Case study

Ambuja Cement: Cost Leader in the Indian Cement Industry

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Introduction

In 2004 GACL was the third largest producer of cement in India

Widely considered to be the lowest cost producer

GACL’s quest for cost leadership had been driven by productivity improvement and cost cutting measures

Believed in doing things in innovative and unconventional ways

Pioneered in various cost cutting measures like:-

(i) Modern plants, large kilns, high degree of automation, low- manpower cost, power tariff, fuel cost.

(ii) Use of substitutes instead of coal to cut energy costs.

(iii) Ship transportation to cut down freight costs.

(iv) Low cost funds helped to cut the cost capita

Picked best practices during overseas visits

BackgroundGACL was established as APCL in 1981 by Narotam S Sekhsaria(Cotton Trader).Suresh Neotia was appointed the Chairman & Sekhsaria took over as MD of APCL. In 1983, company floated a public issue & changed its name to GACL & production started at 0.7 mtpa in Ambuja Nagar Gujarat.In 1993, GACL commissioned its 2nd plant named Gujambuja Cements.

Cont.BackgroundIn 1995, it set up a 1.5 mtpa plant in HP called ACHU & floated a wholly owned subsidiary in Mauritius – CAIL. In 1996, GACL floated Ceylon Ambuja Cements Ltd., through which it acquired a small company, Midigama Cement, in Sri Lanka. In 1997, it acquired Modi Cements, plant of 1.4 mtpa at Raipur for Rs. 1.66 billion. It was renamed ACEL.In 1998, GACL acquired Nadikudi and Proddatur limestone mines in AP to strengthen its presence in Southern India.

Cont.Background

In December 1999, GACL paid 3.5 billion to acquire a 51% stake in Delhi based DLF Cement. After this merger, GACL became the 4th largest cement manufacturer in India after ACC, L&T and Grasim. In December 1999, GACL acquired 7.2% stake in ACC for Rs 4.55 billion. In December 2001, GACL began trial production in Chandrapur, Maharashtra with 2 mtpa, taking its total capacity to 12.5 mtpa.

The Indian Cement Industry

India - world's second largest cement producer after China.With the capacity of 151.2 Million Tones (MT), it is big in size and hence accommodates a number of cement companies in the market .Foreign MNC’s entered the country-Lafarge and ItalicementiGujrat was the largest cement producing state.

Cont…

The demand was closely linked to performance of Indian Economy.Indian Government was a major consumer of cementTop 20 companies accounted for more than 70% of the total cement production in India. The total installed capacity is distributed over 129 plants, owned by 54 major companies across the nation.

Major Players In Indian Cement Industry

ACC – 13.3%Gujrat Ambuja – 11.7%Grasim Ind – 10.2%L & T – 10.1%India Cement – 5.1%Others – 24.4%

Oligopoly

Market Structure characterized by few sellers and interdependent price/output decisionsSignificant barriers to entryProduct could be homogenous (similar) or differentiatedPotential for economic profits in the long runIncentive for illegal price settingCompetition can be vigorous among the few firms

Oligopoly

In oligopoly firms operate under imperfect competition.Demand is relatively inelastic because all other firms leading to similar price cut leading to price war.With the fierce competitiveness created by sticky upward demand curve firms use non price competition in order to accrue greater revenue and market share.

Packaging

cement was packed in 25-50 kg packet bags using jute bags

was 1st to use paper bags for packaging having advantage of low pilferage, better preservation, appearance with low cost

each bag contained the brand name, ISI logo, with identification number, price of the bag and net weight of the bag

Logistics GACL was one of the 1st cement producer company to introduce Integrated

logistics system(ILS)

Order Processing System:-

• involved the flow of information about the orders from generation to fulfillment

• involved transmission of customer order, paper processing, retrieval from the ware-house, dispatch to the transporters, transmission of information to production planning dept.

Inventory Management

Involved knowing both, when to order and how much to order

Management had to control the cost of carrying larger inventory

Had well developed system for inbound raw materials

Manufacturing

Basic raw materials used for manufacturing of cement are :– Limestone– Clay– Silica– Gypsum

Manufacturing• Cement manufacturing process involves the following steps:– Quarrying and crushing– Grinding and blending of raw materials– Clinker production– Finish grinding

Types of processes for production of cement•Wet process• Semi dry process•Dry process

ManufacturingDry process reduced the fuel consumption from 330kg to 250kg of coal.Output of dry process was 2.5 times than wet process.Vertical shaft technology –mini cement units-wet processRotary kiln technology used in large plants –dry process GACL’s engineers used husk and crushed sugarcane to fire the kiln. This bought energy bill down to Rs.20 per ton.GACL replaced V belt driver by flat belt drivers. GACL’s clinker was heated at right temperature thereby reducing the power costs from 120 to 90 units per ton.

MATERIAL REQUIRED FOR THE PRODUCTION OF CEMENT PER TONNE OF CEMENT

1.2 – 1.5 tons of limestone

0.25tons of coal

120 kwh of power

0.05 tons of gypsum

POPULAR VARIETIES OF CEMENT ARE:

Ordinary Portland cement

Portland Pozzoland cement

Portland blast furnace slag cement

White cement

GACL always attempted to reduce their cost of production in any which way possible.

There were two main costs associate with the production costs of GACL:

Power cost

Fuel cost

Dec June Dec2002 2003 2003

Units consumed

86 90 85

Cost/ton 187 183 180K.cal/kg 729 727 718Cost 224 230 229

Techniques used by GACL to reduce its cost of production:

V belt drives which consumed more energy were replaced by flat belt drives.

improved version of mechanical conveyor was used to eliminate breakdown and spillages.

Adjusted retention time,maximised temperature and the rate of cooling to reduce power cost from 120 units per ton to 90 units per ton.

Reduced mining expenses by implementing ‘ripping technology’.

Introduced an Australian device called Surface miner to recover more material from the given area and save energy.

Computerized process control system for easy access and regulating the production process.

Zero Error Electronic Rotary Machines to increase capacity utilization.

Improvement in efficiency and lower shutdown rates to increase capacity utilization.

Fixed cost

R&dDepreciationRent

Variable cost

ElecrtricityRaw materialswages

Cost advantages that a business obtains due to expansion.

Situation in which output can be doubled for less than a doubling of cost.

Economies of scale

Transportation

Cement is highly freight intensive in nature. manufacturing of each tonne involved a transportation of 1.6 tonne of limestone,0.25 tonnes of coal, 0.05 tonnes of gypsum.

Road transportation beyond 200 kms was not economical,55% transported through railways.

Unavailability of wagons for transportation on western and southeastern railways.

Contd…. In 2003,70% of the movement worldwide was by sea compared to

only 1% in india.

GACL was the first co. to use water transportation for domestic as well as export consignments.

As a result the cost came down drastically.

Bought ports and freight handling terminals at Muldwarka, surat and vashi.

Contd….In 2003 muldwarka was equipped to export clinker, cement, import coal and furnace oil.

Built a bulk terminal at kochi in kerala.

Setting up Breakwater and jetty facilities in Gujarat, Maharashtra and Kerala.

Acquired five ships for transporting cement in bulk.

350 self financed trucks and a railway siding provide flexiblity.

Future OutlookGACL has been pursuing a combination of strategies like Strategic alliancesCapacity expansionNew plantsAggressive takeovers.

The company had set up a two million ton Greenfield cement unit in Maharashtra at an investment of Rs.500 crores.

It had expanded capacity at the existing Gujarat Site from three million to four million at an incremental cost just of Rs.100 crores.

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