Cement supply chain

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Cement supply chain - an overview of cement industry in India, understanding key elements of its supply chain network.

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Cement supply chain

  1. 1. Indian Cement Industry Supply Chain Management Private & Confidential
  2. 2. Overview• Manufacturing Process• Product segment• Customer segment• Industry Dynamics• Sourcing – Limestone, Coal, Flyash, Gypsum• Manufacturing – Strategy and challenges• Distribution – Network Strategy, Cost drivers, Challenges• Appendix – RMC Business, Sales Force Organization Private & Confidential
  3. 3. Cement Manufacturing Process Burned Limestone ( called Limestone blending clinker) is blended with flyash, slag or gypsum in grinding mills Limestone is burned with coal inside rotary kilns Limestone Quarry Private & Confidential
  4. 4. Cement Industry – Product Segmentation Ordinary Portland Cement(OPC) • It is made by blending clinker with gypsum. Used in construction where high initial strength is required Portland Pozzolana Cement (PPC) • In addition to gypsum, PPC contains flyash in the tune of 25-30 %. Addition of flyash reduces the per ton cost of cement. The long term strength of PPC is higher than OPC Portland Slag Cement (PSC) • In addition to gypsum PSC contains blast furnace slag. PSC is used where structures are susceptible to attack of chloride and sulphate ( Marine, Water treatment plants) BIS allows use of flyash up to 35 % and slag up to 65 % Source- www.ultratechconcrete.co Private & Confidential
  5. 5. Customer Segments Different nomenclatures are used by different companies but based of needs and preferences customers can be divided in two broad segments Individual House Builders (IHB) • These are retail customers. Since they have limited technical knowledge of construction material, brand value and durability are the top most criteria for selection Infra-Commercial -Industrial (ICI) • This segment consists of builders and big construction companies who have sufficient technical knowledge of product. Quality ,price and service are most important for these buyers Private & Confidential
  6. 6. Industry DynamicsRegional pricing • Non uniform input costs and zonal capacity imbalances • Too many regional players, Standard products, Simple technologyFragmented market and limited R&D requirementHigh entry barrier • Large CAPEX requirement • Ready Mix Concrete, Training and site inspection by qualifiedValue added services engineersCyclic demand • Low demand during monsoon • Mining site rehabilitation , Fugitive emission control, RenewableSustainability purchase obligation (RPO) for electricity as per the SEB rulesGovernment control • Mining Royalty, SEB charges, Rail freight charges • Largely correlated with GDP growth by a multiplication factor ofMarket Growth 1.3-1.4 for developing economy and 1.1-1.2 for developed economy Private & Confidential
  7. 7. Sourcing- SummaryRaw Material Qty/Ton Main Source Major Cost Drivers Procurement Cement StrategyLime Stone 1.3 India has sufficient reserve of good quality Mining royalty, Diesel Captive mines and limestone scattered all across the India price, plants near quarryCoal 0.25 Domestic low quality , high ash coal is used Linkage coal prices Maximize linkage coal for making cement which accounts for quantity majority of consumption, companies also use imported coal during peak demand season to hedge supply riskFly ash 0.3 Power plants are the main source of flyash. Diesel prices Nearest point They are situated uniformly across India. sourcingGypsum 0.05 India’s limited gypsum deposits are Import duty, freight Nearest point concentrated around Rajasthan . Companies charges sourcing import most of the requirement from Thailand and Middle east * All RM consumption fig. are approximate and only main raw material has been mentioned Private & Confidential
  8. 8. Sourcing- Limestone To the benefit of cement industry high grade limestone reserves are scattered uniformly all across India. Volume wise limestone accounts for almost 60 % of raw material. Since setting up plants near quarry saves on inbound transport cost proximity to reserve is the single most important criteria. Mining royalty imposed by state government are paid per ton basis. Dumpers and shovels used in mining consume high quantity of diesel making it the second most important cost driver Private & Confidential
  9. 9. Sourcing- Coal Coal reserves are found mostly in eastern states. 95 % of coal mining is still in control of center or state government. Steel , power and cement companies are allowed to do captive or contract mining Government companies mined coal also know as “linkage coal” is 15-20 % cheaper than open market coal. Companies try to maximize linkage off take by better liaison with railways and coal mining companies Since coal reserves are skewed towards the eastern zone, freight cost is the biggest cost driver. Market coal prices are determined by global supply and demand equation Private & Confidential
  10. 10. Power Plants – Source of flyash Burning of coal results into flyash. Thermal power plants across India produce plenty of good quality flyash which can be used by cement industry. Flyash is used in producing blended cement grades like PPC Flyash prices are determined by local demand and supply equation. Since freight cost is the major component companies look for nearest source of flyash. Freight is the biggest component that determines the landed price of flyash Private & Confidential
  11. 11. Gypsum• Indian’s gypsum reserves are concentrated in Rajasthan and J&K, out of which most reserves are either of low purity or deep seated• 75 % of gypsum requirement is imported from countries like Thailand, Oman and Iran• Since freight cost (Sea + Inland) is a major cost component, as a thumb rule plants near to west coast buy from Oman and Iran while the plant closer to east coast buy from Thailand Private & Confidential
  12. 12. Manufacturing Strategy• Two types of manufacturing units: Type I is Integrated plants where the entire manufacturing till cement grinding and packing is done. Second type are grinding units where clinker comes as raw material and only grinding and packing is carried out.• Blending of raw material: Cement plants receive material from various sources composition of which vary significantly depending on origin. One of the main concern for cement plants is to achieve consistent raw material chemistry , which is achieved by blending different grade of material. Making a right mix not only improves the yield but also save on corrective material cost.• Captive power generation : Power cost is the major component of manufacturing cost. Since SEB power is costlier and unreliable, most of the big industry players install captive thermal power plant .Low grade is coal is used in these power plants. Flyash produced in these plants is consumed in-house for blended cement Private & Confidential
  13. 13. Manufacturing Strategy• Using Alternate fuel and raw material (AFR) is another new trend in cement industry. Tyer chips, paint sludge and other industrial waste are incinerated in the rotary kilns to substitute traditional raw materials and fuels Private & Confidential
  14. 14. Manufacturing Challenges• High CAPEX requirement approximately 600 Cr/MT• Apart from regular productivity and efficiency related challenges cement manufacturing faces challenges such as – Environmental : Mining activity causes significant deforestation , noise pollution and emission. As environmental laws are gradually getting more stringent cement industries are facing continuous challenge of meeting those norms – Human resources: Most of the cement plants are located in hinterlands and difficult areas. Additionally cement plants produces many hazardous emission and dust. Due to all these problems they are not very attractive place for bright employees – Labor unions: Cement plant’s employs a large number of labor force directly or indirectly who are well organized under various unions. Successful management of labor union is big challenge for cement plants Private & Confidential
  15. 15. Distribution Chain for IHBCMU/GU C&FA Distributors Retailer• Bags are loaded • CFA unloads the • Distributors also • Retailers take on wagon or bags, store sand store small quaintly order and trucks delivers it when of cement to meet deliver to end• Companies use order is placed urgent demand consumers rail mode for by distributor • Apart from selling primary • Trucks are used distributors help transportation for secondary company in transportation marketing and sales promotion activities Private & Confidential
  16. 16. Distribution Strategy- Hub & Spoke Model HubLarge Integrated units are fewin number & are situated near tolimestone quarry. SpokeSmaller GU are located near to Integrated unitsmarket and flyash/slag source. TheseGU source clinker from Integrated Grinding units (GU)units Sea Transportation Private & Confidential
  17. 17. Distribution: Key Cost Drivers  Fuel Price  Lead Distance • Freight charges from plants  Contracting with Transporter Transportation to warehouses  Wagon/Truck Loading (65%) • Outbound freight to Regulations customers from warehouse  Road Conditions  Truck Type  Rail to road ratio  Demand/Supply for PP granules  Bag makers conversion cost • Packing Bags (PPE) Cost  Bag specifications Packing Costs  Price Risk Management (15%) • Bag Branding/ printing  Market Structure costs  Tax levies  Alternative Packing Solutions  Local taxes (of Municipalities) • Personnel Costs  Dump Handling costs • Clearing & Forwarding  Location of Dump & manpower Others (20%) costs costs at Dumps  Packing Plant Manpower • Local Taxes, etc  Administrative Overheads Private & Confidential
  18. 18. Distribution: Numerous 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 cement demand 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 wagon 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 big challenge• Value added services such as Ready Mix Concrete ( RMX) has now become a industry trend. It is putting pressure on lead-time and vehicle TAT. Private & Confidential
  19. 19. Appendix Private & Confidential
  20. 20. Ready Mix Concrete RMC: Ready to be consumed customized mix of cement, sand and crushed stone Benefits for customer • Consistent concrete mix for large construction projects • Compared to traditional methods no space is required for storing and preparation of ingredients such as sand • Saving on labor and supervision cost • Less wastage of concrete • Faster and smoother construction Challenges for companies – JIT model • Orders are received only few hours in advance , putting extra pressure on planning and coordination • Vehicle route planning is a serious challenge • Accurate sourcing of sand and crushed stone requires additional planning Private & Confidential
  21. 21. Sales force organization structure Area Officer 1 District Sales Officer 1 Regional Sales officer 1 Area Officer 2Central sales officer District Sales Regional Sales Officer 2 Officer 2 Role Responsibility Central Sales Officer PAN India Regional Sales Officer Few States District Sales Officer Few districts Area Sales Officer Zones within district Private & Confidential

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