The Stream by River Logic

Integrated Business Planning in Coal Mining

February 22, 2014 | By Carlos Centurion

One of our partners – GMCS out of Moscow, Russia – recently helped us prepare a case study of a comprehensive EO-based planning solution they recently implemented at a large coal producer. The client has 30+ mines, produces 100m+ tons of coal per year and sells to 800+ customers. The solution delivered close to 5% of revenue in additional profit per year – a whopping $250 million in this case – for a massive ROI when considering the NPV over even a 5 year time frame.

While this is our everyday business at River Logic, I’m always impressed by the power of Integrated Business Planning (IBP) deployments. The key component of IBP is that it supports demand, supply and financial planning simultaneously, respecting the firm’s market, policy, supply and financial constraints and leveraging optimization to help users identify insights not visible through sequential planning approaches as are commonly deployed in S&OP.

The Power of Integrated Business Planning in Coal Mining

By using Integrated Business Planning in coal mining, the coal producer is able to optimize the entire operation, from mine production through optimizing demand and financial planning. While it might seem easy, it’s actually a complex business as the solution required included support for multiple types of decisions and constraints:

  • Starting with the customer base, there are multiple nuances in selecting which demand to fulfill, and the product mix
    • nternational customers usually require not only certain tonnage delivered to a port by a certain time, but they have very specific quality requirements including caloric content, ash, Sulfur and Nitrogen
    • Domestic markets typically care mostly about caloric content, and the producer has opportunities to substitute products at different caloric price points
    • The spot market is guided mainly by caloric content through a price curve that is highly dynamic
  • In order to supply the demand, the producer has many decisions to make
    • Blending (at the mind, rail and port), which allows it to target the optimal demand price points; blending has to consider the bonus of delivering on spec, plus capturing higher price points
    • Inventory and logistics – through multiple routes, transportation modes, ports and delivery contracts
    • Mine production – not only how much to produce which is influenced by the demand, but it’s cost and all the steps required to process the coal
  • Costs are considered throughout and driven by first principles – this means costs are derived from the activities of the business including volume, product mix, time, input costs (labor, fuel, energy). Therefore, when the solution considers a different product mix or whether to support the spot market, it takes into account the marginal costs incurred in doing so
  • Financial planning is a direct output of the plan, including P&Ls for every mine, logistics and the domestic/export markets.Furthermore, the solution can be constrained to a target EBITDA or a maximum amount of working capital

The GMCS team have not only cracked the problem, they’ve also given the client a full planning framework that has fundamentally changed the way they plan and report on performance. Previously, the client followed the normal S&OP approach, first locking down the sales plan, then production and finally converting the output to financials. Now they have specific steps, but no decision is taken until all participants have agreed – this includes sales, marketing, production, logistics and finance. In fact, planning effort has decreased by about 80% as there are no longer continuous disputes about assumptions or whose model is better.

Closing Thoughts

I’ve seen IBP solutions deliver similar value in several industries now. Now imagine… what if every firm could gain 5% of revenue in additional profitability and a multiple-fold increase in planning agility?

Strengthening S&OP with What-Ifs

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