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You are consulting for the No. 1 producer of cement- Khaitan,
located in the central part of India. Central India is rich in the
raw materials (such as coal mines, limestone mines) required to
produce cement which saves the transportation cost of incurring the
raw material. The plant is spread over 20 hectares of land and is
one of the most well designed plants in the country. This company
currently has 40% of the market, and feels it could have more, but
is running at 100% capacity in one of its plants, located in Madhya
Pradesh (Central India). The market share of the company has fallen
from 50% to 40% because of the entry of a new player, namely JP
Cement which has managed to capture 10% of the market share. The
other big players are Tech and Sirla with 25% and 15% market.
The cost structure for cement production is as follows:
Raw materials-51% Labor and allocated fixed costs-19%
Distribution & transportation-19% Sales and Overhead-11% The
companys selling prices are set by the prevailing market prices in
India. Some problems faced by the cement industry today are that
the cement exports are falling at
great rate. Moreover, it is required by the law that they supply
a minimum of 20% of the fly ash1 produced to the brick industry.
This reduces the amount of fly-ash the company can recycle. This
has increased costs as they now have to purchase fly ash. The
company also recently switched its coal supplier due to quality
issues. This shift has increased costs by 1%.
Land is available to expand the current factory and there is a
suitable site available near Madhya Pradesh, about 200 miles to the
North. Approximately 80% of the customers are within 100 miles of
the current plant. Besides coal, the raw materials are purchased
from a government-owned company, and prices are set through a
yearly contract with the government company. The plant is
unionized, and extra shifts are not possible.
The trucks that Khaitan uses for transportation are owned by the
company itself. These trucks are used to transport the final
product directly to customers throughout the country. Customers pay
for trucking by the mile.
The fixed cost of plant additions is roughly the same as the
cost of a new plant of the same capacity. There are technological
advancements taking place in the cement industry such as new roller
mills which save 15% power but cost twice as much as those used by
the company in status quo. Recently, the Government of India has
passed an Act that places a ceiling on the number of mines
(limestone) a plant can own.
As Khaitans consultant, you are required to advise them on what
they should do to improve their conditions.
ALL THE BEST!
1. Fly Ash is a by-product of the cement industry which is
recycled and used again in the production
process of cement for environmental and efficiency related
reasons.
