BHP Billiton – Remotely Resourcing the Future
Technology development as the key driver of continuous productivity improvement for the world’s largest miner
Created through the 2001 merger between BHP Limited and Billiton, BHP Billiton (BHP) is the world’s largest mining company.
Business model
BHP’s business strategy is aimed at owning and operating large mineral assets that are diversified by commodity type, geography and extraction method. Consistent with pursuing its business strategy, BHP has established a business model that develops core competencies and expertise in evaluating, developing, extracting and selling natural resources.
Winning strategy: continuous productivity improvement
BHP is a very asset intensive business and its success is dependent on reliable, safe and productive operations.
Productivity improvements is the major driver that helped BHP become the world’s largest leading miner with the following unique competitive advantages:
- large(st) scale operations which results in relatively lower unit production cost
- diversified operations which produce different types of commodities to hedge against market price movements
- operations in many parts of the world to reduce supply chain costs
Overtime, BHP has developed a structured approach to continuously improving productivity and measuring performance using simple integrated metrics. BHP’s operating model helped to drive sustainable performance improvement and helped to lay the foundation for successful growth through continuous culture enhancements and technology developments, which is the core of BHP’s success.
Operating model
Despite the complexities associated with mining resources, BHP’s operating model is predicated on a simple and scalable organizational design. The operating model is structured to help BHP achieve superior performance in all elements of its business model, from exploration to extraction and to sales. BHP has also been developing expertise in supply chain specifically as an owner and operator of dedicated transportation assets such as rail lines. A sophisticated supply chain network now forms the backbone of BHP’s operating model and helps to streamline its business model. There are five distinct features of BHP’s operating model:
- Integrated management system provide single source of data which allows BHP to measure, track and benchmark performance down to single components (Example A: 10% increase in truck fleet utilization from 2013 to 2014 following internal and external equipment benchmarking study)
- Application of common systems and standard processes across portfolio mines help BHP to accelerate replication of best practices
- Collaboration with customers to design quality specifications, optimize supply chain and provide deep technical capability support (Example B: 4% improvement in sales forecast accuracy and 30% reduction in variability achieved from 2013 to 2014)
- Internal competition for capital means project teams are incentivized to achieve higher returns with less capital, which helps to reduce cost variability (Example C: average cost over-runs reduced by 23% and overall cost variability reduced by 65% since introducing the concept of internal competition for capital, which has driven a strong sense of capital stewardship)
- Technology developments continues to be a major productivity driver as BHP continues to search for remote and autonomous solutions that deliver cost effective and reliable outcomes. BHP is very focused on leading the mining industry in innovations through using and creating technology solutions (e.g. driverless trucks) that aims to improve safety, lower production costs and increase output.
Remote, autonomous technology as the key productivity driver
BHP is the world renowned leader in remote monitoring and operating of large scale mines. Leveraging technology has been at the core of BHP’s operating model as it attempts to continuously improve efficiency, safety and reliability, consistent with its business strategy. In 2013, BHP unveiled its state-of-the-art remote control center called IROC (Integrated Remote Operations Center). IROC gave BHP an unparalleled vantage point as it provided real-time monitoring and control of BHP’s entire Western Australian Iron Ore network. IROC gave engineers the ability to view supply chain operations, key performance indicators and other live useful information on large screens 24 hours a day. Engineers are able to make adjustments to the entire network including mine, plant, port, rail and even individual trucks. IROC helped BHP increase the overall system-wide availability, utilization and output rate of its assets. Overall, technology systems such as IROC are fundamental in ensuring BHP remains the world’s largest miner with competitive advantages including lowest per unit production cost, largest scale, and highest productivity with continuous improvement and growth.
Source: https://www.youtube.com/watch?v=wXJjM9ppHtA
Sources:
ABC News, 2013. BHP opens automated centre in Perth for its Pilbara mines. [Online]
Available at: http://www.abc.net.au/news/2013-07-02/bhp-opens-new-automated-centre-for-pilbara-mines/4794838
[Accessed 8 December 2015].
BHP Billiton, 2014. Maximising value and shareholder returns. [Online]
Available at: http://www.bhpbilliton.com/~/media/bhp/documents/investors/reports/2014/141027_maximisingvalueandshareholderreturns.pdf?la=en
[Accessed 7 December 2015].
BHP Billiton, 2014. Safely growing production while lowering costs. [Online]
Available at: http://www.bhpbilliton.com/~/media/bhp/documents/investors/reports/2014/141027_safelygrowingproductionwhileloweringcosts.pdf
[Accessed 8 December 2015].
BHP Billiton, 2015. Integrated Remote Operations Center (IROC), Iron Ore. [Online]
Available at: https://www.youtube.com/watch?v=wXJjM9ppHtA
[Accessed 8 December 2015].
BHP Billiton, 2015. Strategic Report 2015. [Online]
Available at: http://www.bhpbilliton.com/~/media/bhp/documents/investors/annual-reports/2015/bhpbillitonstrategicreport2015.pdf
[Accessed 7 December 2015].
S&P Capital IQ, 2015. S&P Capital IQ. [Online]
Available at: https://www.capitaliq.com/
[Accessed 7 December 2015].
The Wall Street Journal, 2015. BHP’s Old New Business Model. [Online]
Available at: http://www.wsj.com/articles/bhps-old-new-business-model-heard-on-the-street-1426608769
[Accessed 7 December 2015].
Wow this is a very impressive piece of analysis with a lot of information to be absorbed. I love how the charts and video effectively supplement your argument. Great job Lee!
While I often associate mining company with bulky (but not necessarily smart) machinery, I am impressed to see how technology-savvy BHP is in integrating different parts of its business model together and monitor through central control system for dynamic process improvement on a daily basis. While the utilisation of IROC seems to be an inevitable outcome given BHP’s large scale across various asset types and locations, it offers BHP a strong competitive edge to harness on its economies of scale in operations – improved utilization rate, cost reduction, better safety monitoring and more – BHP set itself up in the centre of a virtuous cycle of productivity, and I believe it would continue to outperform its competitors on both scale and technology development.
My only concern is that commodities markets are very volatile and mining industry is facing huge headwinds recently. While BHP can partially hedge against the falling commodity price with its diversified asset types, what else could they do with their operating model to help them survive the challenge?
Great post Lee! I’m always very impressed when large companies find ways to excel in industries, avoiding excess bureaucracy that can slow them down. ExxonMobil is a behemoth in the Oil and Gas industry yet still excels as well. I’m interested in knowing the safety culture at BHP. Being a large operator in an inherently dangerous industry, how does safety permeate their culture? Where do they perform on safety metrics versus some of their competitors? What value do they see in working towards safer workplaces, since it isn’t directly tied to their bottom line.
I’m also curious about the implementation of the internal competition for capital. Some projects inherently generate higher rates of return because they are an easier resource to extract, but somehow the company needs to balance their long term strategic objectives in selecting projects as well so I imaging they cannot completely rely on selecting only the projects with a high rate of return.
Awesome analysis Lee. I’ve seen the IROC system and other similar systems in action at mining sites. It is a great example of leveraging technology to solve operational challenges! As BHP has grown and the mining industry has evolved over time, their business model has changed in a couple ways that requires a parallel evolution in operations. For example, some of the largest, highest grade deposits exist in some of the world’s poorest countries (for example, Simandou in Guinea and Oyu Tolgoi in Mongolia). Operating in these types of environments bring a whole host of challenges from navigating regulatory hurdles, government ownership requirements, a lack of basic infrastructure, skilled workers, reliable local suppliers, and inefficient import/customs channels. How do you think BHP can adapt its operating model to working in these environments?