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Why BHP focuses on productivity

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Productivity gains

BHP Billiton’s (BHP) management provided an in-depth discussion of BHP’s approach to productivity. Its focuses on five key areas.

Productivity

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Equipment

Under this area, the focus is on increasing availability, utilization, and rate. A 6% increase in utilization helped achieve a 9% increase in group production in fiscal year 2014. Performance benchmarking for equipment is done internally and externally. An example is BHP’s trucking fleet. Its trucking fleet’s availability increased by 3%. Utilization increased by 10%. The hauling rate increased by 10%. As a result, the material moved increased by 22%.

People

People productivity is a key value driver. Labor is very important. It’s a large part of the total cost base. It represented 41% of the company’s operating cost base in fiscal year 2014. BHP successfully reduced the labor spend by 10% in fiscal year 2014. It’s resorting to strategic insourcing to build an optimal employee to contractor ratio. BHP is also focusing on technology utilization to automate labor-intensive operations.

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Supply

The company is working to reduce the overall supply costs. This led to a cost savings of $1.6 billion over fiscal year 2013 and fiscal year 2014. A four-day improvement in average payable performance in the first half of fiscal year 2014 improved cash utilization by $0.6 billion.

The company also wants to reduce operating spares and consumable inventory to achieve benchmark stock turnover performance. It’s a ratio that shows how many times a company’s inventory is sold and replaced over a period.

Capital

Under capital, the company’s focus is on less budget overruns and lower cost variability to achieve the same volume impact at a lower cost.

Marketing

Under marketing, volumes are increased through supply chain optimization. At Port Hedland, BHP enhanced the vessel mix. It increased iron ore throughput and reduced the turnaround times.

Through all the above measures, the company is targeting at least $3.5 billion in productivity-led gains from its portfolio. In this falling commodity price environment, other iron ore companies—including Rio Tinto (RIO), Vale S.A. (VALE), and Cliffs Natural Resources (CLF)—are also working towards productivity improvements to drive down costs and maintain margins.

These companies are part of the SPDR S&P Metals & Mining ETF (XME).

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