Why group purchasing agreements could be costing your shareholders dearly.
Since the 90’s group purchasing and tendering for supply of process chemicals has become prevalent. These agreements are generally run by purchasing and accounting personnel, and despite appearances often lack any real input from operational personnel. These are particularly counterproductive when they focus on the purchased item not the desired outcome for the organisation. While they may work for pure commodities with easily defined quality and quantity levels, they are more often than not have a negative impact on specialty chemicals because;
As much as we like to think we can scientifically control everything, the use of many specialty chemicals in minerals processing still has a valuable component in the art of selecting and applying the chemicals.
Case study 1
A coal site is using a flocculant for a fine clean coal thickener. It is using flocculant A, and they are spending $300,000/ per annum on the current flocculant. A competitor comes along and offers to supply the “same” flocculant for $200,000/year. Purchasing look at this and say this represents a 33% saving and changes supplier. Seems a pretty simple slam dunk saving, and when at the end of the year the purchasing department get a gong for cutting costs. Looks pretty good in isolation.
What you are not seeing in this picture is that the previous flocculant company employed a highly trained and experienced technical representative, who visited the plant regularly, had a good working relationship with the operational personnel, and trained and mentored the companies staff on good thickener operation. The new flocculant supplier just sends a Christmas card to purchasing. Since the change over in supplier, the trained plant process engineer has moved on, thickener underflow density has decreased and the final filters have been unable to maintain moisture targets. The shipped moisture of the product has gone up by 0.7%, Cost the company $1,000,000 in additional handling charges and penalties. Operations get a please explain from management.
Case Study 2
A site uses an antiscalant to control scale in their heap leach pipework and drippers. The reagent being used is $5.40 kg ex works at annual consumption of 115,000 kg giving a ex works cost of $600,000. The program is challenged on a monthly basis and is controlled to keep the drippers operational for their 2 year operating life, and a good working relationship exists between the supplier and the customer. Purchasing then put out a tender asking for pricing for contract to supply antiscalant. A competitor offers up an alternative product using the same functional chemistry for $3.80/kg, They have highly trained and experienced staff, so ongoing technical support is not going to be an issue. They win the contract and purchasing record a victory for cost saving. What has not been taken into consideration is that the new product is only 66% the concentration of actives as the previous product, so to achieve the same inputs dosage rates (ml/min) must be increased by 50%. This means operations must now pay $657,000 for equivalent results to the old program.
The site is an isolated minesite in far northern Australia, and the chemicals are supplied from depots in Melbourne. Freight rates for delivery work out to $0.60/kg meaning delivery charges for the antiscalant to site rise from $69,000/yr to $103,000/yr.
The net result of the saving in $/kg of reagent has seen the operational expenditure on antiscalant increase from $670,000/yr to $761,000/yr,as the site is effectively paying $0.60/kg to transport an extra 60,000 litres of water from Melbourne to site as well as a higher price per unit active. Operations are asked to explain why their antiscalant expenditure has blown out by $92,000/yr (13%). They then reduce antiscalant dosage to get costs back in line and find that the dripper lines are only staying functional for one year instead of two, leading to lower recovery rates and increased dripper line maintenance costs. Estimated cost to the business over 2 years is $1,400,000 in lost gold recovery.
Conclusion
Both examples used above are based on real life situations I have come across, and have been deliberately simplified to just talk to the main point.
Buying on a nominal $/kg or other similar commodity linked pricing mechanism only works when the required technical expertise exists within an organisation, or an independent assessor is involved, and that the measures used to compare products really are fair. If you have a program which is working, do not focus on the “cost” alone in any purchasing decision, and risk assess for any potential adverse effects on production. A 0.1% reduction in plant recovery is far more costly than any saving from a 20-30% reduction in cost of a process reagent.
The challenge for operational personnel is to ensure in any tender process/group purchasing arrangement that a full risk assessment is carried out. I would be interested to find out about peoples experiences with tenders and group purchasing agreements, and how we can weight these for those often unaccounted for element so they deliver the best outcome for your business. If you must follow a group purchasing agreement or similar, it pays to check the required technical expertise exists within your organisation, or if not, ensure that a technical audit is carried out by a suitably skilled and experienced independent third party.
Since the 90’s group purchasing and tendering for supply of process chemicals has become prevalent. These agreements are generally run by purchasing and accounting personnel, and despite appearances often lack any real input from operational personnel. These are particularly counterproductive when they focus on the purchased item not the desired outcome for the organisation. While they may work for pure commodities with easily defined quality and quantity levels, they are more often than not have a negative impact on specialty chemicals because;
- The organisation does not have all the required technical skills and experience;
- The pricing structure places no value on the technical expertise, experience and resources of the suppliers.
As much as we like to think we can scientifically control everything, the use of many specialty chemicals in minerals processing still has a valuable component in the art of selecting and applying the chemicals.
Case study 1
A coal site is using a flocculant for a fine clean coal thickener. It is using flocculant A, and they are spending $300,000/ per annum on the current flocculant. A competitor comes along and offers to supply the “same” flocculant for $200,000/year. Purchasing look at this and say this represents a 33% saving and changes supplier. Seems a pretty simple slam dunk saving, and when at the end of the year the purchasing department get a gong for cutting costs. Looks pretty good in isolation.
What you are not seeing in this picture is that the previous flocculant company employed a highly trained and experienced technical representative, who visited the plant regularly, had a good working relationship with the operational personnel, and trained and mentored the companies staff on good thickener operation. The new flocculant supplier just sends a Christmas card to purchasing. Since the change over in supplier, the trained plant process engineer has moved on, thickener underflow density has decreased and the final filters have been unable to maintain moisture targets. The shipped moisture of the product has gone up by 0.7%, Cost the company $1,000,000 in additional handling charges and penalties. Operations get a please explain from management.
Case Study 2
A site uses an antiscalant to control scale in their heap leach pipework and drippers. The reagent being used is $5.40 kg ex works at annual consumption of 115,000 kg giving a ex works cost of $600,000. The program is challenged on a monthly basis and is controlled to keep the drippers operational for their 2 year operating life, and a good working relationship exists between the supplier and the customer. Purchasing then put out a tender asking for pricing for contract to supply antiscalant. A competitor offers up an alternative product using the same functional chemistry for $3.80/kg, They have highly trained and experienced staff, so ongoing technical support is not going to be an issue. They win the contract and purchasing record a victory for cost saving. What has not been taken into consideration is that the new product is only 66% the concentration of actives as the previous product, so to achieve the same inputs dosage rates (ml/min) must be increased by 50%. This means operations must now pay $657,000 for equivalent results to the old program.
The site is an isolated minesite in far northern Australia, and the chemicals are supplied from depots in Melbourne. Freight rates for delivery work out to $0.60/kg meaning delivery charges for the antiscalant to site rise from $69,000/yr to $103,000/yr.
The net result of the saving in $/kg of reagent has seen the operational expenditure on antiscalant increase from $670,000/yr to $761,000/yr,as the site is effectively paying $0.60/kg to transport an extra 60,000 litres of water from Melbourne to site as well as a higher price per unit active. Operations are asked to explain why their antiscalant expenditure has blown out by $92,000/yr (13%). They then reduce antiscalant dosage to get costs back in line and find that the dripper lines are only staying functional for one year instead of two, leading to lower recovery rates and increased dripper line maintenance costs. Estimated cost to the business over 2 years is $1,400,000 in lost gold recovery.
Conclusion
Both examples used above are based on real life situations I have come across, and have been deliberately simplified to just talk to the main point.
Buying on a nominal $/kg or other similar commodity linked pricing mechanism only works when the required technical expertise exists within an organisation, or an independent assessor is involved, and that the measures used to compare products really are fair. If you have a program which is working, do not focus on the “cost” alone in any purchasing decision, and risk assess for any potential adverse effects on production. A 0.1% reduction in plant recovery is far more costly than any saving from a 20-30% reduction in cost of a process reagent.
The challenge for operational personnel is to ensure in any tender process/group purchasing arrangement that a full risk assessment is carried out. I would be interested to find out about peoples experiences with tenders and group purchasing agreements, and how we can weight these for those often unaccounted for element so they deliver the best outcome for your business. If you must follow a group purchasing agreement or similar, it pays to check the required technical expertise exists within your organisation, or if not, ensure that a technical audit is carried out by a suitably skilled and experienced independent third party.
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