In the face of rising coal prices through 2008, many U.S. coal producers grew through the mantra “more is better,” acquiring new sources and mines through bolt-on acquisitions. In the past few years, however, U.S. coal producers have encountered increasing market and regulatory headwinds. Downward pressure on thermal coal prices has resulted from an onslaught of cheap shale gas and, to a lesser extent, the rise in renewable generation. Meanwhile, coal-fired power plants are being shut down in the face of emissions regulation on new and existing sources, while those that remain face higher operations costs.
In response to these challenges, one U.S. coal supplier came to Strategy& to evaluate its cost profile and redesign the way the company operates in order to improve margin performance. After the firm conducted a comprehensive evaluation of cost and performance across the company, it was clear that:
Operations and maintenance inefficiencies had arisen through significant variation in approaches across mines
Supplier costs were high, inconsistent, and subject to high individual discretion across mines
The internal overhead structure had grown substantially through bolt-on acquisitions
Strategy& responded by redesigning the operating model. This advanced the company from its holding company approach, in which costs and operations were optimized at the mine level, to optimization at the enterprise level.
How we helped
Strategy& was asked to:
Redesign the operating model to drive efficiency across the organization
Refine operations and support processes to improve the cost structure
Reduce G&A by nearly 25 percent of its baseline levels
Design the new organization in less than three months and implement it in less than six months
Charged with the above, we assembled a team of diverse Strategy& experts to work closely with the client to determine the areas of opportunity. Each area of the business was rigorously analyzed through data collection, analysis, and interviews with key stakeholders. Key work processes and performance metrics were documented across the business, at which point discrepancies in both approach and performance surfaced. New approaches to operations were analyzed, and finally, a new operating model was proposed.
The new operating model focused the business on operations and maintenance excellence and then structured the new organization to enable these objectives. By establishing a centralized performance improvement group, we were able to extrapolate the most efficient and effective processes to the larger company. Internal support functions were then matched to the needs of the resulting organization and daily, weekly, and monthly performance targets aligned with the new operating model objectives were established to focus managers and track improvement.
Strategy& efforts helped this U.S. coal producer substantially increase profitability by
Streamlining G&A costs by over $1 billion
Improving extraction techniques through standardized practices, particularly in high-cost, low-value deep mines; thermal extraction, reducing operational delays to first-quartile levels
Improving maintenance techniques, embedding standard practices to improve equipment availability and replacement parts spend to first-quartile levels
Establishing effective performance objectives and metrics, allowing the company to operate the optimal mix of its most profitable mines, even as market prices and cost inputs shift over time
Ultimately, the U.S. coal company emerged a more lean, nimble, and effective organization prepared to weather additional market and regulatory headwinds in the global marketplace.