Performance Improvement at Sims Metal

1. Performance Improvement at Sims Metal Presentation to AOQ September 20th, 2006

2. Performance improvement at Sims Metals Agenda Introduction and analysis tools identifying the key issues ---Nick The production processes and analysis of revenue drivers --- Carola Feasibility and implementation of recommendations --- Viv Financial justification of options related to corporate strategy --- Justin Conclusion, recommendations and summarisation --- Matt Questions --- All

3. Performance improvement at Sims Metals • Sims Metals QLD division – Recycling industrial and vehicle scrap metal into secondary ferrous and non ferrous primary resources. • A performance improvementresource available… • But… Many processes and many projects all of which will benefit productivity. • Question • So where to apply the additional resources? • Answer Go back to corporate strategy!

4. Performance improvement at Sims Metals • Strategic analysis and diagnostics tools are used to identify the key problem issues that need resolving. • Open systems model for performance improvement diagnostics at the organisation level. • Porters 5 forces analysis. • Porters Value Chain. • Competitive advantages Vs Growth retarding factors

5. Performance improvement at Sims Metals • Open systems model for organisation level diagnostics Feedback Outputs Organisation performance Productivity Finished goods Stakeholder satisfaction Inputs General environment Industry structure Strategy Mission Intentions Objectives Organisational Design Core activities Measurements Structure HRM Strategic goal for QLD is:-Significant growth in revenue Waddell, Cummings and Worley (2004)

6. Force Description Severity and Effect on Sims Metal Threat of new entrants Very Low.The market demand is growing, but the capital cost to enter the market as a major player is very high (shredder and shearer costs). However, there is little product differentiation and no brand recognition. Therefore, smaller scrap merchants can easily enter the market and trade, but not in bulk scrap and export markets. Threat of rivalry Very High.Veryfew competitors, an oligopolistic market. However there are no price collusion effects as world markets are competitive and there are few major customers. Despite only a few major competitors, the lack of differentiation and brand makes scrap metal behave like a commodity. Customers are won first on price, then availability, quality and then to a limited extent, relationship. Threat of powerful suppliers Medium. Plenty of suppliers; many scrap yards exist. However, crushing cars and transportation to Rocklea is expensive so only major scrap merchants provide an economic raw material supply. Supplies are limited and competition is pushing prices up; relationships are important Threat of substitute products V. Low. Both ferrous and non-ferrous scrap customers need the metal. Plastics and other materials have replaced many applications but the rate of replacement is now insignificant. Nonetheless, the market must beware of new technology developments in composite materials and not be complacent of a possible breakthrough effecting demand. Threat of powerful buyers High. Powerful buyers can force prices down in times of reduced end product demand, such as during construction and economic downturns. Ferrous margins are slim at best; large profits are only possible for non- ferrous and specialist metals experiencing a specific demand. Performance improvement at Sims Metals Result: The only threats to Sims are from powerful buyers and rivalry from competitors, nonetheless these are powerful forces that completely negate the opportunity to raise prices for increased revenue.

7. Flat management with a divisional design • ISO 14001 certified system • Part of the worlds 2nd largest metal recycling company providing, financial stability and economies of scale Firm’s Infrastructure • Critical space shortage at Rocklea site Profit Margin • Highly skilled workforce with a professional culture • Core employees are cross skilled in other roles • Good staff relationships and non union labour aids meeting customer needs and preventing high staff turn over. • Environmental regulations limit operations HRM • Shredder process is constantly updated for maximum performance • High technology methods employed in scrap content assessment to prevent customer complaints • Shredder ‘overstretched’ and at maximum throughput • Shearer near EOL Technology Developments • Expert assessment of raw material purchases before collection minimises losses and ensures correct price paid • New and effective plant minimises down time costs Procurement • ACCC regs prevent further acquisition of competitors for growth Inbound Logistics Operations Outbound Logistics Marketing & Sales Service • High efficiency limits O/H costs • High level of process automation reduce cost • Excellent site layout for high throughput • Dust and noise pollution issue limits site to 9 hours of day operations Good quality with on time delivery • Large customer base with long term relationships • High quality product commands premium price • Demand is high, and sales are lost because Rocklea cannot provide enough product • Main site located close to port facilities for on time delivery • Own fleet of trucks and crushers to process cars for transport – Speed and timing • Constant flow of materials keeps space available for more • 70% of output material exported from Brisbane port, close location reduces costs • Local NSW customers for ferrous scrap • Trucks can only load in limited hours, causes ships to wait until full Porters Value Chain Analysis

8. Performance improvement at Sims Metals E $ E C E C= Competition Issue E = Environmental Issue $= Capital Cost Issue

9. Performance improvement at Sims Metals Result: Diagnostic analysis of the organisation reveals 3 core issues that must be addressed by the final recommendation in order to provide significant growth in revenue • Environmental Issue • Surrounding area is occupied by other businesses, hence the noise and dust generated by operations is considered an environmental problem. • Environmental regulations have been imposed, limiting the main plant (shredder) to 11 hours operation per day thus constraining production output. • Competition Issue • Low barriers of entry and a growth market, competitors are entering the market and taking advantage of Sims limited output capacity. • Acquisition of competitors is not possible due to ACCC regulations. • Sims have to depend on organic growth to meet the corporate strategic objective in QLD. • Capital Cost Issue • Competing major projects for resources • A major metal cutting machine (shearer) because it is near EOL • The acquisition of adjacent land for Rocklea plant expansion. • Increasing the range of recycled materials handled. • Investment in a second shredder.

10. Performance improvement at Sims Metals • Action • Analyse the production processes to identify:- • Which are the key profit margin contributors? • Which (if any) can provide the significant growth in revenueand resolve the three core issues. • Develop an implementation plan • Challenge the assumptions (double loop learning) for ‘out of the box’ possibilities • ASK --- Is it Suitable? Acceptable? Feasible?

11. Operational Evaluation and Process Structure • Types and values of consumables and non-consumables produced from recycling process • Analysis of operational and process structure for effectiveness and quality

12. Breakdown of profit sources by product and process

13. Processing Structure for Scrap Materials

15. Recommendation • No performance improvements nor intervention in the shredding process would produce the revenue and solve the issues… Solution? Increased capacity!

16. Feasibility & Implementation Plans Board Approval Local Government Approval

17. Compliance and Regulatory Issues Development Plan • Environmental Management • Waste Management • Storm water Management • Details of Service • Landscape plan ( Prepared by a qualified landscape architect) • Traffic Report • Acoustic Report Scheduling order plan Gantt Chart

18. Gantt Chart

19. Financial Measurements • One shredder versus four shear/excavators • Breakeven Analysis • Tons • Days • Net present Value

20. Breakeven Analysis • Shredder takes longer to pay off, but generates more income • Faster pay off time = more cash available for other projects

21. Net Present Value • Shredder brings more value to the company than the four shear / excavators • Shredder also lowers certain operating costs such as transportation of scrap

22. Financial Wrap-Up • Sims aims to compete as a cost leader • Large capital expense on quality equipment • Ensure accurate products • Minimise downtime

23. Conclusion, Recommendations and Summarisation • Process at Rocklea operating at “critical mass” • Environmental constraints increasing • Potentiality of ACCC involvement • Capital cost issues

24. Recommendations • Purchase a new shredder over purchasing 4 shearer/excavator machines (capital cost and “critical mass” issues) • Place new shredder in recently acquired Townsville location (environmental and competition issues)

25. Summarisation • Preliminary Cost-Benefit analysis presented and approved • Intention of placing new shredder in Townsville presented to ASX • Soil and acoustic tests performed • Environmental Management Plan presented to: • Townsville Port Authority • Townsville City Council • Ergon Energy • Department of Main Roads

26. Summarisation (con’t) • Adjustment of plans raised by concerns of aforementioned parties • Feedback search in process with Townsville Port Authority about operational decisions and processes • Current discourse, planning and operational development congruent with recommendations provided during analysis

27. Questions?