Why Cost Cutting Fails to Deliver

Over the past decade most, if not all participants in the resources sector have been involved in initiatives to improve margins, reduce costs and improve business profitability. In many cases the initiatives undertaken have fallen short of their stated objectives, and in some cases have resulted in the terminal decline of the underlying business. In reviewing why many such initiatives fail, a common theme of arbitrary cost reduction and a focus on minimising cost as opposed to maximising value and cashflow emerges. This paper proposes a structured process that allows mine owners and managers to develop an understanding of their cost structure and optimise production and cost outcomes from the business. The broad objective of cost optimisation is to create value by getting more out of existing and new assets by focussing on operational areas, particularly production and maintenance. The paper uses practical examples to highlight the application of cost driver trees as a mine improvement tool.