limited resources cannot be easily wished away. Consequently, the concept of lean and Six Sigma manufacturing comes in here. According to Folk Group (2009) the understanding of lean production processes among Australian mining companies has been that the individual lean production blocks can be implemented independently but still achieve positive results. Lean Manufacturing and Six Sigma Manufacturing According to the National Institute of Standard lean is used to refer to the systematic approach involving the conscientious identification and elimination of waste by way of ensuring continuous improvement of processes so as to optimize the degree of product perfection (Kilpatrick, 2013). On the other hand, the Folk Group (2009) describes the Six Sigma as a technique geared towards quality improvement which was a brainchild of the Motorola company developed way back in 1986. BHP Billiton applies both processes in management of its production systems aimed at streamlining the manufacturing procedures by eliminating any possible defects during the production (BHP Billiton, 2012).The Six Sigma process is characterized by the incorporation of appointed champions who take care of systematic process implementation across the organization. Moreover, the Six Sigma process is characterized by in-house coaches typically dedicated, on full time basis, to process implementation as well as other responsibilities (Brennan et al., 2014). The authors further explain that the Six Sigma principle incorporates two approaches – DMAIC and DMADV. DMAIC seeks to define the current processes as well as the high level goals for a particular project; measure and determine the key features of the existing processes through the collection and analysis of the relevant data to ensure that all the relevant factors are put into careful consideration; process improvement on basis of data analysis results and finally careful process control to ensure that any deviations are corrected early enough before possible defects occur. On the other hand, DMADV seeks to first define the goals for a particular design putting into consideration enterprise strategy and customer demands; secondly, identify and measure critical characteristics that take care of both product capabilities as well as quality; thirdly, develop and analyze design alternatives as a way of product improvement; and finally review and verification of design details. In the same vein, lean manufacturing seeks to eliminate all identifiable sources of unwarranted wastage in the production process and hence guarantee a quality product for less work (Folk Group, 2009). However, the group of authors also cautions against the application of lean principles in organizations as a whole advising that there is need to adopt such policies cross-functionally. A combination of various concepts commonly referred to as lean production blocks, as applied by BHP Billiton, are preferred by most practitioners who opine that stand-alone tactics are never effective and may even be counter-productive if poorly managed. However, it’s important to note that execution of the so called lean production principles across the manufacturing industries in the world remains an uphill task to many companies (Ferdousi & Ahmed, 2009). Though the concepts are much touted as among the best in matching flexibility and customer focus, most companies remain at cross roads when it comes to determining the applicable adaptive policies in management of production processes (Sanders et al., 2011). It is for this reason that the application of lean and Six Sigma production processes should be applied as a package, if success is to be realized. Forecasting and Inventory Management System According to BHP Billiton Operational Review (2015) increased production by the organization considerably supported the strong performance witnessed across operated assets over the period, 2015. It is for this reason that the production guidance for the new year 2016 was maintained for Copper, Coal and Petroleum. Besides, the report observes that 4 major projects were also tracked and developed according to plan with the Western Flank-A getting completed ahead of the schedule and also under budget. Further, the report gives the production figures for the year 2015 as well as the 2016 projections as follows: a) Petroleum Production – production volumes for the year 2015 reduced by 5% to 124.7MMboe but the 2016 production is poised to hit at least 237MMboe owing to expected divestment of gas businesses in Pakistan. b) Natural Gas Liquids and Crude Oil – Their production for the year ended 2015 was 60.5MMboe, a three percent decline compared to the previous year. However, the onshore liquid volumes grew by 8% for the same year translating to 26.4MMboe.This was attributed to the overall rise in liquid production from Permian and Black Hawk. Owing to reduced development activities for the year 2016, the liquid volumes form these fields are expected to also dip considerably. c) Natural Gas – Its production for the last year, 2015, reportedly declined by 7% to 386bcf.The decline is a reflection of reduction in gas volumes owing to the deferment of development activities in pursuit of long-term value. It is estimated that, capital, whose conventional expenditure is US$ 1.5 Billion will be required for the 2016 financial year. d) Copper – According to the report, the overall copper production for the year 2015 decreased by 6% to 762Kt though the 2016 projection stands at 1.5Mt.This is a reflection of the combined production from all the existing copper mines. e) Iron Ore – The total iron ore production for the year 2015 reportedly increased by about 4% in the year 2015 giving a cumulative figure of 118Mt. However, the 2016 financial year production is poised to take a dip of about 4% owing to the postponement of Samarco operations – one of the major suppliers of the iron ore for the last three years. f) Metallurgical Coal – its production for the year 2015 is reported to have decreased by 3% to 21Mt but the 2016 financial year guidance stands at 40Mt. g) Energy Coal – A 3% decline in energy coal production was recorded for the year 2015 translating to generation of only 19Mt. However, the 2016 guidance for production stands at 40Mt. The reduced production, 1n 2015, was attributed to the heavy rainfall that pounded energy coal from New South Wales.Its important to point out that the 16% increase at Navajo Wells, linked to high customer demands, was offset by low customer requirements in San Juan production. h) Nickel – 37.3Kt was the recorded production amount, being a 23% decrease from the previous year, 2015. The declines were a reflection of planned outages at Kimwanana Refinery and Kargoorlie smelters during the last quarter of 2015. According to BHP Billiton Review (2016) the management of BHP Billiton expects the 2016 profits to include the additional levies US$ (300-450) million. These charges will be attributable to redundancies associated with business simplification; terminations of onshore rigs as well as closure of Crinum Coal Mines (Oniqua Intelligent MRO, 2015). The report also notes that the price of 268Kt of exceptional copper sales will be determined during the rest of the financial year, 2016. Conclusion In sum, the company’s stakeholders group will have to keep a keen eye on an assorted range of items relating to the company’s sectors of operation especially on environmental legislation, safety and health standards required - the fundamental aspects on which it’s continued existence depend. It would be paramount that the company seeks to ensure transparency in the management of its supply chain programs so that the benefits of centralized systems are not only felt but also enjoyed by the different BHP Billiton stakeholder as earlier envisioned. BHP Billiton, as an organization, should also endeavor to engage both commodity –specific and sector-oriented associations in pursuit of the objectives contained in its charter. In addressing global challenges like green house gas emissions it will be prudent for the company to partner with like-minded parties to improve on its margin of success and sustain the noble scheme. Further, the group can also seek to have representatives on specific decision-making organs across its areas or operations. Such a move will be particularly important for projects involving industry relations at both national and international levels. References BHP Billiton (2010). BHP Billiton: Proposed DLC Merger, Explanatory Memorandum. 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