CHAPTER 6 Cost structure and performance trends in deep mining

Introduction 6.1. In this chapter we discuss the cost structure and trends in deep mining and bring together the performance measures used by the NCB for its day-today management and the longer-term control of its business. The need for a particular form of performance measure depends upon the activity being monitored, the level of management at which it is used and the time horizon of interest. In the NCB a large number of performance measures are necessary to provide adequate management control. In the rest of this chapter we discuss in turn: (a) cost structure and trends; (>) manpower costs; (c) material costs; (d) other non-capital costs; (e) capital costs; and (/) relative importance of the various factors. Cost structure and trends 6.2. The NCB's main cost-related measure of performance is operating profit per tonne. If a colliery's proceeds per tonne exceed its production costs per tonne, including depreciation on new investment since 1974 but excluding interest, it is regarded by the NCB as 'profitable'. Proposed investment projects are evaluated using DCF techniques as the main financial yardstick. Each project evaluation put forward for consideration by the Board contains information on the profit after charging depreciation and interest expected on the completion of the project. In the year following completion the colliery's performance is matched against the appraisal data. After this the reporting basis reverts to operating profit per tonne excluding interest. It does not therefore provide adequate information on the performance of the colliery including the new investment in the medium and longer term. In ignoring the total cost of capital, the profitability measure for collieries is misleading and a false picture of increasing profitability results, because it reflects reductions in operating costs (especially labour costs) achieved by productivity-raising investments but fails to take into account the full cost of the finance required. 6.3. The appropriate cost-related measure of operating efficiency is total cost per unit of output, which may be related to realisation values to give a figure for margin on turnover. Total costs may be divided into three main components, labour (and labour-related) costs, material and services costs and capital costs, each of which is the sum of many different items requiring separate, disaggregated analysis. 6.4. The objective of management is to improve financial results by using the best available 'mix' of resources of labour, plant, material, services and capital evaluated with respect to the realisations which will arise from the
101

combination of inputs. Given the strategy for output volume and price structure, it is the task of operational management to minimise the total cost per unit of output by the efficient application of the available resources. In order to determine the optimal mix, adequate measures of the cost per unit of each resource, as well as the volume utilised, are required. The NCB monitors the physical output of labour in great detail, at colliery and even at face level, and makes some physical measurements of capital utilisation, for example, output per machine shift. It also monitors earnings per man-shift, and the cost of materials at colliery level. Apart from the rental charges made for equipment supplied from plant pool (which as we have explained elsewhere do not fully reflect the cost of providing this equipmentsee Chapter 15), total capital costs are not monitored at all at colliery or Area levels except in terms of investment projects during appraisal. The only figures available are those that can be derived from the NCB's accounts. We have discussed in Chapter 3 the difficulties which the NCB considers would be encountered in allocating interest charges to Areas and collieries. Trend in capital costs 6.5. Figure 6.1 shows the trend in 'cost per saleable tonne' produced, at 1980-81 prices, in terms of: (a) total unit cost including interest and depreciation on capital; (b) unit operating cost not including interest charges; and (c) unit operating cost not including interest or depreciation. 6.6. The increasing significance of the capital charges results partly as the consequence of the capital reconstruction of 1965 and 1973 and partly from the general increase in interest rates. However, it also results from an increased rate of investment following the relative lack of investment in the years up to 1973. 6.7. The growing importance of the value of capital consumption and the cost of financing capital is clearly demonstrated by Figure 6.1. The unit costs have been increasing in real terms until 1980-81 with a real reduction in the latest year 1981-82 which is consistent with the maturing of investment in Plan for Coal in previous years. However, the difference between total costs and non-capital operating costs has been increasing and continues to do so. The trend towards greater capital intensity in the industry is likely to continue and with it the growing influence of capital costsv Trend in non-capital components of cost 6.8. To indicate to what extent the NCB has been able to absorb the changes in the real cost of inputs we have tried to simulate what would have happened to its unit cost, since 1971-72, if it had taken no action to offset increases but had accepted the unit cost trends which prevailed in the economy as a whole. The assumptions of this simulation were: (a) no change in operating procedures; (6) no change in labour productivity; (c) no change in fuel mix; (d) that cost component trends followed those in the economy as a whole; and
102

(e) that the effect of ageing of mines referred to in paragraph 6.13 is neglected. 6.9. We considered the following components of cost in terms of resource inputs, labour, materials, fuel and all other costs excluding depreciation and interest. We have considered here operating cost only because financing costs depend very much on the asset and financial structure of the particular industry and are not easily comparable in terms of a national trend. ^ 6.10. Figure 6.2 shows the national trend for these components relative to RPI indexed to 100 in 1971-72. The following indices of national trend were used: Earnings Average annual earnings for whole economy, all employees. Materials Average annual price of materials purchased by manufacturing industry. Electricity Index of average cost per unit used by all United Kingdom industry. Oil Index of wholesale price for all United Kingdom industry. Coal Expected NCB production cost (see below). Other costs Assumed to follow RPI.
FIGURE 6.1 Total cost per tonne of saleable output for mining activities in 1980-81 prices, 1973-74 to 1981-82 showing the influence of financing charges

45 T

^ Q.
O

40Total cost per tonne

JQ
CO CO CO
H-

35Interest Depreciation
30

o
CD

5
I CD Q.

Operating cost/tonne (not including interest or depreciation)

25

8 20
O
15-

1973-74 74-75 75-76 76-77 77-78 78-79 79-80 80-81 (RPI used as deflator index) Source: The NCB.

81-82

103

FIGURE 6.2 National trends in the input cost elements of operational expenditure, 1971-80 (base 1971 = 100) deflated by RPI

180 -

Fuel oil index M Materials index Average earnings index Electricity index

f
1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
Sources: Monthly Digest of statistics. DoE Gazette. Digest of United Kingdom Energy Statistics.

6.11. The expected cost trends have been estimated by taking the cost structure of the mining activity in 1971-72 and projecting each component into subsequent years assuming the trends in Figure 6.2. It is then possible to compare the expected with actual unit cost in total and the proportion of difference accounted for by each component. It is difficult to select a base year which provides an adequate historical perspective (especially the influence of the rapid rise in the price of oil), but is neutral with respect to any typical behaviour in the cost structure. It should be borne in mind that in 1971-72 the NCB was involved with a strike. These comparisons are shown in Figure 6.3.
104

FIGURE 6.3

A comparison in real terms of trends in actual and expected costs per saleable tonne showing the proportion of difference attributable to the component resource costs 1971-72 to 1980-81 for deep mining activities. AH costs deflated by RPI.

Component of total difference due to:

O O

150 -

CM

PS
T-

140-

Higher manpower costs Actual real costs per tonne A Fuel costs Other costs

Lower material costs

r130 -

120 -

110 -

Expected real cost per tonne

o>

Q.

100

90 .
1971-72
Source: MMC study.

72-73

i 73-74

i 74-75

I 75-76

i 76-77

i 77-78

78-79

79-80

80-81

6.12. The analysis suggests that there was a small reduction in actual unit cost in the year 1972-73 relative to that expected. However, during the next two years the position had reversed mainly due to a substantial increase in manpower costs. These increased manpower costs followed directly from the awards in settlement of the mineworkers' strikes of 1972 and 1974. Apart from the manpower cost effect, the NCB appears to have achieved a reduction of actual material cost relative to the expected material cost per tonne, which over the decade would have offset relative increases in other costs. Thus the current cost per tonne, mainly as the result of increased unit manpower costs, appears to be some 16 per cent higher than would have occurred if unit resource cost had followed national trends since 1971-72. The influence of ageing on performance 6.13. The main resource of the mining industry, coal, is non-renewable. As the mineral is extracted and the mine ages the resource wastes in ways not apparent in non-extractive sectors and results in an inherent potential for a steady decline in productivity and an adverse influence on cost trends. 6.14. The loss in productivity occurs over the lifetime of a pit because it requires increasing effort to reach the working face as the seams are penetrated1 and there is also a tendency for the workability of the residual seams to be less favourable. On rare occasions previously abandoned seams can be reworked economically with modern equipment. As the result of these factors the NCB must improve efficiency by at least 0-75 per cent each year (see Appendix 6.1) in order just to maintain productivity of saleable output at a constant level, or regularly replace old capacity with new. The NCB pointed out that to produce a real gain in overall productivity requires additional action including capital investment that must be made at 'current replacement cost' resulting in increased depreciation and interest charges. Ageing is discussed in more detail in Appendix 6.1. Manpower costs 6.15. We have seen that increased manpower costs have been a major contributor to the real increase in unit cost over the past decade. The NCB monitors both the productivity and the earnings rate component of costs. These are discussed below in more detail, but the general trend has been that productivity has improved for some categories of labour substantially but overall the improvement has been modest, whilst earnings rates have increased substantially for all classes of labour. Figure 6.4 shows the trend in the wage cost component per tonne over the period 1971-72 to 1980-81 in 1980-81 prices. The contribution of face wage costs to the overall increase has been modest because of the considerable improvement in face productivity. The productivity component 6.16. The NCB has developed a comprehensive set of labour productivity measures in terms of 'saleable output per man-shift' (OMS). As is normal for a primary productivity measure, OMS includes coal produced and put into stocks after preparation, and certain shifts paid for but not worked are not included,
1 This element would be less important in a mine worked in the total retreat system which is not at present used in Great Britain.

106

FIGURE 6.4

Trend in wage cost per saleable tonne over the period 1970-71 to 1980-81 in deep mining (1980-81 prices)

12-0 Overall

10-00>

I I
OJ (0
CD

80

^
t*4

6-0

V)

O u
0)

2*

40-

Face
2-0 -

Strike

Strike

Incentive scheme

1970-71 71-72

72-73 73-74

74-75

' 75-76

76-77

" 77-78

78-79 79-80

80-81

{RPI used as deflator index) Source: MMC study.

eg training shifts or authorised attendance at training college. This is the principal measure of performance used by the NCB.1 It is used by local management for day-to-day monitoring, for monitoring over longer timescales centrally and by Area planners for target setting. Since OMS is related to coal produced rather than coal sold, and to shifts worked rather than shifts paid for, it is a measurement of man effort and not, if one takes the view that it includes matching supply and demand and reducing non-productive man-shifts, a measure of management efficiency. (This is discussed further in Appendix 6.3.)
1

The following comments should be noted about the QMS measure: (a) Current make of slurry disposed of is included in output but lifted slurry is included only when sold. (b) The measure will be consistent for comparisons over time only if shift lengths remain constant over time and if the shift length is the same for all classes of labour.

107

6.17. An OMS productivity measure is defined by the NCB for different categories of work: (1) Major longwall mechanised = MLMF saleable output face OMS Man-shifts on MLMF (incl overtime) (2) Production OMS = Production saleable output Production man-shifts (3) Other underground OMS = Total revenue saleable output (incl lifted slurry) Development & underground services man-shifts (4) All underground OMS =. Total revenue saleable output All underground man-shifts (5) Surface OMS = Total revenue saleable output Surface man-shifts (6) Overall revenue OMS = Total revenue saleable output Total underground & surface man-shifts (7) Revenue+capital OMS = Total revenue saleable output+ capital output Total underground+surf ace + capital man-shifts Revenue shifts are those for which the expenditure is charged to the revenue account; capital shifts are those which are associated with capital works and expenditure on labour is capitalised. The use of a number of OMS measures is an attempt to separate the contributions to total productivity changes by different categories of work. 6.18. In 1979 the NCB changed the definitions of OMS and its accounting policy to accommodate a change in the criterion for capitalisation of development manpower: (a) Previously all non-capital drivage shifts associated with a face heading were included in the face OMS measure. Since 1979, such face heading shifts not directly associated with a production face have been included in other underground OMS. This has the effect of producing a measure which monitors more closely the effort at the primary production centre. All other man-shifts can be regarded as in some sense diluting the productivity achieved at the source of production. (6) Development work, on roadways for example, is capitalised if the expected lifetime is greater than an agreed threshold value. In 1979 the NCB changed the criterion for capitalisation by reducing the threshold lifetime to five years. (c) Work producing saleable output from capital projects was not previously included in an OMS productivity measure. These changes make it difficult to obtain a consistent run of measures over the past decade, and this should be borne in mind when interpreting the trends.
108

The measure which is probably most consistent is 'total revenue QMS' where the change in capitalisation criterion probably distorts the trend by about 1 per cent. Trend in labour productivity 6.19. Figures 6.5 and 6.6 show the trend in overall revenue OMS for the 12 Areas and the national trend for the period 1970 to 1982. Over the period 1969-70 to 1981-82 there has been an overall improvement of about 9 per cent in the aggregate national figure, most of which has been due to a small but steady year-on-year increase since 1977, previous to which the OMS varied with gains and losses from year to year. A main feature of the Area trends is the wide dispersion of productivity values which persists throughout the period. 6.20. Figure 6.7 shows the national trend in overall revenue OMS and its related components, manpower and saleable output including tip and capital coal, for deep mining for the period 1970-71 to 1981-82. Manpower and output both show a related downward trend. The short-term variations in output, however, are more marked than for manpower. The most significant variation in output reflects the reduced man-shifts during the national strikes of 1971-72 and 1973-74. 6.21. Figure 6.7 also shows the trend in overall man-shifts per year over the period. Between 1970-71 and 1978-79 man-shifts have reduced at a slightly greater rate than overall manpower; however, since 1978-79 man-shifts have increased relative to manpower. The change has resulted from a significant and continuing reduction in the absence rate over the last few years despite a reduction in the proportion of overtime shifts worked. 6.22. The improvement in overall revenue OMS nationally has been achieved by a variety of actions, inter alia: (a) major investment in access ; and (b) concentrating production in better faces, better pits or better Areas which has been assisted by: (i) investment in plant and machinery; (ii) improved technology in plant and machinery; and (iii) implementation of an incentive scheme and improved use of manpower. These are discussed in more detail in Appendix 6.2. 6.23. The June 1974 tripartite report envisaged a labour productivity growth of some 4 per cent per annum from 1974-75. If this had been achieved the average OMS in 1981-82 would have been 3-02 tonnes or 26 per cent higher than the level actually achieved. The report also assumed a closure of 3 to 4 million tons of capacity per year resulting from exhaustion or possible exceptional mining difficulties. The NCB set out three main reasons for the under-achievement and it said in evidence to the Commission: There are three points. The first is that, as you will recall, the tripartite report of June 1974 contained a specific recommendation which was accepted in principle by the trade unions, who were a party to the tripartite report, that
109

FIGURE 6.5

Trends in labour productivity in terms of overall revenue output per man-shift for six Areas and the NCB national average over the period 1970-71 to 1981-82 change in definition
3-0 -

N Yorkshire Doncaster
(0

N Yorkshire Barnsley

<5 Q. ~

2-0 H

S Yorks National Barnsley Northumberland N Scotland S Scotland S Durham N Durham

National Doncaster S Yorks NEast Scottish

a> O

1-0 -

Strike

Strike

t
1970-71 Source: MMC study.

Incentive scheme

I I ' 72-73 I- 74-75 I 76-77 ' 78^79 I 80-81 71-72 73-74 75-76 77-78 79-80 81-82

Notes: (1) In 1974-75 Northumberland was combined with N & S Durham to become N East. (2) In 1973-74 N & S Scotland were combined into a single Scottish Area.

FIGURE 6.6

Trends in labour productivity in terms of overall revenue output per man-shift for six Areas and the NCB national average over the period 1970-71 to 1981-82 Change in definition N Derby N Derby N Notts S Midlands S Notts Staffordshire N Notts

3-0.

-S Notts .S Midlands Western National

V QL

National

2-0-

a +rf
o a I
N Western W Wales E Wales Kent S Wales

1-0
Strike 1970-71 71-72 72-73 Strike Incentive scheme

80-81 76-77 78-79 74-75 81-82 77-78 75-76 79-80 73-74

Source: MMC study.

Notes: (1) In 1972-73 E & W Wales were combined in S Wales Area. (2) In 1974-75 Staffordshire and N. Western were combined in Western Area. (3) In 1976-77 Kent was combined with S Midlands Area.

FIGURE 6.7 Trend in national revenue output per man-shift and in the associated saleable output and manpower components 1970-71 to 1981-82

Incentive scheme
C0

2-6 -

Strike

Strike

Change in definition

O 2-4 0)

c 2-2 0)
I
CO

2-0 H

<5
1970-71 72-73 74-75 76-77 ' 78-79 ' 80-81 71-72 73-74 75-76 77-78 79-80 81-82
5?
0)

140 ^

J.
Q. *O

120 -

100 (0 (0

CO

Note: Saleable output includes tip & capital coal

1970-71 72-73 ' 74-75 ' 76-77 1 78-79 ' 73-74 75-76 77-78

80-81

' 81-82
-62

71-72

79-80

O O O 280 w

290-

p60 -58 -56 -54

(0 0)
Q.

i 0 i CO
2 > <

270 260 Man-shifts

a c
O)

-52

<5

250.
240 . 230 . 220 1970-71 ' 72-73 < 74-75 ' 76-77 75-76 ' 78-79 ' 80-81

- 50
-48 -46 -44 -42

T3 0) H O

I
CO (Q

71-72

73-74

77-78

79-80

81-82

Source: MMC study.

112

there would be introduced an effective scheme for incentives for increased production. Subsequently there were substantial difficulties in bringing in such an incentive scheme. Indeed, in the further tripartite report, called Coal for the Future which was published in May 1977, there was a reference in paragraph 23 of that report referring back to the recommendations of the 1974 tripartite report and observing that such a scheme had not yet been introduced. It was not, at that timethis was May 1977found possible to implement it in the current pay policy. It was noted at that time that the NUM considered the study, but only as one of various possibilities. . . . but this was a significant factor in delaying the time when we expected greater and increased productivity. Indeed, it was not until the end of 1977-78 that we saw locally based incentive schemes introduced which led to an improvement in productivity and which gave continuing benefit that has existed ever since. That was the first point. The second point is that the tripartite report of June 1974 quite specifically referred to the projected closure rate of some three to four million tonnes a year over the years ahead, whereas over the eight years up to 1982 only some 14 million tonnes of capacity was closed which annualised at only half .the rate mentioned in the tripartite report. That had the effect on the benefits in productivity to be obtained by structural change. ThirdlyI think this is also an important point which was made in the 1977 tripartite reportwe agree that in the early 1970s we underestimated the extent to which output and productivity would be depressed because of the after-effects of under-investment which went on right up to 1973. Therefore it took some time for the benefits of investment to flow through. We appreciated that it would take time for investment to flow through, but we underestimated the negative aspects of the under-investment which took place for some years in the early 1970s. Subsequently we have had the benefit of investment as well as incentive schemes to the benefit of productivity and so on. Trend in unit labour cost 6.24. The NCB monitors routinely the earnings per man-shift for various categories of labour. The statistics are used by colliery managers for monitoring the effects of overtime and incentive payments. Figure 6.8 shows the trend in earnings per man-shift over the period 1971 to 1981 in 1980-81 prices. Over the decade earnings rates at the face and elsewhere have improved by about 50 per cent in real terms. To some degree this reflects a response to the reduced relative earnings of mineworkers to workers in general manufacturing industry in the previous decade. Materials costs 6.25. We noted in paragraph 6.12 that the cost category 'materials', which included an element of service charge for Area plant hire and some bought-out services, changed less than may have been expected from the change in the materials prices in the economy as a whole. 6.26. It is very difficult to devise a measure for assessing the productivity of materials and bought-out services because of their great diversity. Measures could be defined separately for each category of resources, but this might be
113

too detailed for use at an aggregate level. It is useful in assessing the effects of management action to look at the trend in total material and service costs per tonne. The NCB does not monitor material productivity at an aggregate level but does monitor material costs per tonne regularly. There remains the problem of attributing changes in cost to changes in volume use, changes in unit price or changes in quality. There may be short-term distortions as a consequence of quality enhancement which result in higher initial cost but longer lifetime before replacement is required.
FIGURE 6.8 Trend in earnings/man-shift over the period 1970-71 to 1981-82 in 1980-81 prices

Total face
30-0 -

Overall
(0

_ o>

20-0

c 'E

Q. W O)

10-0-

i
Strike

ii
Strike

Incentive schemes

1
i

1970-71

I 72-73 ' 74-75 ' 76-77 ' 78-79 ' 80-81 ' 71-72 73-74 75-76 77-78 79-80 81-8:

I.

(RPI used as deflator index)

Source: MMC study. '

114

6.27. Figure 6.9 shows the trend over the period 1973-74 to 1980-81 of the value of materials purchased, the value of materials issued from stores, and the value of stock per tonne of output in 1980-81 prices. The NCB changed the definitions of'issues' in 1976-77 to exclude directly purchased material which forms part of a capital project. In Figure 6.9 the pre-1976 values of issues have been adjusted to exclude capital material to provide a consistent trend.
FIGURE 6.9 Trend in material usage per tonne of output 1980-81 prices

9-0-

Value of total materials purchased

Value of materials issued from stores

Average value of stock in stores

<NCB purchase price index used as deflator)

1973-74 74-75 75-76 76-77 77-78 '78-79 79-80 80-81 Source: MMC study.

81-82

Notes: The definition of issues changed in 1976-77 and the values prior to then have been adjusted to be consistent with the current definition.

115

6.28. The historic values have been converted to constant 1980-81 prices by the use of the NCB Purchase Price Index (PPI). Provided that the sampling procedure used to produce the Index reflects the true mix of materials purchased, then variations in value should indicate variations in volume used. To the extent that the PPI sampling is not representative of the mix then some of the variations in value may result from a change in unit price as well as volume. The NCB says that as far as possible it takes a representative sample and reviews the value of the Index if there is any reason to suppose that the mix of materials purchased has changed significantly. 6.29. The trends indicate that about 30 to 40 per cent of total material is purchased directly, mainly relating to capital projects. The NCB monitors and controls capital and revenue material costs separately. The value in real terms of material purchased (and probably the volume) per tonne of saleable output over the period 1973-74 to 1980-81 has been increasing on average by about 2-5 per cent per year or about 16 per cent overall. The corresponding increase in the value of revenue materials issued through stores per tonne is about 12 per cent overall in real terms. The proportion of materials purchased directly for capital projects has been increasing therefore and reached a peak of about 43 per cent in 1978-79. The real value of stock held in stores per tonne of saleable output has not increased on average in step with the value of material issued but instead has shown a reduction of about 14 per cent over the same period. The NCB purchasing and stock control system is discussed in more detail in Chapter 16.

Other non-capital costs 6.30. Operational costs, other than employment, materials, contract services and fuel, have been increasing at a rate greater than inflation over the whole decade. These costs include: (a) transport; (6) coal preparation and stocking; (c) rent and rates; (d) insurance; (e) surface damage; (f) early retirement payments; and (g) closure costs. In addition the remaining non-operational cost represented by overheads and services attributable to Headquarters and Areas has also shown a real increase. Figure 6.10 shows the trend over the period 1971-72 to 1980-81 of the contributions to the increase in 'other non-capital cost' for: (h) Area overheads and services; (i) Headquarters overheads and services; and 0') other colliery level costs; in constant 1980-81 prices. Figure 6.11 shows in more detail the trend in the individual components of other colliery level costs.
116

FIGURE 6.10

Trend in the proportion of'other non-capital cost' attributable to the colliery, Area and Headquarters levels (1980-81 prices)

6-0-1

50-

Colliery level
costs

83-0

20

Headquarters overheads

1 0 -

Area overheads

1971-72 72-73

73-74 74-75

75-76 76-77

77-78 78-79

79-80 80-81

81-82

(RPI used as deflator index)

Source: MMC study.

6.31. The overheads and services attributable to Area and Headquarters (which includes the cost of research establishments, training, ECSC levy etc) represent about 45 per cent of 'other non-capital costs'. All the components listed above, except closure expenses, have contributed to the real increase in unit cost. The closure expenses include redundancy payments made during closure and some continuing expenses in collieries which are no longer in use. 6.32. Two particular categories have contributed disproportionately to the increase in cost originating at colliery level, first the costs of voluntary early retirement associated with the manpower reductions programme and secondly the cost to the NCB caused by surface damage which has resulted mainly from a reassessment in 1975-76 of the appropriate level of compensation (see Chapter 17). These voluntary early retirement costs, which were notjntroduced

117

FIGURE 6.11

Trends in other non-capital costs 1980-81 prices (excluding overheads and services attributable to Area and Headquarters)

UJ

Voluntary early retirements Closure expenses Pumping charges, dirt disposal, labour pools, rapid loading and sundries Surface damage Rents,rates, wayleaves, insurances Road and rail transport
0-50

32 to
15 w I ' o O

I Q>

'

Coal blending preparation and stocking

1971-72 73-74 75-76 77-78 79-80 81-82 72-73 74-75 76-77 78-79 80-81

(RPI used as deflator index)

Source: MMC study.

until 1977, are now responsible for about 0-7 per tonne produced. In costs originating outside the colliery level, Area and Headquarters overheads and services have added an additional 1 per tonne between 1971 and 1981. The reasons for some of this increase are discussed in Chapter 14. The Area contribution appears to have been stabilised since 1975-76. Capita] costs 6.33. The NCB does not appear to monitor the productivity of capital employed at a national level. The measures described later are partial measures of the productivity of assets but they do not include the value of the assets in use nor discriminate between new and old assets. Capital charges represent about 10 per cent of expenditure whereas total manpower costs represent about 53 per cent of expenditure; nevertheless the capital intensity of the industry is increasing and measures of the potential for increasing the utilisation of the capital are therefore important to management.

118

6.34. The NCB does not have a capital measure comparable to its labour productivity measure and an appropriate capital productivity measure should be similar: Capital productivity = Saleable output in tonnes per year Average capital employed in same year the measure of output being identical to that adopted for labour productivity. Whilst manpower is easily measured and direct in its effect on production, the appropriate measure of capital is more difficult to define. There are a number of factors which contribute to this uncertainty: (a) the lead time for capital investment to influence production is variable and often of the order of several years; () most capital assets are long-lived and subject to revaluation, which makes for difficulty in comparisons at different times; (c) some capital is in the form of reserves, such as land for future development, and will be unproductive until activated; (d) capital reconstruction in the early 1970s; (e) the capital interpretation of leased assets; and (/) the short-term variations in working capital such as coal stocks. 6.35. The NCB has told us that it has examined a similar measure for the capital productivity of plant and machinery: Capital productivity = Value of coal produced per year Gross current replacement cost of plant and machinery By excluding drivages and other capital assets, such an index avoids some of the problems referred to above. The NCB did not consider the measure sufficiently robust to be useful as a monitoring aid. 6.36. The NCB considers that the factors discussed above make it difficult to arrive at any satisfactory measure of overall productivity of capital employed, and that interpretation, over the short term, would be strongly influenced by non-capital effects. In view of the difficulties the NCB considers it would be quite inappropriate to attempt to determine an overall capital productivity measure similar to its labour productivity measure. For the present it has taken the view that the trends in real unit costs (excluding capital charges) provide a good measure of the overall return from investment in the industry. 6.37. We do not consider that it is sufficient to monitor unit operating costs only without an understanding of the related changes in the productivity and contributing cost of all resources. Neither is it sufficient to monitor labour productivity without the information to evaluate whether the best mix of labour and capital is being pursued. The NCB is building upon its already substantial assets with a large capital investment programme. We believe that it is important that the cost and productivity of capital should be monitored. To some extent the technical problems of producing a meaningful measure of capital productivity have been overcome now that the NCB produces current cost accounts.
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Capital plant and equipment 6.38. Potential maximum productivity. With few exceptions, coal is cut at the face by machine. The maximum achievable rate of extraction of mineral at the face is determined partially by the type of machine installed and the face design and partially by mining conditions and seam section. Face design includes the face length, machine combination, method of driving the main and tail gates, type of powered supports and whether the face is worked in the advance or retreat mode. For each face design there is an optimum number of men required to run the cutting machinery, face conveyor, etc. In a theoretical sense only the maximum productivity would be obtained if: (a) all available machines were in action on productive faces; (b) no dirt was cut with the coal; (c) all machines were cutting coal each day for 24 hours at the maximum effective safe speed; (d) the optimum number of men were used to work each machine; (e) each shift were to use all its paid time at the machine; and (/) no restrictions were imposed by statutory requirements on the need to maintain a legally acceptable environment at the work place. Under such ideal circumstances (not achievable in practice) productivity could mainly be improved with increased power of cutting machines or more advanced face technology; but would involve capital investment. 6.39. However, this theoretical maximum productivity can never be achieved in practice for reasons which include the following: (a) Extraction of unproductive product: dirt cut with the coal in thin seams, or dirt included in the seams. (b) Unproductive machine time: resulting from planned maintenance, twoshift working, ancillary work on face ends, breakdowns, etc. (c) Unproductive faces: because of the geological risk factor inherent in mining it is good practice to maintain spare face capacity. (d) Unproductive face manpower during shift: time taken travelling to the face. (e) Other manpower needed elsewhere below ground: for maintenance of roadways, coal conveyance, safety. (/) Other manpower needed on the surface: for winding, coal preparation and distribution, and back up services. (g) Safety: limitations imposed by the Mines and Quarries Act and supporting legislation. (h) Environmental factors: such as dust and water. 6.40. To help diagnose and monitor the causes for changes in its principal measure of labour productivityOMS which is used as a proxy for total factor productivitythe NCB uses a number of other measures: (a) daily output per face; (b) output per machine shift; (c) machine available time;
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(d) machine lost time; (e) extracted area per 100 minutes of machine available time; and (/) vend. No single measure by itself provides enough information for complete management control at the operational level; a number of measures must be used and interpreted together. In Appendix 6.3 we set out a framework which illustrates how these various measures relate to one another, to face productivity, and to the aggregate measures discussed above. 6.41. In strategic terms the management task is to select an appropriate price structure and associated output volume and, given these, to minimise cost by reducing the combined usage of men, materials, and capital. In operational terms, that is day-to-day and month-to-month, the level of resources is largely predetermined and unit cost can be reduced by maximising output. Many of the measures discussed in Appendix 6.3 are therefore concerned with monitoring the extraction rate of coal and the contribution to output of those factors over which operational management has some control. It is clear that a complex network of measures is necessary to provide full management control. 6.42. In general the NCB collects a comprehensive set of operational statistics and tabulates the values and trends of many of the meaures set out in Appendix 6.3. However, in some specific areas we believe that the existing measures should be supplemented. 6.43. Monitoring the level of unproductive assets. The NCB regularly monitors the number of faces which are equipped but not producing in a normal week, where a normal week is one in which the colliery is working for five days. Collieries also routinely monitor measures of the productivity of both faces and machines that are actually in production. In addition the collieries tabulate a measure called the shifting index, which monitors the number of machine shifts achieved on a producing face per day. This is a partial machine utilisation measure since it does not include the potential machine shifts at faces which are equipped but not working. The provision of spare machine shifts or more rarely standby faces and standby machines is a valid management option, where the consequential cost is weighed against the expected reduction in lost output when a face or machine is out of production for reasons beyond management control. In respect of plant pool operations the NCB produces routinely an index of utilisation which represents the proportion of the pool stock that is currently on rent to the collieries. For a number of reasons, including plant waiting for salvage, the index does not provide information about the plant which is actively engaged in mining coal. 6.44. Monitoring the components of machine productivity. Faces may be equipped with one or more machines depending on the face design. Some of them may have specialised duties, and when we refer to 'machine' we mean the machine system as a unit. Monitoring and control of machine productivity during productive shifts requires knowledge of: (a) cutting performance whilst the machine is productive; (&) proportion of time for which the machine is productive;
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(c) proportion of time for which the machine is available for production; and (d) breakdown of time and reasons for the periods for which the machine is not available for production. 6.45. The simple output measureOMScommonly used by the NCB is based upon saleable tonnage, which provides a sensible commercial measure but in terms of comparisons of man or machine performance suffers from distortion by variation in factors such as vend, seam thickness and even changes in density. An alternative measure, which discounts the influence of vend and seam section, is being introduced by the NCB. This measure is based on the area swept by the cutting machine per unit time, in units of square metres per 100 minutes of machine available time. In Germany a similar measure is used but based on the area swept per man-shift to be consistent with the manpower productivity measure. The measure is readily obtainable from statistics already collectedface length and face advance. 6.46. The NCB monitors the total machine available time which measures the time for which the men are available during the manshift for working the machine but does not yet monitor on a routine basis the time spent on the various activities during a machine shift. In particular it does not monitor machine cutting time directly. The NCB operates a number of different systems for obtaining estimates of delays to production at the face from which an indication of apparent cutting time can be deduced. The common procedure used at all collieries is for the turn round time and delays at each production face that are greater than five minutes to be reported to the colliery operations room where it is logged during each shift. More recently, as part of the MINOS system, in some Areas stoppages of the conveyor are recorded automatically by computer. At the national aggregate level more precise information is obtained by the sampling procedure of the face delay studies. Periodically a sample of faces is selected from the Areas and each sample face is observed in detail over a number of shifts, recording the time of each activity. The system provides information on national trends but not continuous monitoring for operational management control on individual faces. An experimental system called FIDO records machine activity directly by means of a number of transducers on each machine where output is logged continuously by computer. Information on the time breakdown of activities is essential for producing procedures or investment to maximise machine cutting time. The NCB does not consider that machine cutting time is a very useful measure. It is, however, used in West Germany (see Appendix 6.3). 6.47. The NCB considers it sufficient to examine the sum of cutting time plus ancillary time, because during the ancillary time on the face ends some coal is cut. However, the winning of coal during the ancillary time is in one sense a by-product. Certainly the productivity during the machine cutting time is higher than that during ancillary time. It is important therefore to maximise the proportion of cutting time and if possible reduce ancillary time. In some face designs it may be that increased performance during the cutting period is. gained at the expense of increased ancillary time. But for any given design it will be an operational objective to increase cutting time and reduce all other time per shift.
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6.48. Over the last decade the average length of face has increased, and the unscheduled lost time per machine shift has been reduced considerably (see Appendix 6.3). These two trends should have resulted in a substantial increase in machine cutting time per shift and a decrease in the proportion of ancillary time. However, the evidence from the face delay studies suggests that this has not been achieved, and indeed that cutting time is currently less, on average, than it was in 1976-77. Machine ancillary time has increased by about 4 per cent over the same period; from the NCB standpoint, therefore, total productive time per shift has improved. 6.49. Monitoring face team performance. Previously we have discussed labour productivity measures in terms of monitoring the contribution to total unit cost in an overall sense and also as a measure of man effort for local management control. For the latter purpose the OMS, DOF, and machine shift output suffer from distortions resulting from geological factors, the type of face machine available, etc. With properly devised work study techniques it is possible to calculate a standard average output for each face which takes proper account of many of these factors. By relating actual output per shift to the standard output for that face a useful performance index can be devised, which monitors the total effort of the team and places all faces on a common basis. The NCB estimates the value of the index routinely for each producing face and produces summaries at colliery and Area level. With such an index comparisons can be made face by face, pit by pit, Area by Area. Face performance index = Saleable output per shift for face Standard output per shift for same face 6.50. Trend in coal extraction rate. There has been an improvement in the daily output per face of about 18 per cent between 1976-77 and 1981-82. This appears to have been achieved partly by improved output per machine shift and since 1977-78 an improvement in the shifting index, ie the number of shifts worked per face per day. The improvement in output per machine shift results from increased cutting performance from more powerful machines and from the change to retreat mining rather than from increased cutting time per shift. The improvement in the shifting index is associated with the introduction of the incentive scheme. These matters are discussed in Appendix 6.2.

Relative importance of the various factors 6.51. The NCB has undertaken a number of analyses of data to assess the contribution of various factors to performance. The aim was to correlate variations in OMS with the individual variations in a number of relevant factors. These analyses are discussed in Appendix 6.4. The work shows the importance of face mechanisation and powered supports in improving productivity in the 1960s, the contribution being some 58 per cent of the total improvement. The work also confirmed the importance of vend and distance from shaft to face as adverse factors in productivity over the period. The analysis of cost changes over the last five years of the 1970s shows the largest contribution to cost increases was from wages and associated costs, and the largest contribution to cost improvement resulted from changes in the balance
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of production between Areas. Recent work by the NCB to quantify and separate the contribution to improvement resulting from the incentive scheme and the heavy duty/advanced technology mining programmes has not produced significant results because of the high level of variation due to other factors. Conclusions and recommendations Performance trends 6.52. Unit production costs have been increasing in real terms. The main component of this is the increase in unit wage and wage related costs. 6.53. Over the period 1969-70 to 1981-82 there has been, especially since 1977, a steady improvement in labour productivity at the face and on the surface. These improvements have been offset by a steady decline in labour productivity elsewhere below ground so that the improvement on overall productivity has been only 9 per cent. 6.54. The modest rise in labour productivity has been the result of a combination of actions: (a) Capital investment in face and surface machinery. (b) Redistribution of output in favour of those production units with higher OMS. This includes the effects of closures, mergers and investment in new capacity. (c) Implementation of an incentive scheme. These actions were offset by the adverse ageing effect of continuing capacity which is an inherent characteristic of the mining industry, and represents an overall effective reduction in productivity of at least 0-75 per cent per year. Performance measures 6.55. The NCB's principal measure of performance is a measure of labour productivity defined in terms of saleable output of coal in tonnes per man-shift worked. The measure is used at both local management and Area planning levels. It is backed up by a large range of associated measures in terms of work category and contributing factors. The scope of the labour productivity measures at the operational management level is adequate for normal control of operations. 6.56. At Area and colliery levels, the emphasis on labour productivity has overshadowed the development of performance measures relating to other resources, particularly capital. While the NCB does have some partial measures of capital productivity, these measures do not represent the value of capital in use, nor do they fully reflect the proportion of unproductive assets in terms of idle machine shifts. 6.57. The NCB uses a measure of unit cost to assess the performance of its operating units. However, it does not include in this a full consideration of the cost of capital used. We believe that this is misleading and may result in the misallocation of investment, since it reflects the cost-reducing aspects of the result of the investment such as improved labour productivity but not the related additional costs of the finance required.
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6.58. We recommend that the NCB should review the nature and structure of its performance measures, in order to achieve a balanced monitoring of the use of all resources and their unit costs linked to a set of commercially orientated measures. In particular they should properly reflect all costs including the cost of capital. The NCB should also give consideration to devising a measure or measures of the productivity of capital which properly reflect its true value. The capital measures should monitor both productive and non-productive assets, at least down to Area level. 6.59. The NCB produces routinely an index of face performance based on the expected standard and actual output for each face which discounts to a large extent the effect of vend and seam thickness. The use of an additional measure, which also discounts these factors, is being considered for routine use. The measure is based on the area swept by the cutting machinery per unit time. As currently formulated neither of the measures are able to discount effects of random geological changes, such as faulting. It may be helpful to try to include in the measures an estimate of the expected variations due to geology against which trends in the resources may be judged. 6.60. We recommend that the NCB should continue the development of measures of face performance such as swept area per unit time and the standardised output index, which would discount as far as possible the effect of local geological factors which are beyond the direct scope of management control. Such measures should be used for comparing the performance of individual faces and for monitoring the trend of a particular face over time. The comparisons should be used for establishing best operational management practice and for setting feasible management targets for improvement. 6.61. The NCB uses a variety of methods in different collieries to monitor face delays, but does not monitor directly machine cutting time per shift. The accuracy of the estimate of machine cutting time inferred from the monitoring of face delays is limited by the precision of the monitoring procedure. Machine cutting time is directly related to the true productive effect of the machine and an accurate method of monitoring this parameter on each face would provide important additional information on which to base management action. The experimental system FIDO would be capable of providing information of adequate precision. 6.62. We recommend that the NCB should monitor regularly and tabulate machine cutting time for appropriate categories of machine systems. It should also develop a procedure for establishing the causes of variations in these measures. We note that the basic data is being made available on an experimental basis.

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