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

1. Indian Cement Industry
Supply Chain Management
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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
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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
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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
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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
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6. Industry Dynamics
Regional pricing • Non uniform input costs and zonal capacity imbalances
• Too many regional players, Standard products, Simple technology
Fragmented market and limited R&D requirement
High entry barrier • Large CAPEX requirement
• Ready Mix Concrete, Training and site inspection by qualified
Value added services engineers
Cyclic demand • Low demand during monsoon
• Mining site rehabilitation , Fugitive emission control, Renewable
Sustainability purchase obligation (RPO) for electricity as per the SEB rules
Government control • Mining Royalty, SEB charges, Rail freight charges
• Largely correlated with GDP growth by a multiplication factor of
Market Growth 1.3-1.4 for developing economy and 1.1-1.2 for developed
economy
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7. Sourcing- Summary
Raw Material Qty/Ton Main Source Major Cost Drivers Procurement
Cement Strategy
Lime 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 quarry
Coal 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 risk
Fly ash 0.3 Power plants are the main source of flyash. Diesel prices Nearest point
They are situated uniformly across India. sourcing
Gypsum 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
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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
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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
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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
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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
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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
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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
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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
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15. Distribution Chain for IHB
CMU/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
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16. Distribution Strategy- Hub & Spoke Model
Hub
Large Integrated units are few
in number & are situated near to
limestone quarry.
Spoke
Smaller GU are located near to Integrated units
market and flyash/slag source. These
GU source clinker from Integrated Grinding units (GU)
units
Sea Transportation
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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
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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.
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19. Appendix
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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
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21. Sales force organization structure
Area Officer 1
District Sales
Officer 1
Regional Sales
officer 1 Area Officer 2
Central 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
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