Shree Cements – Freight Reduction through Transportation Mix

India perhaps is the only country in the world offering incentives for setting up cement plants. But these tax incentives often give an unfair advantage to the new players by allowing them to retain the sales tax collected from consumers. The players use these incentives to penetrate the market by undercutting their competitors and in the process distort the market. As a result, even inexperienced entrepreneurs have been tempted to enter the field. That is why the Indian cement industry is the most fragmented (except China) in the world. It is a peculiar situation where none of the players has a market share over 12 per cent, making it impossible to maintain price discipline. Currently there are 35 companies in India manufacturing cement used for various applications.

Cement is a product that is inexpensive to make and has a huge demand. Most of the raw materi­als such as limestone, fly ash, gravel and coal are available in abundance and do not cost much. The raw material cost accounts for 30 per cent of the total cost required for making cement. A cement plant costs Rs 3500 per tonne, which implies that with an investment INR 350 crores, a company can put up a world-class cement plant. Shree Cements is a relatively new entrant in cement manufacturing in India, having set up its cement manufacturing plant with a capacity of 1 million tones in the coastal area in Gujarat. The state is rich in limestone reserves. The plant started its operations in the 1980s. The technology of cement manufacture was based on the dry process, with the advantage of lower power input per tonne of cement produced, enabling Shree Cements to have the cost advantage over the other cement manufacturers that were using the wet process. Analysis of input cost shows that, apart from the small portion directly attributed to efficiency, cost is almost impossible to control. This is because more than 70 per cent of the inputs come under the purview of the government. Coal prices, power tariff, railway freight, royalty and cess payment on limestone are totally controlled by the government. A look at the main inputs will give a clearer picture of the cost structure in cement industry.

Cement being a bulk commodity, transportation is a vital component of the cement company’s cost sheet. It accounts for a large part of the cost involved in distributing the cement. Shree Cements, having the manufacturing cost advantage due to the dry process technology, had its major focus on the logistics planning to curb the total cost.

1. Transportation Modes

Cement is sold either through the trade or directly to the non-trade customers. The trade sales of the company are directly through a network of 150 CFAs and 4500 stockists. The non-trade sale is by supplying cement directly to large construction sites. Shree Cements use rail transportation for transporting cement over longer distances, that is, above 350 kilometres. However, for distances below 350 kilometres, they use road transportation to destinations that are not connected by rail. With sales growth, the firm is relying more on rail than road transportation. The travel mix of the cement confirms the above fact.

Shree Cements have the advantage of being located on the seacoast of Gujarat and can use sea transport for cement dispatches to the cement-consuming centres located along the Indian coasts (both east and west). The share of sea transportation across the coastal area is not so significant. Apart from sea transportation, Shree Cements is studying the feasibility of transporting cement through inland waterways. This is the most economical form of transportation. The studies conducted by Shree Cements show that there is a fuel (diesel) consumption of 40 litres for transporting 1000 tonnes/km by road, 15 litres by rail and 5.6 litres by water. The company plans to slowly shift its focus more to water and rail, and reduce the share of road dispatches to control the freight cost and thereby gain the competitive advantage.

In the case of road transportation, Shree Cements is using the 40-tonner Volvo or the 16- to 20-tonne Taurus trucks, which give a 10 per cent cost saving as against the 9-tonner trucks.

The whole process of cement transportation depends on the marketing plan of the company. The distribution is the most important aspect of the industry and the entire strategic planning of the com­pany revolves around it. In a bid to reduce its distribution cost, Shree Cements is focusing on markets that have rail and water links, and integrating its distribution and marketing plans to minimize the cost of transportation for every shipment from the factory.

Shree Cements in 1999 started dispatching cement in bulk rather than in the packed form in cement bags weighing 50 kg each. In bulk transportation the cement from the factory is vacuum- filled into a vessel of transportation, either a truck or a ship at the bulk terminal. Shree Cements have developed such a terminal at its Gujarat factory located on the seacoast. At the receiving ports, Shree Cements have developed packing facilities for bulk cement to be packed in 50 kg bags to be finally delivered to the dealers or construction sites. Such facilities have recently been developed at the Cochin and Vizag ports.

1. Ready-Mix Concrete (RMC)

Shree Cements, in a bid to add value to its product offering, have started offering Ready- Mix Concrete to its clients, particularly in the field of large scale construction such as dams, flyovers, seaports, highways and airports. RMC is nothing but a ready-to-use concrete—a blend of cement, sand, aggregates and water mixed in the required proportions. Shree Cements have launched this project in the major metros. The economics of RMC is simple. It takes just INR 7-8 crores to set up a 100 cubic meters per hour cement mixing plant, with 4-5 transit mixers. Each additional transit mixture costs INR 25 lakhs. The plant has a 3- to 4-month gestation period. For the builder it means faster construction period and availability of durable and qual­ity cement with flexibility in mix. In addition, it does not cause air pollution and lowers stor­age requirements. These plants have the incentive of zero per cent excise duty. Shree Cements started this venture to meet 0.5 per cent of the total cement demand in the country, which is growing every year.

2. Dispatches

Shree Cements enjoy the benefits of proximity to the markets. They are mainly serving the markets in Maharshtra (almost 50 per cent of dispatches), Rajasthan (20 per cent), Gujarat (10 per cent), Kerala (10 per cent) and Eastern India (10 per cent). Being located in a backward area in Gujarat, it enjoys the tax incentives as well as a cost advantage of 7.5 per cent over its competitors. The freight cost is the lowest (15 %) in the cement industry.

3. Conclusion

Shree Cements foresee a lot of potential for cost savings in the cement industry. Therefore, they plan to shift the emphasis in their logistics operation to bring the distribution cost even further down. Shree Cements have the location advantage over their rivals and made a lot of effort to develop markets that can be served through rails and sea route to have the freight cost advantage. However, they are under the constant threat of withdrawal of the tax incentives by the government, which may disturb their cost structure leaving a long-term effect on their competitiveness on the price front.

Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.