Cement channels and solutions in logistics are evolving to relinquish traditional methods for more innovative and modern ones. The key driving factor in this transition is finance. ICR delves into the changes in logistics in the face of automation and data analytics.
The connection between logistics, channels of selling, the revenue line and the cost line were established over the last several decades with a mix of supply chain efficiency and cost optimisation. The recent best cases talk about innovation as the driver of change, which in some cases could be deemed as common sense but that seems to be in short supply.
Take the example of cost. Logistics cost (presumably the highest element of cost in the cement cost hierarchy) is not merely transportation cost that most of us make it out to be but the sum total of transportation, warehousing and distribution, inventory holding, ordering cost and documentation, which includes all the wastes that are associated with this. It also includes the trade-offs that are made, which is where most cement companies differ in their approaches to channels and logistics.
There are so many trade-offs that come in the way of cement manufacturing and distribution right up to reaching it to the customer. Some of these trade-offs include reach, penetration and growth versus the cost of each of these when you construct an end-to-end view of the cement outbound chain. Some trade-offs could be around service level and number of warehouses or direct shipsets versus moving through sticky stocking. There is no end to the number of warehouses that will enhance penetration and reach to the markets and service levels, while inventory holding would zoom.
Working with smarter solutions
Maister’s Square Root Law when applied to cement tends to point to as few stocking points as possible to make the optimisation work, but then Maister’s Rule of Inventory is one-dimensional around safety stocks for reduction of lead time variability and demand variability. It does not look at the trade-offs around inventory and the other objective functions. Thus, the network optimisation programme that most cement companies run is a cauldron where many objective functions go in, but only a few emerge as the winning combination of inter-dependencies on which Management Action is to be ordained. Building algorithms around these inter-dependencies start with rocking the entire boat with data requirements at every stage of the cement journey from the inbound to the outbound, right up to the point where customer exchange happens. Most companies are straddled with one part of the chain governed by the proximity to the resource, while the other outbound part needs a network to establish cost efficiency, together with service levels.
At the end, the optimiser should rule the roost as this could be very complex when constructed over micro markets, prices, availability, service, inventory and transportation cost that need data tables not as static interfaces but a more dynamic one. Most companies have ended with an oversimplification as when complexities rise to the hilt, the solutions tend to become just the opposite. Guided by data and observations, communication and sharing of information, a very complex interaction of all of these is vetted for management review almost on a daily basis. That is where the most successful sales and operations implementation rests in the best of cement companies in India. Most of them have planning algorithms to facilitate these processes. But not as a hands-free approach.
Some innovation in channel and logistics is predicated on the digitisation initiatives that separates data as it exists in the system, with the actual reality on the ground. Data is the source of everything, but it must be real, as we know that prices in spatially separated markets are governed by the equivalence of logistics cost. In simple terms, it means prices must cover logistics cost differences in spatially separated markets. Cement logistics cost being the most sensitive parameter, the actual knowledge of the associated cost of moving millions of parcels of cement over distances in spatially separated markets therefore becomes a huge area of focus. A price, which includes the associated logistics cost, must convey in the information the true cost by which two parcels could be separated, given that similar commodities do not have more significant differentiating factor to make a decision ‘play’. Samuelson’s treatise of 1958 still holds good and the question therefore is to digitise information on price as accurately as possible, where the true cost of logistics is part of the information. Best cases in this regard struggle to achieve a 100 per cent accuracy rate, understandably. But efforts are directed to achieve this with tracking and tracing and control towers and the rest.
Paradigm shifts
The next level of innovation will be to actually move from bagged to bulk entirely and from cement to concrete. That is where the world has moved. This changes the supply chain question and one of the major dimensions holding inventory and warehousing for a sales channel is hugely moderated or eliminated at the end, as selling becomes directly to the projects, no matter how small or large they may be.
The advanced nations have moved to this paradigm, which has changed the entire logistics, channel and innovation question to a different level, where the product cement is converted to a service of concreting at prescribed schedules. This, however, is no small switch, it would obviously mean the setting up of supply chains, that would be different from the current ones, with channel partners who are very different. The optimisation question for Ready Mix Concrete would also be different as there are more than one material source involved, aggregates, sand , gravel etc would step in. To be able to extend this step by step across the whole of India, starting with cities and towns and then the deeper areas would need several actors to step in to see how value can be created. At least the world has many examples where this has progressed with more sophistication of markets in construction. It would, however, need more planning and scheduling, use of digital tools and data driven decision support systems. This is where slowly and steadily some companies are progressing and they would obviously be the leaders in the next transition.
-Procyon Mukherjee
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