India is now the world's second-largest market for cement after China, both in terms of production and distribution. This has made India an attractive location for investment by incumbents as well as entry by new players. As a result of this investment activity, the sector has seen substantial gains in manufacturing technology, improved product quality, and falling production costs.
Going forward, the Indian cement industry is primed for further growth due to the country's low cement intensity and strong demand drivers. India's per capita consumption of cement (at 225 kg) is still far below the global average of over 580kg. It is also significantly lower than other large developing economies like China.This leaves substantial headroom for industry growth in the coming years.
Over the last few years, the cement industry has already pocketed most of the potential benefits from implementing operational best practices at their respective plants. Therefore, the clear challenge for Indian cement companies today is to identify new source of margin improvement. Based on our limited interaction with the industry players, INDIAN CEMENT REVIEW identified three key areas of performance excellence-sales and marketing, next-gen supply chain management and going digital-that can deliver sustained margins for cement players in shifting industry scenario.
The first area of focus for cement players is to achieve excellence in sales and marketing. By taking action on this front, companies can both stimulate demand and improve price realisation to drive margin improvement. A recent report by Kanvic identifies four key elements of sales and marketing where companies currently lag and which can be provide a winning advantage. These elements are improving visibility beyond factory gate, engaging micro-marketing, discounting, and bringing key account management to non-trade customers.
Often companies are unaware of the actual price at which their products is sold by the trade, or the price at which their competitor sells. As a result of this limited visibility, cement companies bargain power with their channel partners is weakened and they (cement manufacturers) protect their prices. Given the already slim margins in this commodity segment, these blind spots can have a major impact on profitability. Meanwhile, for the individual home buyers, according to Nilesh Narwekar, CEO, JSW Cement, 'it becomes critical for a cement manufacturer to reach primary and secondary layer as it has a direct logistics bearing, a cost per tonne.'That said, he further added: 'it is also necessary how a cement manufacturer attracts enough primary and secondary layers to be a part of wanting to sell a particular brand.'
In order to improve visibility, cement companies need to implement an effective system for gathering information from the market on a continuous basis and apply it in a decision making. For example, one of the leading cement manufacturers has created a dedicated team whose sole purpose is to gather pricing information on the company and competitor products.
Since the point of sale is the moment of truth, where the products and solutions meet their customers and end-users, for LafargeHolcim, being a business partner to all players in the distribution chain is the key. According to an official, who did not wish to be quoted, 'We make our products and solutions available at all times, generating additional business for customers as distributors, retailers, and DIY stores.' He added, 'We also offer in-store animations, product knowledge, digital platforms, mobile apps, and financing schemes for customers and end-users, including individuals and professionals.'
The dealer networks are extremely important for companies, contributing 70-80 per cent of their sales. So, borrowing a trick or two from credit card loyalty programmes, many companies now have personalised rewards and recognition schemes for their dealers, affiliates and key influencers. These days, companies are wooing dealers with gold, offering scholarship to kids like never before - with some help from data and algorithms. Cement firm Nuvoco (formerly Lafarge India) conducts a national-level singing competition for the family members of its dealers. A high-engagement activity, it gets participation from nearly 42 per cent of its membership base. Nuvoco, besides organising singing competitions, also has accident and health insurance for dealers and their family members. Another, large cement major awards its dealers' children who have obtained high marks. This is a big hit in the southern and eastern regions, especially.
With improved price information, cement companies are better placed to bring greater discipline in discounting. Today, as per the report by Kanvic, cement companies lack strategic approach to discounting, often succumbing to the pressure from their channel partners to increase discount to stimulated demand. To counter these profit-eroding practices, companies need to implement the policies and processes that target discount at where they generate the most value for the business.
For example, by shifting from a uniform discounting policy to one that rewards loyalty and achievement of sales goals, cement companies can differentiate between their most profitable channel partners. The implementation of discount policies should also be accompanied by effective checks and balances that prevent abuse of discount.
To maximise the effect of their micro marketing and achieve optimal demand fulfillment, cement companies need to move to a micro marketing approach. This involves getting a picture of demand that is much more granular than the regional or state-level focus that prevails today. Instead, Kanvic believes that Indian cement companies need to zoom in to the district level to measure an area's sales potential and allocate the necessary resource accordingly.
To this, Narwekar suggests a limited geography for cement players to focus on. He adds, 'With limited geography, cement players can move its product from source with the best and cheapest route along with efficient transport management.' This will entail cement players selling X million tonnes in pan-India, instead to a designated geography. From sales perspective, it will be difficult but, if a cement company has a strong network with assured demand from the region, its market share and volumes will increase in the region. 'However, it's a double-edged sword,' cautioned Narwekar.
Today, new digital tools can make this quicker and dynamic. For example, last year Kanvic was assigned with a building material company. Kanvic helped its client to implement a tool where is sales force could record construction activity at the ward level in a major city to indicate where upcoming demand would come from. Through this process, the company was able to uncover untapped areas of demand to focus on.
Hence, by building a granular picture of demand in this way, cement companies can deploy their sales force, allocate marketing spend and plan fulfillment most effectively. Furthermore, with a clear understanding of an area's sales potential, they can set more accurate targets for their sales team and more closely monitor changes in the market share.
Connecting the dots
Although representing a smaller share of sales today, non-trade cement customers will account for an increasing share of business in the years ahead considering a shift in the market towards non-trade. These larger customers will place very different demands on cement companies' sales volume and marketing due to their more exacting expectations on price, quality and customer service. In order to profitably serve this growing segment, cement companies will need to implement effective system of key account management.
For Rajnish Kapur, Business Head-Grey Cement, JK Cement, the non-trade cement consumers contributes a significant amount to the company's coffer. He adds: 'Cement companies needs to ensure that large customers receive a level of service that is in line with the value they bring to the business.'
However, Kanvic believes that the largest customer base are not always the profitable. Key account practices, which only focus on the size of the customer, will often result in leakage of margins. Instead, cement companies need to make the effort to estimate their customer's lifetime values to predict the profit their account could generate. On this basis, they can segment their key accounts and provide a level of service that is justified by their profitability.
The second area where cement players can improve profitability is their supply chain management. Traditionally, Indian cement companies have focused on achieving efficiency in manufacturing, however, they have realised significant success by making good progress on key performance indicators (KPIs), relating to plant and people productivity, and cost reduction.
Yet, when it comes to supply chain, which on an average accounts for 20-25 per cent of a cement company's costs, there has not been the same level of focus. Whenever Indian cement companies have looked at their supply chain, they've tended to take a more operational view that focuses on improving dispatch or route planning. However, to make supply chain a driver of profit improvement, cement companies need to take an end-to-end view that connects supply chain with their business strategy.
On the other hand, the faster growing non-trade segment, which comprises of large customers who buy direct, has different needs. Their expectations are for on-time delivery to meet critical project timeline along with lower price per tonne due to their high volume requirements. These expectations demand an efficient supply chain that delivers cement at the lowest cost. But shifting from an asset utilisation mindset to focussing on improving responsiveness or efficiency, cement companies can design a supply chain that improves the business' bottom-line. Once the design of the supply chain has been aligned with the customer segments, achieving improvements in responsiveness and efficiency will require actions on three fronts: re-evaluating the geographic footprint, implementing data-driven decision making, and bringing supply chain partners on-board.
In India's rapidly-developing market, the demand patterns for cement are constantly shifting. With infrastructure projects and housing developments springing up in new areas, there is a need to regularly re-evaluate the geographic footprint of cement manufacturers' supply chains to ensure they can fulfil emerging demand responsively and efficiently. This re-evaluation should include mapping the location of warehouses and godowns against demand hotspots. Furthermore, following the implementation of GST, there is further scope to rationalise the supply chain based on actual market needs rather than the earlier focus on State-wise operations.
To this, Rajnish Kapur puts it in a right way. He opines, 'If a cement manufacturer is able to supply its cement product at the right place at the right time and in the right cost to the customer, then you have an edge over your competitor.'
Data-driven decision making
Achieving substantial gains in supply chain responsiveness and efficiency require cement players to move to data-driven decisionmaking. Only by measuring performance at each and every step it is possible to identify and act on the incremental opportunities for improvement that contribute to supply chain excellence. The first step towards data-driven decision making is to create better visibility of inventory, vehicles and product movement across the supply chain. Some cement weighing trucks at the loading bay installs GPS to track their movements, but a few have taken the integrated approach that is necessary to realise its substantial gains. Instead, there is a need to identify all the points where valuable data can be collected and install sensor technology. Once installed, these sensors need to be interconnected which is now possible at low-cost, thanks to the falling prices and rise of cloud computing. With the data flowing from all sections of the supply chain, one is required to intelligently interpret this information to make correct decisions.
This requires the applications of advanced analytics and machine learning algorithms as well as training people to utilise the generated insights they generate in their day-to-day decisions. As supply chain is a cross-functional aspect of the business, there is a need to integrate personnel from different departments in the decision-making process.
'By taking this instrumented, interconnected and intelligent approach, cement companies can bring more consistency and a higher level of predictability to their supply chain operations,' believes Kapur.
Bringing partners on board
Achieving supply chain excellence in the cement industry cannot be done alone. Companies will need to collaborate closely with supply chain partners to realise the potential benefits. This includes working closely with logistics partners to implement technology in their fleet to ensure continuous visibility of product and vehicle movements. Even more importantly, there is a need to establish a joint review and problem-solving mechanism that can quickly flag up and resolve issues and develop creative new solutions to drive further gains. This partnership model requires a mindset shift from the traditionally adversarial relationship, focused on constant price negotiation, to a collaborative approach that rewards performance improvement. Not only with logistics partners, cement companies will also need to work closely with technology providers and analytics experts to design and implement new systems and train people in their use. Companies should bear in mind that technology in this space is evolving rapidly so flexibility and adaptability are the key.
The third area that can contribute to long-term profit improvement in the Indian cement industry is the application of digital at scale. Today, companies are adopting new hardware and software solutions on a piecemeal basis to address specific problems, but a few players are viewing digital as a driver of overall business performance and all are struggling to adopt a truly digital culture.
To realise the potential of digital for their bottom-line, cement companies should make four major changes. Firstly, they need to make digital a priority for the C-suite. Secondly, they need to replace the technology lens with a business outlook. And thirdly, they must invest in digital talent.
Breaking the silo mindset
Finally, to realise the full benefits of digital, there is a need to take an integrated approach across the business. This requires cement companies to break-down the traditional silo mindset that separates functions like production, marketing, and sales. Successful digital transformation ensures all departments have a common understanding of digital and its importance to their function.
ICR's conversation with cement companies has revealed that digital is not yet a priority for C-level executives. In most cases, digital initiatives are usually left to lower levels of the organisation or the IT department, who are tasked with implementing new solutions like CRM. As a consequence, digital fails to become a strategic priority for the business.
To drive digital in a concerted way across the organisation leaders need to place it firmly on the C-suite agenda by discussing it alongside other strategic decisions. Furthermore, it is essential that a digital champion is appointed at a senior level who has the authority to lead the process across functions and with direct accountability to the board. They also have the responsibility of creating firm-level awareness of digital and its importance to the organisation's future.
To kick-start this process, one large manufacturing organisation conducted a C-level workshop facilitated by external experts who brought an outside perspective on the opportunities and threats digital presented to their business. This helped foster a sense of urgency around digital and successfully brought it onto the board's agenda.
Thinking beyond technologies
Even in cement companies that have adopted progressive digital initiatives, there is a tendency to see them through the technology lens which limits the field of vision to specific solutions, rather than looking at all encompassing impact of digital across business spectrum.
With digital technologies advancing at a fast pace and customers, even in more conservative B2B organisations - rapidly adopting new buying behaviour, a narrow view of digital will leave cement players exposed to the threat of digital disruption. For example, one leading company successfully deployed drone technology to achieve lower pricing from Indian Railways by ensuring wagons were not overloaded, and thus avoided heavy fines. In another case, the same company implemented an automated fuel management system at its mines through RFID tagging, which ensured fuel was only dispensed to authorised vehicles. However, the real long-term benefits from digital will come when individual initiatives such as these are taken in line with a strategic roadmap to digitalise the business. This approach will help prioritise the areas to digitalise first for maximum business impact and provide a common infrastructure to realise synergies across the business.
Invest in talent
In order to digitalise their business, cement companies will need to attract and retain a different a very different talent profile. Today's digital talent typically prefer to go to analytics and Internet firms where they can learn and apply cutting-edge techniques. In order to attract this critical talent, cement companies will need to create a compelling value proposition for digital professionals to consider the industry and redefine their role and responsibilities beyond the traditional remit of information technology.
The Indian cement industry is gradually shifting away from the traditionally dominant trade channel that retails cement bags to large numbers of small customers, and towards non-trade customers like large construction and ready-made concrete (RMC) companies. This trend will accelerate further as sectors like infrastructure and low-cost housing increase their share of cement demand. For example, infrastructure share of demand is projected to rise from around 20 per cent to 25 per cent by 2020. These segments will put greater pressure on price realisation through their desire to keep costs low and the high level of bargaining power that comes with a large scale of projects.
Here both Narwekar from JSW Cement and Kapur from JK Lakshmi believe that the demand for RMC as a channel will grow only if there is a economy of scale. RMC would be more useful for programmes like Bharatmala, and Sagarmala.
- RAHUL KAMAT