Enforcing Cost and Production Accountability Key to Reaching Budgeted Goals

By David A. Robinson, MBA, Robinson Consulting Group, LLC

The key to reaching budgeted goalsWhen I entered the coal industry in 1980, I quickly immersed myself in the world of mining production. I was intrigued with the prospect of applying the principles of my accounting education to the mining of our nation’s greatest natural resource. Short stays in the banking and manufacturing industries, prior to joining the coal industry, had whet my appetite for applying cost management principles to production processes. So I began visiting underground operations, surface mines and preparation plants to learn the ins and outs of this industry.

As an accountant, I was responsible for preparing the financial statements for each coal division. Each month, I would listen as mine managers explained to senior managers why production exceeded or fell short of targets. Additionally, mine managers, often relying on my assistance, would explain cost variations arising from unexpected repairs or production downtime. Invariably the old adage that more production tonnage will cover a multitude of sins would become the goal for the succeeding month.

Throughout my years in the coal industry, many of my employers sold out or shut down their operations. Consequently, I had the opportunity to work in both large, publicly held entities as well as smaller privately held operations. With each employer and management group I observed two common themes and two extremes of tracking and reporting costs and profitability. On one extreme, I observed sophisticated production and reporting systems. On the other extreme, I observed nearly non-existent systems for collecting financial data. Regardless of the effort exerted to track performance, neither method educated employees as to their role in maintaining cost control and accountability.

If any education effort was attempted, it typically stopped with the top manager of an individual mine. However, there are fundamental flaws with this narrow focus. Managers have their hands full with day-to-day operations and the never-ending pressure to produce more coal. Therefore, they rarely have the available time or tools to teach their employees how their actions can impact the bottom line.

In my most recent assignments, I was given the freedom to build relationships with both managerial staff and hourly production personnel. While I gained production knowledge and experience from mine site personnel, I was able to share my financial background with them. I set up individual cost centers for each production area of the mine in the company’s accounting system. Cost and production data were tracked and recorded for each production section as well as the outbye areas of the mine.

Once the accounting system was in place, I shared both the daily and monthly financials as well as production numbers with each area of the mine’s supervisory personnel. My goal was to change the mindset of supervisors so they would view their section, pit or plant, as a separate company with its own profit and loss statement – for which they were to be held accountable. In addition, I initiated friendly competition between the various production areas, as well as between entire mines. Awards were given where key parameters were exceeded.

Safety in the coal mining industry should always be the number one priority and that priority must be communicated to all employees. In my experience, when safety parameters were set as goals for all employees and successes were recognized – with gifts and/or monetary rewards – safety quickly became the organization’s top priority. Similarly, when production tonnage goals and production cost goals were quantified and rewarded – with quarterly bonus payments – employees habitually upped production to earn those bonuses. Employees would also encourage and guide co-workers to ensure future rewards as well. Well-established and managed reward systems ensured safety numbers improved significantly at the same time as production tonnages increased and production costs were minimized.

Under these innovative management plans, mines were kept cleaner, thereby reducing the number of accidents. Supplies were organized in specific areas of the mine to reduce waste and lower costs. Results for each of these goals were posted in common meeting areas for each cost center that was established for a particular mine or plant. Seeing the results for other cost center areas fostered a spirit of friendly competition that was good for the company. A sense of pride was recognizable in those team members that won a particular period of the “competition.” Of course each area of a surface mine or deep mine is different and faces different challenges, so it is necessary to adjust site-specific goals to level the playing field.

There is a fundamental weakness in many coal operations where the education of and the accountability for the mining costs is not communicated throughout the supervisory ranks. Given my past experience, I have found that this is where the largest contribution to the bottom line can be made. Time after time, I have witnessed the leadership of a mining company fail to instill a sense of production cost accountability into their operational supervisors. Generally, a good job is done in driving home the importance of safety and productivity but rarely did I see cost accountability enforced.

Well-established and managed reward systems ensured safety numbers improved significantly at the same time as production tonnages increased and production costs were minimized.

Senior managers should realize that some mine site costs are out of the reach of a production supervisor. However, there are still many line item expenses that these production supervisors can affect. Fixed costs (i.e. fixed in dollars but variable per ton) can be lowered on a per-ton basis by producing more coal. Those costs that are variable in dollars can be controlled to a degree by aggressive purchasing bidding processes – which is where a good purchasing agent can work together with the production supervisor to obtain the best product or service at the lowest price from the preferred vendor – and efficient storage and use of the material and supplies, thus reducing waste.

In one instance, a company was swimming in red ink when I was brought on. My task was to bring this company out of bankruptcy and prepare to sell the property. I immediately noticed that everyone in the company who had a cell phone considered themselves to be a purchasing agent. As a result of poor inventory control, nobody knew what supplies the mine already had so items were regularly purchased when they could have been obtained from on-hand inventory. Therefore, one of my first acts as chief financial officer was to ban all employees, outside of the purchasing department, from placing orders for the company. I followed this directive by contacting all vendors to request their assistance enforcing this policy. I noted that no invoices would be paid without having a purchase order (PO) issued by the purchasing department. This strategy helped to bring down out of control spending.

Production downtime was also reduced as we centralized our purchasing system to handle multiple mine locations. When a foreman at one site needed a part, he was given a “one-stop shopping” phone number for the purchasing department. There, purchasing experts were allowed to utilize their parts inventory locaters and leverage the purchasing power of the entire firm. Additionally, the foreman’s time could now stay focused on operations instead of having to chase parts for equipment repairs or to order operating supplies.

A side benefit of moving to this purchase order system was avoiding occasional vendor errors where invoices were sent for parts/supplies or services that were never delivered. With a unique PO numbering system, the vendor’s invoice could be readily approved if it contained one of the PO numbers assigned by the purchasing department. If the PO number had not been properly approved or the item had not been received, no check was sent and money was saved.

Managing costs is a mindset. To implement that mindset, a culture change often has to be accomplished among the operating personnel at the mine. That culture change can be encouraged when cost containment programs have clear support throughout the organization’s management structure.

Eliminating waste and improving efficiency through a properly managed purchasing department will send the positive effects of improved safety numbers, higher productivity and cost minimization straight to the bottom line, thereby helping to provide secure employment for all. Open communication of results is also essential to instill feelings of responsibility and accountability in the operating workforce. Ownership of these ideas will translate into acceptance of the practices.

David A. Robinson is the owner of Robinson Consulting Group, LLC.

17. April 2014 by Jason Hayes
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