Many of us have entered 2020 with a great deal of trepidation. It seems the only thing we can rely on this year is taxes and death (too soon?). The world is becoming increasingly volatile and uncertainty reigns supreme, as such it is probably time we started to accept this as the new normal. If it isn’t the Coronavirus it will be a long drought, a flood, a supply chain disruption or a tech disruption that will cause us to have to suddenly change tack. But how do you plan for disruption when you have no idea what will cause it in the future.
We hear a lot about VUCA, a situation that is Volatile, Uncertain, Complex and or Ambiguous, what we don’t hear a lot about is what it takes to carve a path through that.
- Where you have Volatility you need to apply Vision,
- Where you have Uncertainty you need to increase your Understanding,
- Where you have Complexity you must create Clarity and Simplicity
- Where you have Ambiguity you need to find a way to be Adaptable
Managing External VUCA Risks:
Variability is not a new phenomenon in nature and we have many mathematical solutions to help us understand the impacts of these in terms we can intrinsically understand as a business risk. The factors impacting a business can be numerous and overwhelming but each financial model we build has estimations for what we expect from a market such as predicted volume, supply, demand, exchange rates etc. One of the most respected methods for understanding risk is the Monte Carlo simulation. This is used to understand the probability of different outcomes of intervention of random variables. It provides a great platform for financial impact scenario modelling.
In addition to this and perhaps in compliment; in operations, there is a well-known model called “the News Vendor Model” for estimating what volume of product a company can expect to move in a market that has uncertainty in demand and particularly where there is a perishable element to the product (think coal). In short, it provides guidance on the question of what demand might look like in a risk-balanced approached. It is a simple formula that factors in the cost of what will be sold at “clearance” if there is oversupply against what the loss is in opportunity if you failed to supply enough based on long spans of historical data. It is not common in mining but has been used sporadically in volatile spot markets ad to assess investments, as such we think it might be a tool worth adding to the mix.
Managing Internal VUCA Risks
Internal supply to market issues in mining nearly always stem from failure to manage operational risk, be it safety, an understanding of geological risk or the ability to safeguard and manage your assets. When share prices fall for mining companies the majority of times it’s because operations were managed poorly rather than external market conditions. A mining company must know how to manage the known unknowns and unknown unknowns. Robust procedures for maintenance of assets and supply chains will assist in reducing this risk, and common threats to production such as unplanned geotechnical movement, wet weather including seasonal floods and cyclones, drought, fire and safety can be prevented or managed from the top down with a robust risk management system and risk registers that are linked to everyday actions. We highly recommend a regular audit process as a means of establishing best practice in risk management for each of these areas.
Beyond this building resilience into your mine plan extends to how you well you are set up to manage the pivots in the market. In this case how you define ore is critical to being able to pivot and take advantage of the swings and roundabouts. If you have activity-based accounting methods and cost models for defining ore that are well modelled you can quickly flex to change your definition of ore when you need it most and take advantage of the market conditions.
Being Digital is offering a significant advantage to companies who have invested in the tech. If it’s done right it will enable you to work out where you are losing volume, time and money along the value chain and quickly correct course. If your data is live you can enable Short Interval Control to step in before a problem evolves.
The world may well be a VUCA place but if you want to stay in business you need to install Vision, Clarity, Understanding and Agility into your operational environments.