CEMENT INDUSTRY: CHANNEL STRUCTURES

You have a product that in expensive to make and has a phenomenal demand. so have you hit the jackpot?

Not quite.

What takes away a chunk of the winning is the disproportionate transportation cost.

This is the dilemma which cement makers in India face.

GROUP NO.7

Piyush Chouradiya RMM 02 Shardha RMM 24 Punita Gabba RMM 29 J. Soujanya Haripriya RMM 31 Larrisa Dmello RMM 32 Deepti Upendra RMM 42

Channel management, as a process by which a company creates formalized programs for selling and servicing customers within a specific channel.

CEMENT PLAYERS IN INDIAN MARKET:

Dalmia cement

Chettinad

Major players

Over 370 companies in the organized sector However, industry dominated by 20 companies who account for over 70% of the market Individually no company accounts for over 12% of the market

Cement : Industry Structure

Cement industry is considered as one of the core infrastructure industries Cement industry in India dates back to 1914, first unit in Porbunder Indian cement industry is the fourth largest in the world Fragmented industry : 56 cement companies in India operating 124 large plants & 300 mini plants Total Capacity in cement industry Large Plants = 137 million tonnes) Mini Cement Plants = 11.1 million tonnes)

Common method
Transportation Transportation costs high - freight accounts for 17% of the production cost Road preferred mode for transportation for distances less than 250kms. However, industry is heavily dependant on roads as the railway infrastructure is not adequate - shortage of wagons. Capacity additions Acquisitions have been the mainstay of the business Regional imbalance resulting in cross regional movement limestone availability in pockets has led to uneven capacity additions Capacity additions have slowed down

Cement : Market Size & Demand Trends

Estimated market size - Rs. 290 Bn. (2001-02)

Industry grew by 10 percent growth during 2001 - 02

Production rose from 93.6 Mn tonnes to 102.4 Mn tonnes Attributed to a host of factors including slow progress of major infrastructure projects
Mn Tonnes

29.9

12.1

23

29

Production Consumption
28.7 12 25.5 25.7

Capacity & Production

Mn. tonnes (2001-02) Installed capacity Production (Large Plants) Production (Mini Plants) Consumption 137.0 102.4 6.0 102.4

Till the mid nineties most of the excess capacity was added in North-West India, in Maharashtra, Gujarat. Madhya Pradesh and Rajasthan. MP, Rajashtan & AP account for 53 % of production Today the excess capacity is a major problem resulting in low cement prices in most parts Capacity utilisation : 75 %

Sales & Distribution

Cement in India is primarily sold through a distributor - dealer network Total margins for the distribution channels - 17 to 18 % Direct sales less than 2 % of total sales

Managing the distribution network & strong working relationships with distributors, contractors etc., critical .

15

TRANSPORTATION ROUTES
COMPANY FOR EXPORTS:

C & F AGENTS
Via roadways or railways

Cement reaches nearest port and is then transferred to importing country.

FOR DOMESTIC MARKETS:

C & F agents /Warehouse

OWN ORGANISATION

GOVERNMENT

Dealers or distributers
Sub-dealers End Users

Government Policies
1940-1981 : Price and Distribution controls Cement an essential commodity Very slow growth 1982-1988 : Partial Decontrol Levy cement quota was fixed for the units and the balance could be sold in the open market 1989 : Total Decontrol Rapid growth in sales & profits Slow down during recession of early nineties Rapid growth after 1992-93, with large capacity additions

Capacity in 1980-81 : 27.9 mt

Led to rapid growth

Capacity grew by 110 % to 59 mt by 1989

KEY CHALLENGES TRAVEL PATTERN:

In India..
Distributed in 50 kg bags
Once bagged cement becomes a perishable commodity

A bag of cement cost Rs. 100-160

Out of this Rs 21-35 per bag goes for transportation (around 25% of total cost)

Before 1980
After 1980

 TRAVEL TYPE Gujarat cement & L&T cement plants experimented with the sea transportation of cement Private jetty- they transport cement to deficient states likes Kerala, Mumbai, Goa and Mangalore

TRAVEL MIX CEMENT DESPATCHES BY RAIL AND ROAD

YEAR
1995-1996 1996-1997 1997-1998

RAIL
29.2 31.1 32.6

%
45.3 44.5 42.5

ROAD
32.6 38.8 44.0

%
50.5 55.5 57.5

KMS
NA 566 568

1998-1999
1999-2000 2000-2001

32.8
38.7 36.7

40.0
41.2 39.4

49.1
55.3 56.7

60.0
58.8 60.1

568
NA 571

LOGISTIC DYNAMICS Rail transportation- longer distances i.e. above 350 kms. Many plants own your wagon scheme with govt. Pilferage is more in railways total cement loss is 2% Because cement handling occurs twice as against single handling in truck transportation.

STATE

NORTH EAST WEST MP

96-97 97-98 98-99 99-00 SHARE OF REGION CONSUMPTION MET BY ITSELF 63 63 67 67 51 66 92 55 63 91 50 66 90 49 64 88

00-01

68 49 63 87

SOUTH

94

93

95

94

94

SHARE OF REGION DISPATCHMENT TO ITSELF NORTH 90 88 89 90 90

EAST
WEST MP SOUTH

90
84 23 84

90
80 22 84

93
86 24 84

95
85 22 84

100
88 23 83

MASTER MARKETING Marketing & Distribution Company is not able to achieve the least distributed cost, when: not marketed Improper location market is not penetrated , resulting in use of less than full truckload V SAT COMMUNICATION Optimum logistic mix

SUPPLY CHAIN PRACTICES

Stop production Pack faster Grind next to the market Bulk transport Ready-mix concrete Inland water transportation

Competitive Scenario : Consolidation Time

Industry has witnessed consolidation through a spate of take-overs and mergers

Gujarat Ambuja (GACC) picked up 11.4 % stake in ACC at Rs. 5201 / tonne from Tata group GACC also bought out DLF Cement Grasim Industries acquired Reliances 10 percent stake in L& T recently Major action expected from MNCs Lafarge acquired Tiscos cement division at Rs. 3555 / tonne Lafarge acquired Raymond Cement at Rs. 3500 / tonne Cement Francais Italia picked up 50 % stake in Zuari Cement at Rs. 4000 / tonne Holderbank and Cemex may come in All have eyes on 37.5 % stake in L&Ts cement business Share of MNCs in Indian Cement Industry has rose to 40% while the Indian majors incl. GACC, ACC, L&T hold the rest 60 %

 Logistics Cement, being freight intensive industry, various initiatives had been taken up by GACL to streamline its logistics. GACL was one of the first cement producers of the country to introduce an Integrated Logistics System (ILS). At each manufacturing unit, a cross functional committee was responsible for the efficient management of logistic functions. The committee met at regular intervals and reviewed the working of the total system. The recommendations were forwarded to the top management for immediate action.

 Order Processing Systems

Order Processing Systems involved the flow of information about the orders from generation to order fulfilment. Orders once received, had to be processed quickly and accurately. GACL had linked all the major offices through a Wide Area Network (WAN). Electronic Data Exchange (EDE) and Material Resources Planning (MRP) systems facilitated timely and accurate processing of orders...
Future Outlook In line with the company's vision to become the leader in Indian cement industry, GACL had been pursuing a combination of strategies like strategic alliances, capacity expansion, new plants, and aggressive takeovers. The company had set up a two million ton Greenfield cement unit in Maharashtra at an investment of Rs. 500 crores...

Future of Cement Sector is as follows:

1. Steady price growth over the next 2-3 years 2. Housing and government infrastructure spending to translate into an 8 per cent CAGR in demand 3. Greenfield/Brownfield capacity additions of around 35 million tonnes will be required to match the robust demand growth 4. Blending to contribute around 10 million tonnes of capacity 5. Operating rates to touch 88 per cent by 2006-07 6. Production costs to increase moderately

CONCLUSION
It is evident that there is huge potential for the cost saving in the cement industry. However this will require a structural shift in the market place which might not be possible in the short run Players like Ambuja cement and L&T have been successful in making the best out of their location advantages and developed means of transport cement.

In the future as international players get stronger hold of the market some of the best international practices might emerges
It will be very difficult for the companies to completely eliminate bagged cement sales. But even if a substantial portion moves to bulk, it would in considerable cost saving

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