Radical Innovation in Mining Management – The Industrial Age fuelled by Myth 1

The following article was published on 2019 June 27 at http://www.austmine.com.au/news/radical-innovation-in-mining-management-1  Austmine is the leading industry body for the Australian Mining, Equipment, Technology and Services (METS) sector. 

In the last edition we introduced how yesterday’s solutions have led to three myths that control current mining thinking.

Myth 1: The best way to run a mine is to focus on cost certainty and manage people as if they are parts of a machine.

Myth 2: Mine operations should be optimised from start to finish to produce the best results.

Myth 3: We can achieve social licence acceptance and safety aims within our current management paradigm by pursuing effective culture change.

Each myth began as a solution for a specific era of time.

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A myth follows a life-cycle S-curve pattern. It slowly begins as a new idea in the embryonic stage. A growth spurt occurs when people embrace the idea; the adoption rate rapidly increases. A myth can perpetuate for many years, decades, centuries. As time passes and the myth matures, it succumbs to changes in society, technology, and environment. Methods founded on the myth struggle to solve prevailing problems. Different solutions emerge, some based on research breakthroughs and some unfortunately based on pseudoscience. This crisis period is pictorialised by the “yellow bubble.” As the myth is still the dominant paradigm, myth protectors attempt to maintain the status quo by denying, challenging or crushing the rise of disruptive ideas.

It sounds wise for organisations which are generating big profits to show reluctance to change. Everyone has heard the story about Kodak whose managers didn’t recognise soon enough that digital technology would decimate its traditional business. According to these managers, it’s a myth. They were very aware of the new technology. The failure was not convincing Kodak executives to provide R&D funding. The finance decision-makers did not want anything to disrupt the flow of money coming from film.[1]

For consultants who have created a lucrative business, it’s reasonable to keep “milking the cow.” After all, the myth has not reached the peak yet. Enticing spinoff solutions are sold to clients such as “train the trainer” to institutionalise the myth and strengthen the consulting relationship. Late maturity is often marked by a professional certification program with stepped levels of knowledge attainment. Learn all there is to know and earn a badge. But it’s also a signal the declining stage of the S-curve is nearing.

Others realise earlier in the life-cycle the ground beneath is dramatically shifted. They appreciate the myth’s thinking has been valuable and still delivering results. However, they also know why clients are staying awake at night thinking about unresolvable problems. As Peter Senge said: “Today’s problems come from yesterday’s solutions.” It’s time to “jump the S-curve” and explore what the next Age and its solutions has to offer.

Our intent is to not criticise the past by searching for root cause, blaming someone, but learning from it. We have the pleasure of hindsight bias. In this article we will turn back the clock to see what made logical sense as the Industrial Age unfolded. We delve deeper into Myth 1 and the problems it creates today.

Industrial Age Myth: The best way to run a mine is to focus on cost certainty and manage people as if they are parts of a machine.  

The Industrial Age was a golden period of growth, expansion and productivity increase. The big idea in the early 20th century was Frederick Taylor’s Scientific Management principles of productivity.

Two quotes from Taylor illustrate the managerial thinking at the time.

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Order, structure, and discipline emanated from Taylor’s beliefs. Industrial giants like Henry Ford implemented the machine assembly line and production flow concepts into manufacturing. In line with this thinking was Ford’s “You can have any colour of car as long as it is black.” Certainty meant dealing with “known knowns” and working with proven cause & effect relationships.

The Industrial Age birthed statistics and statistical theory. The first control chart appeared in 1924. People schooled in Scientific Management developed the new method of statistical process control (SPC). However, it wasn’t successfully implemented in a business setting until the 1950s. Other cost certainty methods that followed included cost accounting, activity-based costing, inventory management, zero-based budgeting, material requirements planning (MRP).

Academic professors turned consultants chimed in with business research applying a case study approach. It didn’t take long before project managers were writing a business case complete with a benefit-cost analysis.

In conjunction with improving assembly line operations was the formal organisation of people. Academics and big consulting firms introduced an idea dating as far back as Plato – Division of Labour. A managerial class would separate decision making from the doing of work, a strategy visible in the institutions of church and military at the time. The schema took root and easily spread in a relatively stable, repeatable, and predictable work environment.[2]

An early adopter was General Motors who implemented the divisional organisation in response to the car market demanding greater variety and choice. Cost accounting was used to calculate transfer pricing and keep the system coherent. This made sense because 85-90% of the value of an item sold could be attributed to variable costs (direct labour and raw material).[3]  As engineering, financial and marketing functions grew to satisfy the evolving market, by the late 1990s only 30-40% of costs were truly variable. However, management thinking stayed the same and fixed overhead costs were allocated by various means. This started to skew decision making, but few noticed.

To keep the assembly line running smoothly, engineers, accountants, and process analysts closely tracked what went wrong. Control was about minimalising deviations and stoppages like machine breakdowns, equipment failures, supply shortages. Failure analysis extended to the treatment of front-line workers. Processes were designed with humans performing “perfectly” without errors. Mistakes and absenteeism were not tolerated and often led to loss of pay punishment or outright dismissal.

In 1936 Charlie Chaplin wrote and directed the film “Modern Times.” While billed as a comedy, the film captured the painful working conditions shaped by the efficiencies of modern industrialisation.

The rise of unions

Counterbalancing the heavy-handed treatment of workers was the rise of labour unions. Work stoppage was the economic weapon. Not all strikes were confined to internal struggles between workers and management; politicians and even military troops were drawn into the picture. In Australia the 1949 coal miners strike saw 23,000 workers withdraw their labour between June 27 and August 15 of that year[4]. The dispute dominated Australian politics at the time and saw elements of revolution and counter-revolution which had been a rarity on Australian soil. Labour unrest shook the once stable work environment. The assumption that humans behaved in a predictable manner like machines was thrown into doubt.

The non-union managerial class was also subjected to command & control. HR produced job descriptions which included new terms such as roles & responsibilities, accountability, transparency, blameworthiness. Management by Objectives (MBO) was popularised by Peter Drucker in his 1954 book The Practice of Management. It surfaced as a system to measure managerial performance. Pressure was applied by setting annual KPI targets and stretch objectives for individuals aspiring to climb the corporate ladder.

TQM and PM

During this crisis period in the Industrial Age humans strengthened by union solidarity reacted to being poorly treated as cogs of a cost-driven industrial machine and demanded changes in working conditions.

Total Quality Management emerged as one “yellow bubble” solution. Pioneers Edwards Deming, Joe Juran, and Phil Crosby led the advancement of TQM. They are also credited for developing Project Management as a discipline. Progressive companies adopted TQM as their way of overseeing all activities and tasks needed to maintain a desired level of excellence. Instead of mainly looking inward for efficiency improvements, TQM promoted the idea of looking outward and achieving customer satisfaction.

Themes in Deming’ s PDCA cycle were continuous improvement, waste reduction, and customer loyalty. Quality was measured in financial terms. Improvements in waste management, production control, and increased sales from happy customers were calculated in terms of budgetary impact.

Juran applied the 80/20 Pareto Principle to prioritise quality issues. A major contribution was highlighting the human side of TQM. He stressed the importance of education, training, and understanding resistance to change.

Crosby’s philosophy was “do it right the first time”. He coined the term Zero Defects. Eliminate errors. Avoid time-consuming and costly failure fixes.

Many organisations did not get excited about TQM and saw it as a passing fad. They chose to remain entrenched in cost certainty mode and placed attention on finding more ways to reduce expenses.  Consultants were more than willing to help and offered innovations such as unbundling, outsourcing,  replacing labour with automation, and optimising supply chains.

Not everyone was in favour of Zero Defects. Detractors deemed the assumption human error is avoidable as unrealistic and unattainable. In the safety industry a similar assumption is that all injuries are preventable. The worry is putting a strain on worker performance and morale.

Not everyone was in favour of focusing on the customer. In 1976 a controversial idea that shareholders owned the firm and the true purpose of management was to maximise shareholder value. SVA[5] became the rallying cry for CEOs and financial markets who would benefit most from the paradigm. A major player was Jack Welch while CEO at General Electric. Not quite calling it a myth, upon reflection in 2011 he called SVA “the dumbest idea in the world.” [6] He questioned why do CEOs and their top managers receive massive incentives to focus most of their attention on the expectations market, rather than the real job of running the company producing real products and services.

Lessons learned from the Industrial Age

Behind all ideas are good intentions. But so are unintended negative consequences. What results have been accomplished? What have we discovered and learned from the Industrial Age?

Mining Productivity

Australian mining experienced a resource boom in the Industrial Age. In the early 1960s, discoveries of new metals led to a resurgence of interest in Australia’s mineral resources. Production also increased and Australia became a major raw materials exporter, especially to Japan and Europe.

Today Australia is one of the world’s leading mineral resources nations. It is the world’s largest refiner of bauxite, producer of gem and industrial diamonds, lead and tantalum, and the mineral sands ilmenite, rutile and zircon. Other world rankings in production are: zinc (2nd); gold, iron ore and manganese ore (3rd); nickel, aluminium (4th); copper, silver, black coal (5th). [7]

It seems odd that Australia’s enviable position has been accomplished with productivity levels that have been trending downwards. According to Ernst & Young[8] capital productivity in Australia has fallen 45% since 2000. Perhaps it’s because Australia hasn’t been alone in the worldwide decline. E&Y reported labour productivity in the South African gold sector dropping by 35% since 2007.

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These sobering findings are corroborated by McKinsey [9] which found that global mining productivity overall has decreased by 29% over the last decade. From 2014 to 2016 McKinsey’s Mine Lens shows a 2.8% per annum uptick in productivity, but productivity is still far below the level 15 years ago.[10]

Employee engagement

Organisations consider employee engagement an important indicator of company health. Engaged employees offer their talents and energy to work efficiently and effectively. Actively disengaged workers, on the other hand, look around for ways to ignore or damage the best interests of the organisation. Galluphas been measuring employee engagement across the world for many decades.

“Worldwide, the percentage of adults who work full time for an employer and are engaged at work — they are highly involved in and enthusiastic about their work and workplace — is just 15%.

“They imply a stunning amount of wasted potential, given that business units in the top quartile of Gallup’s global employee engagement database are 17% more productive and 21% more profitable than those in the bottom quartile”.

For Australia/New Zealand the 2013 report identifies 24% or workers as highly engaged and 16% actively disengaged.[11] In the 2017 survey the highly engaged number dropped to 19%.[12] 

Compounding the employee engagement problem is anecdotal evidence that millennials do not see mining as a promising career. Jake Klein, CEO of Evolution Mining stunned many attending the 2019 Future of Mining Conference in Sydney by informing there are only 25 mining engineers enrolled in Australian Universities[13]. He sees the biggest challenge is making mining an attractive industry for young people.

Klein’s concern reinforces a view expressed by the World Economic Forum (WEF).[14]Business leaders say that attracting, managing and retaining a skilled workforce is their number one business challenge in the next five years. WEF research showed better benefits, more accessible savings plans, and guidance and technology tailored to individual needs would have a very positive impact on a workforce.

Despite the clear message, Myth 1 continues to be played out today. Permanent employee levels are contained or shrunk by using contracted labour and outsourcing (parts of a machine). Financial actions such as switching employer-employee shared pension plans from defined benefits to market-based enhance cost-certainty and shift the risk of retirements fund sufficiency from the company to the individual. When workers opt out on corporate buy-out and early retirement programs, the labour cost savings are highlighted but neglected are the non-monetary losses in tacit knowledge and experience.

Implications of running mines according to Myth 1

History has taught us that Myth 1 has created “wicked” problems for the mining industry. Wicked problems are difficult or impossible to solve because of incomplete, contradictory, and changing requirements that are often difficult to recognise. [15] 

Some industry pundits believe that poor productivity and employee engagement are two sides of the same coin. Measuring systemic productivity while enforcing individual accountability injects disharmony into the organisation and reaps diminishing returns.  How does this happen? Boston Consulting group partner Yves Morieux[16] explains: 

“…this drive for clarity and accountability triggers a counterproductive multiplication of interfaces, middle offices, coordinators that do not only mobilise people and resources, but that also add obstacles. And the more complicated the organisation, the more difficult it is to understand what is really happening. So we need summaries, proxies, reports, key performance indicators, metrics. So people put their energy in what can get measured, at the expense of cooperation. And as performance deteriorates, we add even more structure, process, systems. People spend their time in meetings, writing reports they have to do, undo and redo. Based on our analysis, teams in these organisations spend between 40 and 80 percent of their time wasting their time, but working harder and harder, longer and longer, on less and less value-adding activities. This is what is killing productivity, what makes people suffer at work. 

We need employees to cooperate, to trust their coworkers and managers. It is to take a risk, because you sacrifice the ultimate protection granted by objectively measurable individual performance. It is to make a super difference in the performance of others, with whom we are compared. It takes being stupid to cooperate, then. And people are not stupid; they don’t cooperate.” 

Safety in the Industrial Age

Ever wonder why Safety is a cost item in a budget? We hear platitudes that an organisation’s greatest asset is its employees. Yet instead of an investment, they are entered as expenses on the Profit & Loss statement. No different than a replaceable part in a machine.

“Safety-I” was coined by Erik Hollnagel[17] to reflect the mechanistic treatment of humans in the Industrial Age. Safety is defined as the absence of negative events. Humans are error prone, focus on what goes wrong, and the ideal target is Zero Harm, a logical extension of Zero Defects thinking.

Surrounded by scientific management principles, the beginnings of Safety as a practice intuitively mirrored the patterns of business and the avoidance of human failure. In 1931 Herbert Heinrich published his book “Industrial Accident Prevention, a Scientific Approach.” [18]  The book cited 88 percent of all workplace accidents and injuries/illnesses are caused by “man-failure.” More famous is Heinrich’s Law: that in a workplace, for every accident that causes a major injury, there are 29 accidents that cause minor injuries and 300 accidents that cause no injuries. Alas, Fred Manuele disclosed in his 2011 review, it’s a myth.[19]

Learning to let go

The Y-axis of the Life-cycle diagram is labelled “Utility of the Paradigm” for a good reason. A subsequent age doesn’t start from zero but is elevated by the previous age. That means we carry forward the valuable lessons and practices and adapt them to the next emerging Age. And just as important, we let go of the myths and fallacies of the old Age.

In the next article we examine the radical thinking in the Information Age. Scientific Management yields to Systems Thinking. An Engineering paradigm emerges. And a new myth is born.

Thank you for the feedback and enthusiastic show of support. In response to the interest, we are conducting 1-day Radical Innovation in Mining Management workshops on October 31 (Sydney) and November 8 (Brisbane). To be added to our invitation list, please contact Hendrik Lourens at hendrik@stratflow.com.au .

Written by Gary Wong and Hendrik Lourens

References

[1]       The Real Lessons From Kodak’s Decline, MITSloan Management Review Magazine: Summer 2016.

[2]       Freedom from command and control, John Seddon, Productivity Press, Kindle, 2005.

[3]       Profitability with no boundaries, Reza M. Pirashteh and Robert Fox, American Society for

Quality, 2011.

[4]       Australian Coal Strike https://en.wikipedia.org/wiki/1949_Australian_coal_strike

[5]       Theory of the Firm: Managerial Behavior, Agency Cost and Ownership Structure, Michael Jensen and William Meckling, Journal of Financial Economics, 1976.

[6]       The Dumbest Idea In The World: Maximising Shareholder Value, Steve Deming, Forbes, Nov 2011.

[7]       History of Australia’s Minerals Industry. http://www.australianminesatlas.gov.au/history/index.html

[8]       Productivity in Mining: Now comes the hard part, Ernst & Young, 2016.

[9]       Productivity in Mining Operations: Reversing the downward trend, McKinsey, 2015.

[10]   Behind the mining productivity upswing: Technology enabled transformation, McKinsey, 2018.

[11]   State of the Global Workplace, Gallup, 2017.

[12]   State of the Global Workplace, Gallup, 2013.

[13]   Future of Mining Australia 2019, Jake Klein. https://www.youtube.com/watch?v=0cw0V30gmyk

[14]   Is this the secret to happy and engaged employees? WEF 2018.

[15]   Wicked Problem, Wikipedia.

[16]   Smart Rules: Six ways to get people to solve problems without you, Yves Morieux, Harvard Business Review, September 2011.

[17]   Safety I and Safety II: The Past and Future of Safety Management, Erik Hollnagel, 2014.

[18]   Industrial accident prevention, H.W. Heinrich, McGraw Hill, 1931

[19]   Reviewing Heinrich: Dislodging Two Myths From the Practice of Safety, Fred Manuele, Oct 2011, Professional Safety, www.asse.org