Cement players have no option but to zealously focus on operational efficiencies for protecting their margins and bottom-lines, say AMIT GANERIWALLA and RISHAB GOEL.
The last few years have been a challenging time for the cement industry. Overall, profitability for the industry has dropped by about 10 per cent since FY 13. While price realisations have been flat, there has been significant cost pressure with both selling and distribution costs as well as energy costs increasing by 5-10 per cent. Cement players have no option but to zealously focus on operational efficiencies for protecting their margins and bottom-lines.
While traditional levers of ´lean operations´ continue to form the backbone of such efforts, there is growing awareness and adoption of digital tools which are churning huge amounts of data to help identify hitherto hidden opportunities. Based on our work with various cement players on this topic, we believe there is an opportunity to optimise costs between 10-15 per cent depending on the starting position and level of operational sophistication.
There are three broad areas of what we call ´cost unlock´ which we will discuss in detail: logistics and material handling, energy efficiency, and manufacturing process control and optimisation.
Logistics and material handling
This is one of the key areas for cost optimisation especially in the context of the potential GST rollout next year as well as significant advancement in analytical supply chain tools.
The logistics cost base can fundamentally be addressed through thinking about four key levers: freight rates, logistics operations, CFA (Carrying and Forwarding Agent) handling costs, and the plant-to-market network.
For long, the main effort on freight rate reduction has relied on negotiations with transporters. While that continues to be one of the levers, there is a lot of focus that firms are driving on unlocking efficiencies through the right mix of road versus rail, maximising direct movement, improving vehicle turnaround, optimising size of vehicles/wagons deployed, etc.
Maximising direct movement of material from plant to customer can significantly impact costs, both from reducing extra handling, and eliminating the costly secondary leg of transportation from warehouses. To enable this, companies need to invest in understanding their customer (dealer) demand pattern in a very granular manner, and use this to predict as well as plan for direct dispatches. With new analytical tools, it is possible to do this exercise at a customer-by-customer level, for every order placed in the relevant historical period. This can then be used for predictive planning of transportation capacity and regular monitoring of direct dispatch performance. Another lever is for firms to drive improvements in vehicle turnaround time - both within the plant and in the transit time. This can drive better asset utilisation of the trucks and support efforts to reduce freight rates. With GPS and RFID adoption growing among cement firms, this is soon becoming a ´hygiene´ practice. However, it is equally critical to support the technology deployment with the right processes to drive value unlock (for example, a system for efficient order allocation to trucks based on GPS location, in-plant vehicle management process, etc).
CFA (Carrying and Forwarding Agent) costs tend to be one of the most overlooked cost heads for most players, given legacy reasons and sensitivity to potential market disruption. Players would do well to challenge this and revisit their contracts at a certain frequency. There are many areas for potential cost rationalisation ù for example, lower charges due to increased scale, eliminating commissions given to drive sales (and instead using own sales force), improving the per cent of rake firing, etc.
The most critical lever on logistics however is the optimisation of the plant-to-market network. Using latest geo-analytical tools, it is now possible to redesign the warehouse network to reduce the overall logistics cost significantly. In one specific example, this allowed for a reduction of ~5 per cent in the logistics cost base. This exercise is now imperative, given the potential GST rollout next year and is an opportune moment for cement players to use the latest analytical tools to design an optimal network, given current and future demand.
To optimise on energy costs, companies need to evaluate both reduction of energy consumption as well as avenues for reduction in per unit cost of energy.
One of the biggest cost levers for the cement industry in recent times has been the use of pet-coke as an alternative to coal. Some firms have made a big push on converting their usage to pet-coke and reaped significant benefits. However, the recent trend of increasing prices of pet-coke is likely to reduce the level of savings from this lever.
Advanced analytics are also helping create models for simulating scenarios with different coal mixes and evaluating the effect on target operating parameters. This has the potential to help optimise coal usage in a considerable manner.
Various ´lean´ operating initiatives can also drive greater energy efficiency. For example, companies can look to reduce leakages in the pre-heater by controlling O2 exit levels and hence minimising radiation losses. Another opportunity is in efficient heat recovery from the clinker through the cooler which requires close monitoring of exit temperatures and appropriate interventions to maximise the reclamation. Companies are also optimising diesel consumption in mines through monitoring devices and analysing usage patterns to spot leakages and inefficiencies. There are also opportunities to deploy variable frequency drives to optimise fixed power consumption in the plants.
Manufacturing process control and optimisation
Tight process control and optimisation can allow for significant value unlock in cement plants, especially through optimisation of limestone-to-clinker ratio and clinker-to-cement ratio.
Best-in-class firms are constantly pushing the bar on optimising their production parameters to achieve the most optimal outcome.
The advent of Industry 4.0 is presenting many new tools and technologies to create a step change in production performance. By leveraging the full potential of technology, companies can now use various types of IoT (Internet of Things) devices to both monitor, as well as control the equipment remotely. They can also integrate their plant control centres (MES) with ERP systems and automate the condition-monitoring process. This will allow for much greater precision in equipment control and hence will optimise cost of operations.
Another emerging technology which is now available to firms is simulation tools. These tools can model out the entire production process on a desktop and help firms in optimising the processes through running virtual scenarios and constantly improving operating parameters.
As the cement industry goes through the current overcapacity cycle, it is imperative for players to immediately evaluate and implement many of the cost efficiency initiatives described above. The advent of advanced analytics and digital tools is helping identify fundamentally new sources of cost optimization, and firms need to invest in building these capabilities internally. A structured cost improvement programme, leveraging the best of lean methodologies and digital tools, can help significantly shore up profitability and drive competitive advantage in these challenging times.
Amit Ganeriwalla is Partner and Director, The Boston Consulting Group.
Rishabh Goel is Principal, The Boston Consulting Group.