Logistics Costs: A perspective for the Indian Cement Industry26 April, 2017
After posting the poorest show in a decade in 2010-11, the Indian Cement Industry sold 223.02 million tonnes (mt) of the building material inFY12 compared with 209.5 million tonnes in FY11. Production, too, rose to 223.6 million tonnes against 210.5 million tonnes, up 6.2 per cent. The industry had in a way outpaced itself, ramping up production capacity and sparking off a spate of mergers and acquisitions to spur growth. Going forward these drivers will assist the industry’s growth in the next five years. On an average India’s GDP is expected to grow at a positive rate, thereby giving clear visibility of demand.
Yet as the industry continues to grow, costs seem to be on the rise too. Compared to other industries, Cement has the highest logistics cost as a percentage of sales. All freight cost is highly dependent on the cost of transportation which relates directly to fuel prices. In India transportation cost of cement is around Rs. 1.03 or Rs. 1.04 per ton Kilometer. The cost rises high when the material is unloaded and carried on road for further distance and if the material is brought from or taken to hinterlands, transportation cost by road increases. The industry depends heavily on road transport for movement of clinker to cement. The transportation cost by truck transport over a period of last 10 years has increased by nearly 50%. Moreover, the transportation cost to most of the big consumer centers, tier 2 and tier 3 cities and villages have been affected by rising railway transportation cost, both for input materials like coal and gypsum and more glaringly for clinker and cement.
WHERE IS THE NEXT SET OF SAVINGS?
Cement industry needs solutions to get transportation costs under control. And from this perspective, automation of key processes with respect to monitoring and controls can provide some savings in freight expenditure. Some of the initiatives could include; transport planning using intelligent algorithms and smart monitoring of execution operations using GPS technologies. Given a nearly 20% plus cost spend on freight and distribution, as seen in the above graph, a focused approach in this area could yield results. Nevertheless it should be noted that the Indian transportation industry is completely different from the other geographies. Fragmentation of the businesses, infrastructure issues, lack of professionals in operations/ drivers, skill shortages all plague the road transportation industry. Hence at one end, we can have all possible automation interventions for operations and planning on transportation, yet on the other side, the execution of such strategies creates difficult change management issues. Are there other possibilities? Organizations end up handling extra-ordinary amount of paper-work to manage the fragmented transportation industry’s services. The transport bills processing and related operations alone is voluminous and often a de-centralized operation. Freight contracts can be exceedingly complex. Likewise, freight invoices is accompanied by numerous types of required supporting documents. With high fluctuations of fuel costs, low visibility of the future freight costs and high complexity of the freight quotes, organizations conduct cost verification checks to keep a tab on the transportation spend.
Nevertheless it should also be noted that freight cost verification exercises are vulnerable to human and process errors. Instead well thought of freight audit program can ensure that an organization does not overpay for services it used or pay of services it did not use.