Digging In

With the economy in the pits, companies are leaving no stone unturned in their efforts to cut supply-chain costs.

Overwhelmed by rising costs, many companies are realizing that profits don’t come easy these days. That’s true even when you’re sitting on a gold mine. Despite the massive run-up in gold prices (160 percent since August 2003), Kinross Gold Corp. has taken a pickax to a host of supply-chain costs, driving out waste wherever it can. Finance executives in many sectors can relate, as manufacturers, distributors, retailers, and others suddenly realize that with margins under pressure, ideas that once seemed unworkable are now viable.

Kinross has a supply chain that’s unusual, to say the least. Consider its Maricunga open-pit mine, located high in Chile’s Atacama Desert, nearly three miles above sea level. In the summer, winds whip in excess of 60 mph, and in winter the temperature can drop to
–20° F or more. Visitors to the mine require a physical before making the ascent and another when they arrive, and workers are checked daily by medical personnel lest altitude sickness take a toll. “When I get back to sea level, I sometimes find that my notes don’t make sense,” concedes Sean Samson, vice president of commercial development for $1.1 billion Kinross.

The Toronto-based company extracts and processes about 11 million metric tons of ore per year from Maricunga, which yields about 8 tons of gold. At Maricunga and other similarly remote sites, that activity requires vast fleets of heavy trucks, some of which consume an astounding 20 to 25 gallons of diesel fuel an hour. Kinross executives can be thankful that the soaring price of oil has coincided with an equally momentous bull market in gold. “Our revenue is growing tremendously with the rising price of gold,” Samson says. “We are in a tremendous boom — a super cycle in precious-metals mining. But we are also heavy consumers of oil, which is killing us on the cost side. That means we have to continue to bring financial discipline to our supply chain.”

To do that, Kinross and other companies are leaving no stone unturned. Many are talking more frequently with vendors and customers to improve forecasting and better manage inventory levels. Some are deploying technology in the cause, from warehouse robots to software systems that help businesses route freight efficiently. Still others are revisiting payment and delivery terms with suppliers and customers, centralizing procurement activities to leverage economies of scale, exploring more-sophisticated commodity-hedging strategies, and scrounging for any way they can think of to minimize energy consumption. Some, like Arrow Electronics Inc., a $16 billion distributor of electronic components and computer products headquartered in Melville, New York, have even tweaked their compensation schemes to reward managers for efficient supply-chain operations.

“This economy has sensitized people to what it really costs them when they’re not doing as good a job as they can with forecasting and other aspects of managing their supply chains,” says Stephen Timme, president of supply-chain consulting firm FinListics Solutions Inc. in Atlanta. “We’ve been talking about this for years, but this slowdown has convinced people to go back and revisit the issue.”


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