Post Graduate Programme in Management(PGPM: 2011-13 Batch Section: B)

Term: IV (Jun 2012 – Sep 2012)

Management Development Institute - Gurgaon

Supply Chain Management

Case 02

Travails of Cement Travel

SCMMinor Project

Submission Date: 25-08-2012

Indian cement industry

• India is world's second largest cement producer after China • As various infrastructure projects, road networks and

housing projects are coming up, many of which are backed by the government, the cement industry in India is growing at a great pace these days.

• With the capacity of 151.2 Million tonnes (MT), the Indian cement industry is truly big in size and hence accommodates a number of cement companies in the market.

• Not only that, more growth is further expected in the coming years, which will also lead to the growth of top cement companies in India.

Salient features of Indian cement industry

• Regional pricing – Non uniform input costs and zonal capacity imbalances

• Fragmented market - Too many regional players, Standard products, Simple technology and limited R&D requirement

• High entry barrier - Large CAPEX requirement• Value added services - Ready Mix Concrete, Training and site

inspection by qualified engineers • Cyclic demand - Low demand during monsoon• Sustainability - Mining site rehabilitation , Fugitive emission control,

Renewable purchase obligation (RPO) for electricity as per the SEB rules

• Government control – Mining Royalty, SEB charges, Rail freight charges

Raw Material SourcingRaw

materialMain source Major cost

drivers

Lime Stone

India has sufficient reserve of good quality limestone scattered all across the India

Mining royalty, Diesel price,

Coal Domestic low quality, high ash coal is used for making cement which accounts for majority of consumption, companies also use imported coal during peak demand season to hedge supply risk

Linkage coal prices

Fly ash Power plants are the main source of fly ash. They are situated uniformly across India.

Diesel prices

Gypsum India’s limited gypsum deposits are concentrated around Rajasthan. Companies import most of the requirement from Thailand and Middle east

Import duty, freight charges

Distribution Chain for IHB

• Central Manufacturing Unit (CMU)– Bags are loaded on wagon or trucks– Companies use rail mode for primary transportation

• Carrying & Forwarding Agent (C&FA)– CFA unloads the bags, stores and delivers it when order is placed by distributor– Trucks are used for secondary transportation

• Distributors– Distributors also store small quaintly of cement to meet urgent demand– Apart from selling distributors help company in marketing and sales promotion activities

• Retailer– Retailers take order and deliver to end consumers

Central Manufacturing Unit

(CMU)

C&FA

Distributors

Retailer

Supply-Demand ScenarioSupply: The dema

nd-suppl

y situation is high

skewed

with the

latter being significantly highe

r

Demand:

Housing

sector acts as

the princip

al growt

h driver

for cemen

t. Howev

er, recent

ly indust

rial and

infrastructur

e sectors have

also emerged as dema

nd drivers

.

Industry Dynamics

Cement Supply Chain

Supply Chain Challenges• Cement has a useful shelf life of approximately 6 months. Customers

also have a bias towards fresh cement (“Garam Cement”) forcing manufacturers to predict accurate amount of inventory

• In India construction activities slows down during rainy season that is why demand for cement is cyclic in nature. A fine balance needs to be achieved between inventory cost and capacity utilization

• Since railway route is the cheapest mode of transport, availability of railway wagons is a big constraint in present scenario

• Since companies put multiple plants to save on transportation cost, which market should be served from which plant is a big challenge

• Value added services such as Ready Mix Concrete (RMC) have now become an industry trend. It is putting pressure on lead-time and vehicle efficiency

Balanced Score Card

• Financial: Since the core issue discussed in the case is the high transportation costs (about 18- 25% of total cost), it is imperative to reduce these costs to ensure lower operating costs and hence, higher ROI

• Customer: The customer is the most important entity; hence efforts must be made to make shipments regular and on-time which will lead to increased customer satisfaction.

Balanced Score Card (Contd.)

• Internal business process: This includes proper co-ordination between the internal functions so as to better forecast demand and match supply, reduce holding costs of inventory.

• Innovation and learning: Innovation and implementing new technology is important for companies which wish to increase their efficiency frontier. Constant learning and training should be imparted to employees for increasing efficiency.

Suggestions

• Implementation of software-based transportation optimization solution

• Implementation of bulk transport• Choosing the correct mode of transport• Containerisation of cement for rail travel• Development of Ready Mix Concrete