Rethinking the cement industry supply chain
Cement companies in the past focused heavily on improving asset utilization since the investment in equipment and facilities tended to overshadow other elements of cost – partially because many companies did not have a clear view of the true costs of other aspects of the business such as energy or transportation. Because of the assumption that utilization and asset management were the keys to profitability, supply chain management has traditionally been relegated to the back burner and viewed as an operational concern rather than a strategic initiative. In addition, cements heavy weight and low cost have meant that it was more effective to produce cement near the point of use to minimize logistics costs.
Global changes in patterns of consumption have forced some companies to reevaluate the role of supply chain planning. The slowdown in demand in India coupled with the continued torrid pace of consumption in China have left some companies with a regional imbalance in production capacity compared to demand. These companies are starting to investigate whether a more effective supply chain can help control costs and hold the line on margins and profitability.
Companies are considering various non-traditional options such as:
- Shutting down cement plants in areas where demand and cost structure is no longer sufficient to support profitable business
- Continuing to produce from plants that may not be profitable in their immediate region and shipping the goods to areas with higher demand or higher price tolerance – despite that fact that the transportation costs will rise
- Offering more flexibility in packaging and pricing to be able to take market share in their local market from competitors.
Supply chain strategy typically relies on finding an optimal balance between efficient operations, customer service and asset utilization. Cement companies have typically focused solely on asset utilization, but a few companies are beginning to introduce customer service and efficiency as a method of differentiating themselves in a market that is dominated by a just few sellers and traditionally viewed as highly commoditized.
Developed countries typically consume cement in bulk, while emerging countries may opt for smaller quantities delivered in bags or other packs. One innovative option that forward thinking cement companies in emerging markets such as Pakistan are evaluating is moving from the traditional make to stock manufacturing method and moving some or all of their production to a configure to order to make to order method, where the possible configurations consist of an array of packaging options. The ability to deliver small, custom packaged lots to customers has allowed these companies to charge a premium price for the convenience and service while having little or no effect on operational efficiency.
Moving from an operation focused on utilization to one focused on balancing customer service with efficiency is no small task, but it is not an unprecedented journey. Many large manufacturers in asset intensive industries have gone through a similar process in the past twenty to thirty years as they adopted more lean and responsive production philosophies. For example:
- The steel industry is considering finish-to-order postponement strategies and more collaborative port operations, to reduce overall freight costs and decrease delivery lead times.
- The automotive industry continues to improve on its goal to produce customized cars with short delivery times.
- Any number of high-volume manufacturers learned to become more agile and thrive while offering mass customization options to their customers.
- Several Colombian oil companies combined their supply chain requirements and contracted with a single 3PL (third party logistics) provider to manage all their transportation and customs requirements.
The result of each of these very different scenarios was a shift from a very utilization focused industry to one with a renewed understanding of the benefits of a balanced supply chain strategy. In each of these cases, the companies involved increased their customer responsiveness while reducing overall costs, despite some decreases in overall asset utilization metrics. These industries today are better positioned to adapt to changing global economic conditions and to service their customers better and more cost effectively than ever before.
The same opportunity applies today to the cement industry – even stronger in emerging countries.
Yes, there are obstacles, but they have been overcome in other industries.
New analytic capabilities, easier access to simulation & prediction, and advanced supply chain solutions provide a solid foundation to embark on such a journey.
Do you have experience with any of these concepts? Please share and we can generate more ideas for discussion.