S Sathish, Partner and National Sector Leader – Industrial Manufacturing, KPMG India, explores key levers across energy, logistics, and manpower to drive efficiency and resilience.
Over the last two quarters, margins of cement players are under pressure and some of the players have shown a 25 to 30 per cent reduction in their EBITDA. While the key reasons can be attributed to the external situation of rising material prices and constraints to increase cement price, all the players are quite actively looking at strategies to enhance the bottom line to stay prosperous. The need of the hour for cement players is to think of innovative cost optimisation practices. We will deep dive into optimisation strategies for three major cost heads in this article.
Optimisation opportunities
A: Energy and fuel cost is one of the key costs for cement sector. While a lot of focus has been done on energy consumption optimisation, waste heat recovery areas, buying optimisation of coal and petcoke is a new area, which cement companies are focusing on.
Identifying the right import supplier and source country combination can help in optimising the buying cost. We have seen that if this aspect is intelligently done can lead to an optimisation of 8 to 10 per cent in fuel costs. This would entail mapping the importers in India, quantities they import, companies they supply and deciding the right contracting strategy with the right ones.
Analysing the quality of different sources of coal such as Indonesian, South African, Middle Eastern, American, etc. and deciding the right fit for your organisation based on equipment capability can help in optimisation.
Having an AI-based model to optimise the buying cost of fuel, based on petcoke price trends, price trends of coal from different sources, both import and domestic, quality variation analysis of different sources, etc. is a best practice adopted by some leading players to optimise fuel buying.
Exploration with green fuels and alternative fuel resources is another big area cement players are working on.
B: Logistics cost is the next biggest cost driver in cement sector. While prima facie this cost appears to be driven more by demand requirement and market conditions, a sharper focus on drivers of spend will help in optimising this cost.
Many companies operate with a long tail of transporters for each lane to de-risk themselves from the cost of unavailability of trucks. However, the share of business gets split across multiple transporters leading to lesser bargaining power. Some companies operate based on three quote negotiations even today where the breakup of price is opaque to the buyers. Leading companies adopt zero-based costing methodologies / should be cost modelling to build up the should be costs and use that for negotiation coupled with share of business optimisation. AI is used by some of the companies here as well in deciding the right share of business based on supplier price and transporter performance scores.
Synergy leverage between outbound, inbound, primary and secondary logistics is another innovative way of optimisation. Traditionally inbound and secondary logistics is managed by procurement function and outbound and primary transport is managed by sales function. This structurally does not allow for optimisation of spend and we have seen that the same transporter manages between two different functions and in some cases even with different rates for the same distance. Structured negotiation with the total spend share for the transporter can give substantial optimisation. Many companies have changed the logistics organisation structure between inbound and outbound logistics under a common reporting structure.
Load consolidations and right carrier/mode mix optimisation is a big lever. Based on analytics of load in a particular direction and the vehicle type used provides one with an option of increasing the vehicle capacity. An increased vehicle capacity can reduce the number of trips and at the same time reduces the logistics cost per ton. Loadability is often not measured which if optimised can help in reducing the costs. Evaluating the
right logistics mode in terms of road, rail and sea transport based on destination is another
lever used by different industries. Some of the leading cement players are exploring waterways to become more sustainable.
C: Manpower costs is one of the next biggest costs in cement sector. We can look at key strategies for contract manpower costs and white collar costs.
Typically contract manpower costs are a big contributor to manpower costs. Companies adopt the piece rate model or man-day rate model in areas such as packing where a daily output is involved. While a piece rate model may appear optimal, many companies don’t really get into details of how the piece rate is arrived at. Assumptions taken for piece rate calculation such as number of people planned to be deployed, skill levels of people considered, and wage rate assumed for each level leave a lot of room for optimisation. Once the value is unearthed, companies rationalise the number of contractors and increase share of business with a few contractors to realise the value unearthed.
Another innovative lever in white collar manpower is evaluating the people deployment/ cost incurred by core and non-core functions and exploring possibilities of managed services for non-core functions. Payroll/ IT service functions are mostly outsourced by many companies but companies today have started looking at other subfunctions/functions such as recruitment / tax / accounting where service providers are asked to reduce cost of service year on year through automation and digital interventions and. Another trend we see is even the non-core activities of core functions like procurement are being actively outsourced. The strategy here is to make variable the fixed costs, which helps companies in downturn to still stay profitable.
While we have deliberated on strategies for three top cost heads with a few levers, there are other cost heads such as indirect spend and packaging costs, which also provide more optimisation potential. The need of the hour for cement players is to think of an innovative approach to cost optimisation with new levers, to achieve higher order bottomline benefits.
About the author:
S Sathish, Partner and National Sector Leader- Industrial Manufacturing, KPMG, is responsible for increasing revenues for the industrial manufacturing sector, and increasing penetration in sector key accounts/corridors. He has rich experience in auto, industrial manufacturing and consumer market sectors. He has delivered more than 100+ engagements in India and abroad in his 27 years of experience.
