The importance of Enterprise Resource Planning (ERP) software in the mining industry is unquestionable. Once simply an accounting transaction engine and a way to collect data for the production of statutory reports, ERP has evolved into an essential part of the mining industry, improving decision making, bringing visibility of key indicators to the surface, and helping businesses improve their bottom line. This is evident through the industry wide implementation of software solutions, as well as market indicators such as the dramatic increase in demand for experienced ERP professionals. ERP has become an accepted requirement of mining companies at any phase in the organizational development life cycle.

Mining is a diverse industry due to the variety of minerals produced, geographical locations, globalization, production methodology and the varied functions of the organizations. ERP has evolved to provide endlessly valuable insight into the business.

An effective use of an ERP, across any of these disciplines, can have a direct impact upon the financial well being of an organization. While an ERP system may not ultimately turn a company’s fortunes around, it can, if implemented correctly, provide a return on investment that will dramatically improve the performance of an organization as opposed to one without ERP.

With the influx of ERP packages marketed to the mining industry, it is difficult for both emerging and established companies to decide on the most suitable software package. Emerging organizations typically may not be exposed to industry best practices; while established companies may have a legacy of an existing selection process based on personal preference and opinion. Regardless, achieving any kind of return on an outlay for software is reliant on the following three processes:

• Selection of a suitable ERP package

• Effective implementation

• Ongoing development and alignment of the ERP to the business

Each of these processes requires significant planning and discussion. Prior to implementation of any process, it is important to understand the return on investment (ROI) behind the software. Although

this is common practice elsewhere, the ERP industry does not provide much detail on the return.

While the ROI should be the first criteria the organization considers, it is often misunderstood as a measure for ERP’s effectiveness. The business needs to evaluate whether the ERP will add both short and long term value to its operations. Evaluating how an ERP can translate into an ROI is essential for successfully streamlining and improving business operations.

Through client opinion, interviews, projects and industry best practice, ROI for mining organizations comes from a range of sources that are best broken down into the following broad categories:

1. Outbound Demand Planning - is managing the inventory that leaves the warehouse, bound for internal use; typically critical spares, consumables, personal protective equipment (PPE), and anything used in the ongoing operation of the mine site.

2. Inbound Demand Planning - procurement and replenishment process of inventory coming into the mine’s warehouse.

3. Labor Management and Scheduling - managing labor head count and efficiency to maximize downtime and cost.

4. Real Time Knowledge - gathering accurate information quickly is critical to the decision making process and improving the business.

5. Accountable Management - understanding the remote nature of mining, having an accountable management of the operation is essential to meeting targets.

Outbound Demand Planning

The internal use of inventory is a major component driving costs - primarily from the large quantity of supplies and materials held in mine warehouses. Managing how a mine allocates and commits the inventory is critical for effectively running the plant and fleet associated with the mine. Despite the advances in technology, a number of mining organizations still monitor inventory requests and allocations using a “paper-based” or “honour” system. Implementing an efficient inventory control system, allows mines a greater understanding of their real usage.

TRANSLATING ERP INTO ROI FOR MINING COMPANIES

PARTNER Marc Harris, Partner 905 270 7770 Ext. 5462 mharris@bdo.ca

AUTHOR Jarrad Sonnenberg, Consultant 905 270 7700 Ext. 2126 jsonnenberg@bdo.ca

www.bdo.ca/solutions

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Given the significant values of the inventory held, and issues facing most mining warehouses, building a seamless and logical process for tracking internal inventory is essential for g the financial health of an organization.

A best practice life cycle is summarized below, with each step of the process contributing to the overall improvement of the ROI:

1. Departments who have a reliance on store inventory (Environmental, Maintenance, Mobile Maintenance, Construction/Capital Development, Geology, Drilling, Blasting) should request materials on a picking slip request. The request should include the inventory item required, where the item will be used, a piece of equipment, a General Ledger (GL) code, a capital project, etc. This immediately recognizes that there is a demand for the specified inventory to allow the Supply Chain department to plan for its replenishment and issue.

2. Picking slip requests should go through an internal approval process which allows the organization to prevent over commitment of inventory items and minimize any abuse of inventory.

3. Once the picking slip request is approved and categorized as such, the warehouse is notified of the demand for inventory. The Procurement department can use this approval to separate actual demand from potential demand.

4. Inventory is set aside for future use, and marked as committed. The Purchasing department is notified, and accountants know what accruals may be necessary.

5. Once the item is delivered/picked up, the inventory is updated to note it is no longer in the store, and the necessary costing posted to the GL immediately for accurate inventory on hand and financial standing reporting.

The implementation of this process can only be achieved through ERP. There is a distinct relationship between managing the amount of inventory used to reducing the outward flow of cash and eliminating the abuse of inventory.

Inbound Demand Planning

The second step in the process of demand planning is fulfilling all the necessary internal demands by going to an external vendor and procuring the requirements. It is essential that the replenishment process is swiftly carried out to make use of assisted purchasing quantities and automatic order creation. Mines can use an ERP system to not only help understand how much to order, but also to determine why a certain quantity has been suggested. Downtime related to supply chain inefficiency is significantly reduced in all of the subject user group operations, because the ERP system is being used to help handle the demands of procurement.

Inventory catalogs can range from 15,000 to 100,000 line items from thousands of vendors. The time it would take to accurately analyze this information manually would significantly delay supply chain processes. In addition to the huge amounts of data, this type of information has the ability to change at a moment’s notice if there is an urgent requirement to fix a critically broken piece of equipment or carry out additional shutdown maintenance. The implementation of the ERP software allows the mine to react quickly to such changes in demand and recalculate suggested order quantities and prices, improving the supply chain process. Each change to the ERP’s data flows through to the replenishment calculations so that ordering is up to the minute.

Calculating replenishment requirements includes a number of factors:

• Size of shipments

• Speed of shipments

• Supplier average lead time

• Suggested buying quantity for economy reasons such as bulk discount

• Shipment cost/method

• Minimum/maximum recommended inventory on hand

• Average demand for the inventory item

• Seasonal usage

• Inventory already on order/in transit

Each of these factors allows for the purchase replenishment automation tool to suggest to the end user the quantity of each item to be ordered, and the vendor to be used for the replenishment of the items. In doing so, an inventory catalog of thousands of reorder items can be suggested, modified and approved, and loaded into bulk purchase orders in a matter of hours.

Direct financial benefits for streamlining:

• Force users into ordering based on standardized rules on demand and lead times.

• Order inventory so that required items are readily available to keep the mine operating.

• Replenish critical spares so that production is not halted.

• Keep artisanal labor busy with required materials to prevent labor downtime.

• Allow the Procurement staff to spend less time managing the entry of orders, and more time managing the performance of vendors.

Given the significant values of the inventory held, and issues facing most mining warehouses, building a seamless and logical process for tracking internal inventory is essential for the financial health of an organization.

Translating ERP into ROI for Mining Companies | BDO Canada

A typical process for the replenishment of inventory in a structured ERP environment:

1. Parameters are set up at the time of implementation, suitable to the mine site’s replenishment road map. All mine sites are different, especially if a mine site location is in a remote area, out of range of the expedited supply chain. These parameters set out the guidelines for the system to automatically generate purchase order demand.

2. A regular replenishment report is processed, which can be run with defined parameters for any dynamic requirements, such as ordering items that are at critical levels of inventory, ordering based on shipment method, or changing the types of items ordered. Running this process on a regular daily or weekly basis allows demand to be picked up as it arises.

3. Orders are consolidated by supplier, and modifications to system suggestions can be made as needed. This is essential if the price is not as important as the lead time, or based on supplier availability.

4. Orders are placed electronically to expedite order placement. This saves significant time in not only the supplier commencing to ship the order, but also minimizes handling time and reduces the need for over sized procurement teams.

Labor Management and Scheduling – From a Maintenance Perspective

A key for mine operations, especially those working on a fly-in and fly-out basis, is determining adequate staffing levels. Not only is this relevant from a cost perspective, but also to satisfy the need to keep a plant running with no downtime. Generating a preventative maintenance plan, including all labor types and estimated job times, allows a mine to forecast their short and long term commitment to labor identifying existing shortfalls and surpluses. Such planning helps mine sites manage their labor, and assists maintenance departments in forecasting, budgeting and accurate reporting to finance users.

The process of managing labor starts with understanding what is actually required of the labor force. A Plant Maintenance department is responsible for the preventative and retrospective maintenance and repairs for the mine site’s fleet of mobile and fixed plants. Visualizing the work load of a maintenance team is next to impossible without an ERP package. Typically, an ERP implementation will house:

• Plant items to be maintained

• Required PM Tasks / scheduled jobs

• Labor types

• Condition monitoring (monitoring point integration for meters and gauges)

Mapping out the entire plant structure provides the visibility over all of the equipment that is required to be maintained for the ongoing operation of the mine. If maintenance is neglected, this directly impacts the ability of a mine to haul, or process ore. In order to ensure production is not impeded due to a lack of preventative maintenance, the ERP software allows maintenance departments to schedule work at the level of each employee and be aware of:

• Periods of time where employees are under / over utilized

• Equipment that is due for service

• Documented cases of machine failure to improve the reliability of the fleet

• Trend analysis on where the plant can be improved

Without an ERP, there is no accountability on the maintenance department to keep up with the demands of running a plant without fail, and more importantly, the information is not accessible by the other departments of the organization. It is absolutely essential that the maintenance information is visible to other departments to minimize risk on equipment that is occupationally unsafe and prone to downtime, and to review any inventory items needed for purchasing, forecasting, and running a costing analysis. ERP ensures transparency and accountability, providing the Maintenance department with the necessary tools to keep mine sites running at optimum performance and identify shortfalls in their maintenance plan before they arise.

A halt to production is likely to be more dangerous to the bottom line than cost saving, so it is essential to consider maintenance as part of the ROI plan for an ERP system.

Real Time Knowledge

One of the most significant changes to ERP systems in the last ten years has been the ability to transform a transaction engine into a reporting tool. An integrated Business Intelligence (BI) solution provides users with real time information anywhere in the world from any internet accessible device. The reporting tool has helped managers working offsite, without a connection to their ERP, make decisions and understand the key performance indicators of the organization. An integrated BI tool is becoming a foundation level must-have for all clients.

By providing real time information, an intelligent ERP system generates the necessary insight needed to operate on a dynamic basis.

Such knowledge can be obtained through a number of ways:

• Automated alerts that notify specific users of events - A recent example included a client that needed to see when shipments are processed through customs to track the availability of incoming supply chain

Translating ERP into ROI for Mining Companies | BDO Canada

deliveries to the mine. Through the automated alerts via third party logistics integration, the client was able to determine where risks exist for goods that were not meeting delivery deadlines.

• Real Time Reporting Portal - Following the example above, in case a shipment is delayed, dashboards can be integrated into an ERP user’s smart device, browser window or ERP pane to provide complete visibility over what items may not arrive as expected. The organization can use this data to source critical items locally or through expedited air freight.

This real time knowledge allows mining companies to operate with dynamically to meet its requirements. The examples of real time knowledge benefits are endless. Using real time knowledge to improve the reaction speed of users makes it easier for companies to prevent high risk scenarios such as the example above of critical items not reaching the mine in sufficient time, projects going over budget or time-sensitive orders that require approval.

Accountable Management

Navigating the development of a mining organization’s life cycle can be difficult. A well-planned ERP software implementation can evolve with the mine, providing management accountability throughout the mine’s progression. Costs can accumulate in different ways, especially for a mining organization, and circumstances like fluctuating commodity price require companies to see value in all exercises.

Project Costing and GL are two standard ERP modules that integrate to form a budgeting tool that allows the Finance department to keep managers at any level accountable for the accumulation of cost. Being able to see costs at the level of a specific project, or at the level of a department cost center, has become key in knowing where budget variances exist and who is responsible. This driver is the underlining strength of an ERP system.

It is simply not effective enough to manage budget on a monthly period at the level of a GL code. This means that a Trial Balance is not an effective tool for promoting accountability among the organization’s managers; using an ERP allows CFO’s to budget at any level.

A great example is the Construction (Work) in Progress balance we find for mining organizations in the process of capitalizing development. Typically, the GL would summarize this into one line, but by linking the GL to a Project Costing ledger, it is possible then to break that one line into projects for each construction project and then even break each one of those projects into phases. By doing so, the ERP can be set up to mirror the organizational responsibility structure so that project managers oversee each of their projects at a suitable level and can be made accountable for their budgets. It is essential that such integration exists in the administrative function of the mining industry so that employees can be given a chance to succeed. This also provides CFOs faith that their management is operating in a uniform manner when it comes to budget management.

Other Considerations

Customization

Organizations should embrace customization as it is a continual investment into the ERP software. It is rare that software can satisfy 100% of the organization’s needs. The proper methodology would be to perform a cost benefit analysis to determine the overall benefit of customizing the software. The right modifications can add significant value to the effectiveness of the ERP system. A common example seen in the ERP industry is the need to integrate to 3rd party vendors like shipping companies. The same evaluation process, performed at the time of implementing and selecting an ERP solution, should be applied

to customization projects to ensure the same value is added at each step of an ERP development life cycle. Whether a differentiation exists due to a geographic location or a mining methodology, it is common for organizations to customize their ERP to ensure its full functionality.

User buy-in

Involving multiple segments of the business in the selection and deployment of the ERP is necessary for ensuring a successful implementation and in maximizing ROI. There is a common misconception that ERP software falls into the management of Information Technology (IT), which can be problematic unless the IT personnel have ERP exposure. ERP implementation and selection is most effective when all major business units are able to contribute. As discussed earlier, ROI is achieved in all major departments of business, including Supply Chain, Maintenance and Finance, and as a result each should be equally represented in the selection. If an ERP package does not provide the ability to procure inventory in an efficient manner, then a full ROI will not be realized. The Supply Chain Manager would be in best position to analyze whether this is the case or not.

Fraudulent operating environments

A significant number of clients that have discussed the topic of ROI were concerned with minimizing fraud and improving the fundamental controls within the business. ERP allows these businesses to set up control mechanisms to be aware of damaging behavior. An example of this would be a client that managed to catch an attempt to change a vendor’s bank details to a fraud based account prior to a large EFT run. Additional controls include the need to segregate functions like entering an invoice and paying an invoice or entering a PO and entering an invoice. The installation of a robust and secure ERP system may have a positive impact on the bottom line of businesses that are continually experiencing fraud.

Conclusion

The progression of the mining industry coupled with the strength of ERP software in collecting and managing data volumes makes ERP an essential tool for business. The evidence supports that ERP has significant potential in providing ROI, while also providing control and visibility to unify operations. In an industry where building shareholder value is critical, it is clear that ERP has become an accepted requirement of mining companies at any phase in the organizational development life cycle.

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Translating ERP into ROI for Mining Companies | BDO Canada

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