Cement manufacturing and distribution is an extensive network connecting suppliers, manufacturers, warehouses and retailers. Ineffective management of this network leads to poor productivity and material loss.
Logistics in cement industry typically involves bulk cargo handling, both in the inbound (sourcing) and outbound (distribution) side. Inbound logistics involves transporting limestone and other raw materials that do not involve any notable warehousing and value added activities, while outbound logistics involves systematic transportation and storage activities, apart from a few value added services. The product needs to be weather proofed in every stage of its distribution until it finally reaches the end-user. Ensuring its safety across the distribution chain is a major priority for the cement industry.
Cement companies spend about 3 per cent of the gross revenue on inward logistics, while outward logistics accounts for another bulk of 15 per cent. Inward logistics include coal and limestone transportation, while outward logistics is mostly the final product cement. Some companies also incur outbound logistics cost on transporting clinker to the grinding plants. Where plants are closer to the collieries, the inbound transportation cost is less.
The industry has worked a lot on reducing energy costs. Now, further cost competency by squeezing more on this front is difficult. So, the next level is to focus on logistics, as in India on a per tonne basis, the logistics costs are phenomenal. Currently, around 60 per cent of cement in India is transported using roads – the costliest of transportation modes at around Rs 1.5 per tonne per km. This roughly translates into an additional cost of about Rs 25 on a 50 kg bag of cement if transported 300 km from production units. Although railway is a cheaper option to move cement, most companies cannot avail this infrastructure as much as they need it. Lack of integrated rail connectivity from sourcing locations to plants and again from plants to last mile distribution points is the major issue faced by the industry. Currently, for every 50-kg bag of cement, the logistic cost comes to around Rs 12-15 by railways, depending on the distance. However, railways have other demands. Foodgrains and fertilisers have to be moved in a big way, and not just cement. The rail resource is under tremendous pressure.
On the other hand inland water transport is almost non-existent in the country. The sea route is the most cost-efficient as it costs just about 50 paisa per tonne per km – a third of the costs involved in roads. Today, 70 per cent of the cement movement worldwide is by sea compared to just 1-2 per cent in India. However, the scenario is changing with most of the big players like L&T, ACC and Grasim having set up their bulk terminals.
Cement is a high volume, low value commodity. Even at Rs 350 a bag, it is only Rs 7 a kg. The logistics cost may either equal or exceed manufacturing cost. Five to 10 years down the line, for many companies the distribution cost will be more than the manufacturing cost.
The industry is focusing on using more railway routes than roads, shrinking lead distance (distance between the manufacturing facility and market) and opting for sea-routes wherever possible, but these efforts are severely restricted by poor infrastructural support. Bad road conditions across the country (especially for the last mile distribution) are a major hurdle for the cement industry utilising road transportation. Rapid fuel price hike leading to frequent escalation of transport charges is another challenge. In addition, rising toll charges on highways is also adding to transportation costs for the industry.
Another technical challenge faced by cement manufacturers is monitoring a bulker or bowser carrying powder cement. Since tankers ferry cement – with a limited shelf life – directly to the construction site, it is important to ensure that the vehicle movement is monitored until timely delivery. Mining operations management too is a complex process. From ascertaining that mining activity is occurring within boundaries to ensuring effective transportation, mining companies have to manage these functions effectively.
The industry is now looking at improvements in packaging technologies, such as improved packing materials, vacuum sealed packing, automation in loading at plants, etc. Realisation of Dedicated Freight Corridors (DFCs) by the Indian Railways (expected to be operational by 2015-16) is also likely to shift a significant share of cement transportation from road to rail mode.