Abstract
Operational management refers to the careful management of business activities to maintain high levels of efficiency within an organization. Organizations adopt a specific operational management approach depending on the activities it is involved in, the size of the organization, and its goals. This paper is an analysis of operational management in Newmont Mining, with the focus on operational opportunities and challenges faced by the company. The paper will also explore the strategies taken to address operational challenges and problems faced during the implementation of the strategies.
Introduction
Newmont Mining is one of the largest mining companies across the globe. It was founded in 1921 by William Boyce Thompson and was publicly traded in 1925 (Newmont Mining Corporation, 2017). Over the years, the company has grown tremendously through acquisition and diversification. Currently, it operates in the United States, Australia, Ghana, Peru, and Suriname. Newmont Mining produces up to 5.7 million ounces of gold and has a reserved of 73.7 million ounces of gold (Hoovers, 2017). It also produces over 600 million pounds of copper mostly through its Batu Hijau project in Indonesia (Hoovers, 2017). Newmont Mining has over 30,000 employees and contractors responsible for mining and other support operations. The organization’s operations are vast since it operates in a global environment. Each location is guided by different legal, economic and social environment aspects that must be taken into consideration.
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The mining industry is one of the most complex industries known for the multifaceted chain of operations and processes. The competition in the industry is also stiff. The Newmont Mining Corporation was once the leading gold producer in the globe, but now it is the second leading producer after Barrick (Hoovers, 2017). Notable competitors in the industry include Barrick Gold Corporation, Anglogold Ashanti Limited and Goldcorp Inc. (Hoovers, 2017).
Key players in the mining industry face similar opportunities and challenges. A significant opportunity for the mining industry is technology and innovation. Mining is a labor-intensive and costly process. Technology and innovation must be adopted to make mining operations easier. There are new models of scaling up equipment to improve efficiency. Technology should be adopted in all mining operations, ranging from data analytics used in the R & D departments to automated trucks in the mines. Mining companies must focus on applying futuristic solutions to mining problems, rather than relying on old and ineffective methods.
Another opportunity is mergers and acquisitions. Many mining companies, including Newmont, have survived the industry challenges through mergers and acquisitions. Mergers and acquisitions increase the firm’s resources, operational capacity, expertise, and productivity. It also improves the company’s ability to solve or mitigate risks in the mining environment.
Effective operational management is an opportunity that mining organizations must take advantage of. Effective operational management is about prioritizing operational excellence, capability development, tracking operational risk factors to improve efficiency levels. Mining companies must have the ability to transform operational challenges into opportunities through effective strategic management that uses new operational management approaches and technology.
The main operational challenge is lost productivity; the global mining industry has lost 30% of its productivity in the past 50 years (Domingues et al., 2016). Young people no longer view mining as a viable career, and a big percentage of the present workforce is retiring. Without a properly trained workforce, the industry’s productivity will be jeopardized. Another notable challenge facing the industry is the high usage of energy and water. Mining gold, copper, and other metals require a lot of energy. Mining firms spend a lot of money on energy to fuel the operations, and eventually, they have to increase the prices of their products to cover the production costs. Lastly, operating in a global environment is quite tricky. Securing licensing is costly, and in most cases, feelings of exploitation in the host nation can cripple a business.
Problem Definition
Newmont Mining Corporation faces various operational challenges that have affected its productivity and profitability over the years. A controversial operation challenge is the constant accusation of environmental and human rights abuses in its mines in Peru, Indonesia, and Ghana. Such accusations affect the company’s operations, and in some cases, the mines have been closed to facilitate investigations into the accusations. A report by RepRisk in 2012 concluded that Newmont is the second most controversial mine in the globe.
Other notable operational challenges include labor problems, new projects, supply chain problems, ineffective business process and quality problems. Labor problems often paralyze operations in the mine and lead to a decline in output. For example, in 2012, there was a prolonged labor strike in Newmont Indonesian mine that lasted for over three months. The workers wanted a 37% rise in wages; this affected the firm’s profitability as it was forced to increase its wages and incur the losses from the three-month worker strike.
New projects being undertaken by the company are a source of operational challenges too. New mining projects are complicated; they involve new processes, employees, and resources. Newmont invests millions in new projects with the hope of making more profits from the new projects. New mining projects take years and a lot of company resources. In some cases, new projects face challenges such that they are eventually abandoned. Newmont had invested heavily in the Conga project in Peru, but the new project was marred with problems since the beginning. Newmont invested heavily in the project by building water reservoirs and plant facilities, but resistance from the community delayed operations significantly.
The company also faces notable supply chain challenge. Newmont operates in eight countries in five continents; hence the logistical challenges are complex. Supply chain processes that are crucial for the success of the company often take a back seat as the company focuses on finding, extracting and processing minerals. Supply chain processes are dealing with the delivery of raw materials and finished products in an effective manner to reduce costs. Newmont could save millions of dollars in operational costs by reexamining its supply chain. Though there is virtually no receivables; the company delivers products to different partners. Through the extensive mergers and acquisition, Newmont is now saddled with ineffective and redundant supply chain bureaucracies that are too costly for the organization. Inconsistent supply chain processes, higher freight costs and poor management of a global multi-modal supply chain are some of the common supply chain problems.
Lastly, quality problems also affect operations at Newmont Mining Corporation. The quality of Newmont’s mining processes, particularly in Peru and Indonesia has been heavily criticized. Newmont was blamed for a number of pollution issues in Indonesia, and it faced numerous criminal charges due to the poor quality of its mining activities. Newmont’s activities lead to the pollution of major rivers and water sources. Newmont’s giant drills that pierce holes in the rocks and the use of explosives produce a lot of waste and pollutants. The heavy use of cyanide and improper waste management only makes the situation worse, and this explains why Newmont has been sued for poor processes in the past. For example, the massive Yanococha open-pit mine was known for substandard practices; it produced gold through cyanide leaching. Cyanide found its way to the rivers and streams, and in one serious incident, the mine spilled over 330 pounds of dangerous substance along a 25-mile road injuring eight people in Peru.
The quality problems do not affect the mines only; they affect other aspects of the businesses such as finance, supply chain and R & D. There is a need to adopt new forms of technology to make operations more efficient.
Analysis
Newmont has implemented various measures to deal with some of the operational challenges it faces. According to a Forbes article (2016), Newmont is well placed to face notable challenges in the mining industry because of its capability to come up with robust strategies. To deal with the perennial problem of environmental and human rights by coming up with an effective ethics and governance framework (Newmont Mining Corporation, 2017). The environmental and human rights issues that plagued production were experienced in the early 2000s, but in the past decade, Newmont came up with a framework to guide operations as per the international and local standards. Newmont new policies on land, water, labor policies and human rights have helped the firm reduce conflicts and focus on production.
Newmont has attempted to solve labor problems through various strategies such as improving working conditions and processes, upgrading mining equipment and adopting better labor terms. The labor-intensive mining industry means that the organization cannot afford to neglect labor problems. New labor agreements reflect the needs of the employees and the employer so that everyone’s needs are addressed. The new labor agreement adopted in 2013 takes into consideration the changes in the external environment, internal business factors and the need to maintain a mutually beneficial relationship between the company and employees.
Newmont also addressed the supply chain challenge through the adoption of cost reduction strategies. Newmont adopted a centrally-led supply chain management structure; the structure is divided into five primary categories and secondary strategic relationships. A centralized approach to supply chain ensures proper management of the many strategic relationships that the company is involved in. Newmont also created a three-tier category council across all of its locations across the globe to streamline supply chain operations. Each team is responsible for development, implementation, and negotiation of purchases using the already established strategies to guide the entire firm. Cross-functionality in supply chain management became the only way in which the company could reduce supply chain costs drastically.
To deal with operational challenges associated with new projects, Newmont aims to meet all the needs of different stakeholders to avoid any controversies. New mining projects are complicated, especially when the projects are pursued internationally. Newmont has gone through a series of problems when dealing with new projects. To avoid new project challenge, Newmont tries to follow the accepted environmental and social standards to guide mining. Mining can be very damaging to the environment, and Newmont partners with the local community in an effort to provide sustainable value to the community and other stakeholders. Newmont’s new projects are now guided by the principles of sustainability, social responsibility, engagement and partnership, environmental stewardship and zero harm workplace (Newmont Mining Corporation, 2017).
Lastly, Newmont adopted new technology and processes to improve the quality of its products and operations. The exploration of precious metals is a complex process; Newmont uses technology to evaluate land’s geologic and geographic data to identify places rich in minerals. The company also uses technology and strategic methods to limit damage to the environment. Technology has improved the quality of other support operations, particularly supply chain and executive decision making.
Implementation Challenges
The process of implementing change is a challenging process. This explains why most changes do not bring the expected results. Newmont identified various strategies to solve some of the operational challenges, but implementing the strategies became a challenge on its own.
Some of the implementation challenges include inadequate resources, lack of executive buy-in, external challenges, lack of consistency and strategic planning overload. A notable implementation challenge is the lack of resources, both financial and human resources to steer change. Operational management is complex, time-consuming and requires tremendous effort. Though Newmont has adequate financial resources, the company’s resources are insufficient due to the high number of operational challenges. Some of the efforts such as improved supply chain processes, new technology, and improved labor relations are costly. Hence, Newmont is incapable of implementing all the efforts due to lack of resources.
Another implementation challenge is the lack of executive buy-in. The top management sets the tone for change, and when the top management is genuinely interested in implementing change, the rest of the organization will follow suit. However, Newmont’s executives find themselves with conflicting priorities towards different stakeholders. For example, the shareholders expect the firm to make a profit , while customer expects quality yet affordable products. Thus, Newmont’s management has not fully dedicated itself to implementing operational changes due to other pressing priorities.
External challenges also affect the implementation of changes. Newmont operates in the mining industry, an industry that is easily affected by external changes. Environmental, labor and supply chain problems are affected by external factors in the legal, political, social and technological environment. For example, the various countries that Newmont operates in have different environmental policies; hence Newmont finds it hard to keep up with the policies. Constant changes in the economic, political and social environment affect the company’s ability to dedicate itself fully to implementing changes as the changes render the efforts useless.
Lack of consistency is another implementation challenge. Newmont identified various solutions to most of its problems but has lacked consistency in implementing. For instance, Newmont’s sustainability framework was created to guide environmental issues, new projects and poor quality in its processes. The sustainability framework is made up of various principles such as social responsibility and partnership. Such efforts are comprehensive in theory, but they fail because the company fails to implement every aspect of the solution. In most cases, the company only implements the easy parts, leaving out other important aspects.
Lastly, strategic overload adversely affects implementation process. There are many operational challenges facing Newmont, each challenge requiring the company to plan strategically on how to address the challenge. Consequently, too many implementing too many strategies will be impossible for the organization, and the stakeholders might lose the morale to implement change if they are constantly being told to do so.
Results
A Forbes article (2016) states that Newmont entered 2016 well placed to face operational challenges. This is because Newmont has put in place adequate measures to address the challenges to secure the company’s future. By addressing some of the operational issues, Newmont is now in a better position, and this is reflected in the performance and profitability of the organization. According to Forbes (2016), gold prices weakened in 2015 by approximately 8% in comparison to 2014 prices, yet Newmont retained profitability because it had implemented operational changes. Changes in the supply chain, quality management, and new projects approach led to reducing costs, which helped the firm deal with the weakening gold prices in 2015.
According to Bochove (2016), Newmont Mining experienced a decline in operational costs for the first time. Newmont’s all-in costs fell to $864 from $1,031 in 2016. The trend in the reduction in operational costs is positive. The operational costs stood at $1,104 in 2013, but due to operational changes the company now spends less money in production. The company sold non-core assets and implemented various cost-reduction strategies in its operations. This has also enabled the company to keep its debt in check, by the end of the third quarter of 2015, Newmont’s debt stood at $6.3 billion in comparison to $6.7 billion at the end of 2013 (Bochove, 2016).
The changes have led to strong and consistent changes in the operational performance reflected on the balance sheet. Newmont has been continually outperforming in the past few years, despite the external challenges in the market.
Despite the steps taken to tackle operational challenges, Newmont could be doing more. Places such as Ghana, Peru, and Indonesia that host Newmont mines are still plagued by environmental, labor issues, supply chain and new project problems. Newmont must find a way to solve this issue once and for all because the strategies in place have failed to address the problem adequately. Newmont still has a strained relationship with Indonesian government today, a problem which affected its operations and profitability a decade ago. In 2015, Newmont sold its shares in the Batu Hijau mine in Indonesia because it could not come to an agreement with the Indonesian government due to the company’s operation. This was a big blow for Newmont because the Batu Hijau mine produced 676,000 ounces of gold in 2015, accounting for 21% of Newmont’s revenue.
In conclusion, Newmont is in one of the most volatile industries, hence the many operational challenges. Additionally, Newmont operates on five continents; it is exposed to many operational challenges that are not faced by a mining company based in one location. Operational challenges such as supply chain problems, new projects, and labor problems have significantly affected the firm’s profitability. Recent efforts to address the problems through a host of strategies yielded positive results for the firm. Newmont should focus more on implementing the changes consistently to reap more positive effects.
References
Bochove, D. ( 2016, July 20). Newmont Tops Forecasts on Higher Gold Prices, Production. Bloomberg. Retrieved from : https://www.bloomberg.com/news/articles/2016-07-20/newmont-profit-exceeds- estimates-on-better-than-expected-output
Domingues, M. S. Q., Baptista, A. L., & Diogo, M. T. (2016, November). Risk management in the mining sector through complex systems. In 3rd International Symposium on Mine Safety Science and Engineering (pp. 381-386).
Hoovers. (2017). Newmont mining corporation: Competition. Retrieved from: http://www.hoovers.com/company- information/cs/competition.newmont_mining_corporation.e21baff6c475efe4.html
Newmont Mining Well Placed To Face The Challenges Of 2016. (2016, Jan 12). Forbes. Retrieved from: https://www.forbes.com/sites/greatspeculations/2016/01/12/newmont-mining- well-placed-to-face-the-challenges-of-2016/2/#32238eb88785
Newmont Mining Corporation. (2017). Beyond the Mine: Our 2015 Social and Environmental Performance . Retrieved from: http://sustainabilityreport.newmont.com/2015/ethics-and-governance/human- rights
