Performance Improvement at Sims Metal Presentation to AOQ September 20 th, 2006.

Performance Improvement Performance Improvement at Sims Metalat Sims Metal

Presentation to AOQPresentation to AOQ

September 20September 20thth, 2006, 2006

Performance improvement at Sims MetalsPerformance improvement at Sims Metals

AgendaAgenda

Introduction and analysis tools identifying the key issues ---NickIntroduction and analysis tools identifying the key issues ---Nick

The production processes and analysis of revenue drivers --- CarolaThe production processes and analysis of revenue drivers --- Carola

Feasibility and implementation of recommendations --- VivFeasibility and implementation of recommendations --- Viv

Financial justification of options related to corporate strategy --- JustinFinancial justification of options related to corporate strategy --- Justin

Conclusion, recommendations and summarisation --- MattConclusion, recommendations and summarisation --- Matt

Questions --- AllQuestions --- All


Sims Metals QLD division – Recycling industrial and Sims Metals QLD division – Recycling industrial and vehicle scrap metal into secondary ferrous and non vehicle scrap metal into secondary ferrous and non ferrous primary resources. ferrous primary resources.

A performance improvementA performance improvement resource available…resource available… But… Many processes and many projects all of which will benefit But… Many processes and many projects all of which will benefit

productivity.productivity.

QuestionQuestion So where to apply the additional resources?So where to apply the additional resources?

AnswerAnswer

Go back to corporate Go back to corporate strategy!strategy!


Strategic analysis and diagnostics Strategic analysis and diagnostics tools are used to identify the key tools are used to identify the key problem issues that need resolving.problem issues that need resolving.

1.1. Open systems model for performance improvement Open systems model for performance improvement diagnostics at the organisation level.diagnostics at the organisation level.

2.2. Porters 5 forces analysis.Porters 5 forces analysis.

3.3. Porters Value Chain.Porters Value Chain.

4.4. Competitive advantages Vs Growth retarding factors Competitive advantages Vs Growth retarding factors


Open systems model for organisation level diagnosticsOpen systems model for organisation level diagnostics

Waddell, Cummings and Worley (2004)

Inputs

General environment

Industry structure

Organisational Design

Core activities

Measurements

Structure

HRM

Outputs

Organisation performance

ProductivityFinished goods

Stakeholdersatisfaction

Feedback

Strategy

Mission

Intentions

Objectives

Strategic goal for QLD is:-Significant growth in

revenue


Force Description

Severity and Effect on Sims Metal

Threat of new entrants

Very Low. The market demand is growing, but the capital cost to enter the market as a major player is very high (shredder and shearer costs). However, there is little product differentiation and no brand recognition. Therefore, smaller scrap merchants can easily enter the market and trade, but not in bulk scrap and export markets.

Threat of rivalryVery High. Very few competitors, an oligopolistic market. However there are no price collusion effects as world markets are competitive and there are few major customers.Despite only a few major competitors, the lack of differentiation and brand makes scrap metal behave like a commodity. Customers are won first on price, then availability, quality and then to a limited extent, relationship.

Threat of powerful suppliers

Medium. Plenty of suppliers; many scrap yards exist. However, crushing cars and transportation to Rocklea is expensive so only major scrap merchants provide an economic raw material supply. Supplies are limited and competition is pushing prices up; relationships are important

Threat of substitute products

V. Low. Both ferrous and non-ferrous scrap customers need the metal. Plastics and other materials have replaced many applications but the rate of replacement is now insignificant. Nonetheless, the market must beware of new technology developments in composite materials and not be complacent of a possible breakthrough effecting demand.

Threat of powerful buyers

High. Powerful buyers can force prices down in times of reduced end product demand, such as during construction and economic downturns. Ferrous margins are slim at best; large profits are only possible for non- ferrous and specialist metals experiencing a specific demand.

Result: The only threats to Sims are from powerful buyers and rivalry from competitors, nonetheless these are powerful forces that completely negate the opportunity to raise

prices for increased revenue.

InboundLogistics

Operations Marketing & Sales

Service

Main site located close to port facilities for on time delivery

Own fleet of trucks and crushers to process cars for transport – Speed and timing

Constant flow of materials keeps space available for more

70% of output material exported from Brisbane port, close location reduces costs

Local NSW customers for ferrous scrap

Trucks can only load in limited hours, causes ships to wait until full

Large customer base with long term relationships

High quality product commands premium price

Demand is high, and sales are lost because Rocklea cannot provide enough product

OutboundLogistics

Flat management with a divisional designISO 14001 certified systemPart of the worlds 2nd largest metal recycling company providing, financial stability and economies of scale

Highly skilled workforce with a professional cultureCore employees are cross skilled in other rolesGood staff relationships and non union labour aids meeting customer needs and preventing high staff turn over.

Shredder process is constantly updated for maximum performanceHigh technology methods employed in scrap content assessment to prevent customer complaints

Expert assessment of raw material purchases before collection minimises losses and ensures correct price paidNew and effective plant minimises down time costs

High efficiency limits O/H costs

High level of process automation reduce cost

Excellent site layout for high throughput

Dust and noise pollution issue limits site to 9 hours of day operations

Good quality with on time delivery

Critical space shortage at Rocklea site

Shredder ‘overstretched’ and at maximum throughputShearer near EOL

Environmental regulations limit operations

Porters Value Chain

Analysis

HRM

Firm’s Infrastructure

Technology Developments

Procurement ACCC regs prevent further acquisition of competitors for growth

Profit Margin

Competitive advantagesCompetitive advantages Retarding elementsRetarding elements

Part of the world’s second largest metal Part of the world’s second largest metal recycling company providing, financial stability recycling company providing, financial stability and economies of scale with HQ resourcesand economies of scale with HQ resources

Critical space shortage at Rocklea site, in the event of shredder Critical space shortage at Rocklea site, in the event of shredder breakdown deliveries soon have to be stoppedbreakdown deliveries soon have to be stopped

Highly skilled workforce with a professional Highly skilled workforce with a professional culture and high technology business systems culture and high technology business systems allows bulk price dealing on world markets and allows bulk price dealing on world markets and fast response to customer requirementsfast response to customer requirements

Shredder process ‘overstretched’ and at maximum hourly throughput, Shredder process ‘overstretched’ and at maximum hourly throughput, daily maintenance is completed overnight.daily maintenance is completed overnight.

The Shearer equipment is near EOLThe Shearer equipment is near EOL

New and effective plant throughout minimises New and effective plant throughout minimises down time costs and ensures long-term high down time costs and ensures long-term high productivityproductivity

Environmental regulations limit the hours of operationsEnvironmental regulations limit the hours of operations

and create an overhead cost in dust and noise controland create an overhead cost in dust and noise control

Main site located close to port facilities for on Main site located close to port facilities for on time delivery and low haulage coststime delivery and low haulage costs

ACCC regulations prevents acquisition of competitors for growthACCC regulations prevents acquisition of competitors for growth

Own fleet of trucks and crushers to process Own fleet of trucks and crushers to process cars from scrap suppliers for high density low cars from scrap suppliers for high density low cost transport – Speed and timing advantagescost transport – Speed and timing advantages

Demand for finished product is high, and sales are lost because Demand for finished product is high, and sales are lost because Rocklea site cannot provide enough product at peak demandRocklea site cannot provide enough product at peak demand

High level of process automation reduces the High level of process automation reduces the cost of adding valuecost of adding value

Trucks can only load in limited hours, causes ships to wait until fully Trucks can only load in limited hours, causes ships to wait until fully loadedloaded

70% of output material exported from Brisbane 70% of output material exported from Brisbane port, close location reduces costsport, close location reduces costs

Dust and noise pollution issue limits siteDust and noise pollution issue limits site

to 9 hours /day of shredder operationsto 9 hours /day of shredder operations

Performance improvement at Sims Metals

C = Competition

Issue

E = Environmental Issue

$ = Capital Cost Issue

C

E

E

$

E


Environmental Issue

• Surrounding area is occupied by other businesses, hence the noise and dust generated by operations is considered an environmental problem.

• Environmental regulations have been imposed, limiting the main plant (shredder) to 11 hours operation per day thus constraining production output.

Competition Issue

•Low barriers of entry and a growth market, competitors are entering the market and taking advantage of Sims limited output capacity.

• Acquisition of competitors is not possible due to ACCC regulations.

• Sims have to depend on organic growth to meet the corporate strategic objective in QLD.

Capital Cost Issue

•Competing major projects for resources

•A major metal cutting machine (shearer) because it is near EOL

•The acquisition of adjacent land for Rocklea plant expansion.

•Increasing the range of recycled materials handled.

•Investment in a second shredder.

Result: Diagnostic analysis of the organisation reveals 3 core issues that must be addressed by the final recommendation in order to

provide significant growth in revenue


ActionAction Analyse the production processes to identify:-Analyse the production processes to identify:-

• Which are the key profit margin contributors?Which are the key profit margin contributors?• Which (if any) can provide the Which (if any) can provide the significant significant

growth in revenuegrowth in revenue andand resolve the three core resolve the three core issues.issues.

Develop an implementation planDevelop an implementation plan

Challenge the assumptions (double loop learning) for ‘out Challenge the assumptions (double loop learning) for ‘out of the box’ possibilitiesof the box’ possibilities

ASK --- Is it Suitable? Acceptable? Feasible? ASK --- Is it Suitable? Acceptable? Feasible?

Operational Evaluation and Process Operational Evaluation and Process StructureStructure

Types and values of consumables and Types and values of consumables and non-consumables produced from recycling non-consumables produced from recycling processprocess

Analysis of operational and process Analysis of operational and process structure for effectiveness and qualitystructure for effectiveness and quality

Breakdown of profit sources by Breakdown of profit sources by product and processproduct and process

ProductProduct Volume per Volume per annum annum tonnestonnes

Price per Price per tonne $tonne $

RevenueRevenue$$

% Gross % Gross MarginMargin

Total profitTotal profit$$

Key Operational Key Operational ProcessProcess

FerrousFerrous 240,000240,000 $250$250 $60m$60m 15%15% $9m$9m ShreddedShredded

Non ferrousNon ferrous 4,2004,200 $2300$2300 $9.66m$9.66m 85%85% $8.22m$8.22m ShreddedShredded

Stainless & HM Stainless & HM SteelSteel 40,00040,000 $400$400 $16$16 13%13% $2,08m$2,08m

Sheared and Sheared and plasma cutplasma cut

Pure sorted bails Pure sorted bails of:of:

Lead, Zinc, Lead, Zinc, Copper,Copper,

AluminiumAluminium

5,0005,000 $2500$2500 $12.5m$12.5m 18%18% $2.25m$2.25m Recovery, value Recovery, value

added and trading added and trading activitiesactivities

TotalTotal$ 98.16m$ 98.16m $21.55m$21.55m

Processing Structure for Scrap Processing Structure for Scrap MaterialsMaterials

Light material are placed into the input of the shredder machine

Heavy material?

No

YesHeavy material cut using

gas plasma, static shearer or transported to a North Brisbane site to provide

further space

Car bodies cut in mobile car

crushing plant

Car bodies?

Yes

Scrap material cut by mobile shearer

No

Meet requirements?

Yes

Scrap materials are inspected

Discarded

No

Light material are placed into the input of the shredder machine

The recycled metal is repeatedly smashed until they can pass through a

grid

Rotating drums with electromagnets

collect ferrous metal

Light rubbish (foam, plastic

fibre) is separated

Metal continue though a coveyor

The remaining is non ferrous

metal

Air draught

Product 1:Light non metallic rubbish for landfill

Product 2: Secondary Ferrous

metal

Product 3:Non-ferrous metal

Ferrous and non ferrous metal are allocated to

customers

No

RecommendationRecommendation

No performance improvements nor No performance improvements nor intervention in the shredding process intervention in the shredding process would produce the revenue and solve the would produce the revenue and solve the issues… Solution? issues… Solution?

Increased capacity!Increased capacity!

Feasibility & Implementation PlansFeasibility & Implementation Plans

Board ApprovalBoard Approval

Local Government ApprovalLocal Government Approval

Compliance and Regulatory Compliance and Regulatory IssuesIssues

Development PlanDevelopment Plano Environmental ManagementEnvironmental Managemento Waste ManagementWaste Managemento Storm water ManagementStorm water Managemento Details of ServiceDetails of Serviceo Landscape planLandscape plan( Prepared by a qualified landscape ( Prepared by a qualified landscape

architect)architect)

o Traffic ReportTraffic Reporto Acoustic Report Acoustic Report

Scheduling order plan

Gantt Chart

Gantt ChartGantt Chart

ID Task Name DurationJul 2006 Aug 2006

7/2 7/9 7/16 7/23 7/30 8/6 8/13 8/20 8/27

1 1wBoard Approval

2 4wArrange Preliminary Lease

3 1wQuotes for Environmental Plan

4 2wAppoint consultant

5 5wEnvironmental management Plan

6 1wQuotes for acoustic

7 2wAppoint consultant

8 5wReport on acoustic plan

9 1wQuote for Traffic Report

10 2wAppoint Traffic company

11 5wTraffic Report Plan

15 1wQuote for Stormwater Plan

16 2wAppoint company

17 5wReport of Stormwater Plan

18 1wQuotes for landscape Plan

19 2wAppoint Agency

20 5wReport of Landscape Plan

21 2wReport on Services from port authority

22 2wCompile Development Applications

Sep 2006

9/3 9/10

14

13

12 1wQuote for Waste Management Plan

2wAppoint agency

5wWaste Management Plan

Financial MeasurementsFinancial Measurements

One shredder versus four One shredder versus four shear/excavatorsshear/excavators

Breakeven AnalysisBreakeven Analysis TonsTons DaysDays

Net present ValueNet present Value

Breakeven AnalysisBreakeven Analysis ShredderShredder Shear/Excavator (1)Shear/Excavator (1) Shear/Excavator (4)Shear/Excavator (4)

Initial CostInitial Cost $15,000,000.00 $15,000,000.00 $ 500,000.00 $ 500,000.00 $ 2,000,000.00 $ 2,000,000.00

Fixed/Variable costs per tonFixed/Variable costs per ton $ 283.00 $ 283.00 $ 250.00 $ 250.00 $ 1,000.00 $ 1,000.00

Average income per tonAverage income per ton $ 300.00 $ 300.00 $ 280.00 $ 280.00 $ 1,120.00 $ 1,120.00

Net average income per tonNet average income per ton $ 17.00 $ 17.00 $ 30.00 $ 30.00 $ 120.00 $ 120.00

Average income per hourAverage income per hour $ 1,700.00 $ 1,700.00 $ 150.00 $ 150.00 $ 600.00 $ 600.00

Average operating hours per dayAverage operating hours per day 7.0822 7.0822 1212 1212

Average income per dayAverage income per day $ 12,039.74 $ 12,039.74 $ 1,800.00 $ 1,800.00 $ 7,200.00 $ 7,200.00

Average income per yearAverage income per year $ 4,394,505.10 $ 4,394,505.10 $ 657,000.00 $ 657,000.00 $ 2,628,000.00 $ 2,628,000.00

Breakeven point (days)Breakeven point (days) 1245.8741245.874 277.778277.778 277.778277.778

Breakeven point (tons)Breakeven point (tons) 882352.941882352.941 16666.66716666.667 16666.66716666.667

• Shredder takes longer to pay off, but generates more income

• Faster pay off time = more cash available for other projects

Net Present ValueNet Present Value

ShredderShredder Shear/Excavator (1)Shear/Excavator (1) Shear/Excavator (4)Shear/Excavator (4)

Initial CostInitial Cost $ 15,000,000.00 $ 15,000,000.00 $ 500,000.00 $ 500,000.00 $ 2,000,000.00 $ 2,000,000.00

Required Rate of ReturnRequired Rate of Return 18%18% 25%25% 25%25%

Expected Life (Years)Expected Life (Years) 1515 88 88

Annual IncomeAnnual Income $ 4,394,505.10 $ 4,394,505.10 $ 657,000.00 $ 657,000.00 $ 2,628,000.00 $ 2,628,000.00

Net Present ValueNet Present Value $ 7,374,963.55 $ 7,374,963.55 $ 1,687,094.76 $ 1,687,094.76 $ 6,748,379.05 $ 6,748,379.05

• Shredder brings more value to the company than the four shear / excavators

• Shredder also lowers certain operating costs such as transportation of scrap

Financial Wrap-UpFinancial Wrap-Up

Sims aims to compete as a cost leaderSims aims to compete as a cost leader Large capital expense on quality Large capital expense on quality

equipmentequipment Ensure accurate productsEnsure accurate products Minimise downtimeMinimise downtime

Conclusion, Recommendations and Conclusion, Recommendations and SummarisationSummarisation

Process at Rocklea operating at “critical Process at Rocklea operating at “critical mass”mass”

Environmental constraints increasingEnvironmental constraints increasing

Potentiality of ACCC involvementPotentiality of ACCC involvement

Capital cost issuesCapital cost issues

RecommendationsRecommendations

Purchase a new shredder over purchasing Purchase a new shredder over purchasing 4 shearer/excavator machines (capital 4 shearer/excavator machines (capital cost and “critical mass” issues)cost and “critical mass” issues)

Place new shredder in recently acquired Place new shredder in recently acquired Townsville location (environmental and Townsville location (environmental and competition issues)competition issues)

SummarisationSummarisation

Preliminary Cost-Benefit analysis presented and Preliminary Cost-Benefit analysis presented and approvedapproved

Intention of placing new shredder in Townsville Intention of placing new shredder in Townsville presented to ASXpresented to ASX

Soil and acoustic tests performedSoil and acoustic tests performed Environmental Management Plan presented to:Environmental Management Plan presented to:

Townsville Port AuthorityTownsville Port Authority Townsville City CouncilTownsville City Council Ergon EnergyErgon Energy Department of Main RoadsDepartment of Main Roads

Summarisation (con’t)Summarisation (con’t)

Adjustment of plans raised by concerns of Adjustment of plans raised by concerns of aforementioned partiesaforementioned parties

Feedback search in process with Townsville Feedback search in process with Townsville Port Authority about operational decisions and Port Authority about operational decisions and processesprocesses

Current discourse, planning and Current discourse, planning and operational development congruent with operational development congruent with recommendations provided during analysisrecommendations provided during analysis

Questions?Questions?

Performance Improvement at Sims Metal Presentation to AOQ September 20 th, 2006.

Documents

Transcript of Performance Improvement at Sims Metal Presentation to AOQ September 20 th, 2006.