Morbi Case for Class Discussion

8/13/2019 Morbi Case for Class Discussion

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Customers value expectations (CVE) and suppliers value propositions(SVP) in

developing new services and relationships: Case study from natural gas industry

Copyright: Pramod Paliwal & Ramendra Singh

Analyse and discuss the case in the context of market development f or natural gas/natural gas

based appli cations. You may also bring in the reference of simi lar instances in natural

gas/energy industry for a broader perspective.

1. Introduction

While deciding about products and services, customers always value certain specific criteria in

them. Features, service quality and reliability and service guarantees are examples of attributes

that represent value to customers. Customers incur real costs (and opportunity costs) when

acquiring offerings and hence these are important elements of customer value. Customer value

expectations thus have a very important role to play in developing offerings by marketers.

Value proposition is an offer that describes the quantifiable benefits that individuals or

organizations making an offer promise to deliver. Its development is based on a review and

analysis of the benefits, costs and value that an organization can deliver to its customers,

prospective customers, and other constituent groups within and outside the organization. It is

also a positioning of value, where value is a function of benefits and associated costs.

The significance of the case study stems from the unique context of the case study, i.e., the

natural gas distribution business. Distance between the supplier and consumers and creation of

natural gas transmission and distribution infrastructure form major contours of this business.

Moreover natural gas once explored and produced from the wellhead, cannot be stored easily.

Further the creation of storage infrastructure entails significant capital expenditure and given the


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physical & chemical properties of natural gas, considerable space is taken up in storing the gas.

Therefore, ideally end-to-end supply tie-ups have to be in place between suppliers and

customers, before the first cubic meter of gas is sold to the customer. In the absence of such tie-

ups, the entire business model becomes unviable as return on investment in creating pipeline

network for transportation and distribution until last mile becomes inadequate. It is a challenge

for any business marketer to operate under such a business model, unless it finds a match

between CVE and SVP for the target market.

This case study illustrates how the environmental variables such as competitive intensity that

affects profit margins necessitates an industry (in the case study, ceramic industry at Morbi-

henceforth, CERACO), to review internal cost-structure and manufacturing processes, and

design elements of CVE. GASCO finds a latent opportunity for matching CVE while planning a

market entry using piped natural gas (PNG) as total fuel solution, replacing LPG as a previous

solution.

2. The GASCO-CERACO Case Study

2.1.1. Data Collection

To enable data collection for the case study, representatives from supplier, GASCO and the

buyers in CERACO were interviewed to understand the sequence of steps that preceded the

entire market development. Twenty key ceramic manufacturers (customers) were visited that

represent CERACO. We conducted semi-structured interviews with few key representatives of

ceramic manufacturers, equipment supplier representatives, and GASCO representatives. Two

vendors of GASCO and a representative of the gas pipeline (infrastructure) company close to

GASCO were also interviewed. Themes were identified in the analysis of the semi-structured


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interview transcripts, focused group discussions and the documented information. The research

thus involved the examination of supplier-customer interaction activities, and the benefits of

making it an integral part of new service relationship strategy.

From both theoretical as well as the practitioners perspective, it would be important to gain

insights into the phenomenon of market development for GASCO by co-creating value by

managing the CVE- SVP (Supplier Value Proposition) interaction process. If value co-creation

as a market entry strategy can be successfully demonstrated in a relatively complex environment

such as the natural gas market in terms of logistics, infrastructure, and technology-, then it

should be useful for business marketers in terms of contextualizing the case findings in various

other (and maybe less complex) business marketing situations.

2.2 The Ceramic Industry at Morbi (CERACO)

2.2.1. Background

Morbi, 210 km from Ahmedabad, the commercial capital of western Indian state of Gujarat, has

a unique distinction for being host to around 400 ceramic units of various capacities. Almost

two-thirds of these units manufacture floor and wall tiles and remaining are vitrified tile and

sanitaryware manufacturers. The typical production levels for ceramic manufacturing plants in

Morbi range from 70 to 1800 metric tonnes/month for sanitaryware and 180 to 4500 metric

tonnes /month for ceramic tiles. The ceramic tile and sanitary wares manufacturing consists of

basic raw clay minerals mixed with other additive minerals that are used for the firing/fusion

process. In the firing /fusion process, the raw materials are transformed in a glassy phase

(vitrification) at temperatures between 1,000C and 1,400C. The vitrification process causes the

ceramic products to have certain chemical and physical properties, including resistance to heat

and fire, high strength, and chemical inertness. The major manufacturing processes include raw


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material storage, preparation of raw materials, shaping, drying, surface treatment (glazing or

enamelling), firing, treatment (polishing), sorting, and packaging (Source: UNIDO- DIPP).

The products mainly consist of a mixture of clay minerals complemented with other minerals

such as additives, fillers and fluxing agents, and glaze components. When received from the

extraction- sites, raw materials are prepared through several processes (primary and secondary

crushing, grinding, screening, dry or wet milling, dry screening and spray drying), mixed and

pressed, and extruded or slip cast into shape using shaping/forming. Glaze -preparation is

conducted using silica (as major glaze component), fluxing agents (alkalis, alkaline earths,

boron, lead, etc.), pacifiers (zirconium, titanium, and so on), and colouring agents (iron,

chromium, cobalt, manganese, etc.). Water is used frequently for a thorough mixing and shaping,

followed by aeration stage. Surface treatment and decoration of the clay products may follow

later. The products are then placed in kilns for firing/ vitrification. (UNIDO- DIPP)

The firing process allows the vitrification of the shaped and dried clay products. The continuous

kilns include tunnel kilns for sanitary ware, and roller hearth kilns for tiles. Firing is produced by

burners located at the sides of the kiln. The manufacture of ceramic products is complicated due

to the sensitive nature of the numerous chemical reactions that occur during the manufacturing

process. Therefore, manufacturing is a complex operation that involves massive supply of heat.

Usage of cheaper fuels may lead to technical problems, which may result in poor quality of the

end products. The use of a clean fuel such as natural gas enhances the product quality by

reducing technical problems in the manufacturing process. Ceramic products depending upon

their finished quality of the final products are generally categorized as follows:

1. Category A: These command a premium price2. Category B: These are sold at a discount of 20-25% as compared to category A


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3. Category C: These fetch a price that ranges between 10-50% of the discounted priceof A.

4. The average daily production from Morbi ceramic cluster reflects a clear pattern, asshown in Table 2:

End-Product Quality

Fuel Used

Coal Gas/CBFS LPG Natural Gas

Category A 50% 52-55% 52-55%

Category B 40% 42-45% 42-45%

Category C 10% 0-6% 0-6%

Total 100% 100% 100%

Table 2:Product quality wise distribution based on type of fuel used in Morbi Cluster

Fuel cost

per unit of

production

Supply

security

Kiln/Equipment

maintenanceFinal

product

quality

Health, safety

&

environmentissues

Coal Gas 2 3 2 3 4

CBFS 1 4 3 2 3

LPG 3 2 1 1 2

Natural Gas 4 1 1 1 1

Note: Ranking: 1-4 (Highest to lowest)

Table 3: Comparative analysis (ranking) of fuels used for kiln firing at Morbi

Thus, natural gas has the potential to increase the production of category- A and B products,

which commanded significantly higher premiums in the market. Incidentally, using LPG also


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brings down the rejections of end product, but since LPG, compared to natural gas, scored less

on other major underlying parameters (Table 3); natural gas became the preferred heating fuel in

the Morbi ceramic industry. As shall be also seen in the subsequent sections, the intensive

interactive engagement of GASCO with CERACO players was extremely useful in

understanding this phenomenon, and eventually the adoption of natural gas as a preferred fuel,

was beneficial for the end customers.

Both the major stakeholders in the process i.e. customers, and the business marketer reported that

they had intensive interactions with each other during the entire process i.e. from the beginning

of the business discontinuance till the adoption process for natural gas as the new fuel for kiln

firing was complete.

2.2.2.The Fuel Crisis: Business discontinuity and a latent opportunity for CVE-SVP interaction

process between GASCO and CERACO

Ceramic manufacturing is highly energy intensive, where energy costs account for 15% to 40%

of the total production cost. The existing fuels being used are fuel oil, producer gas, natural gas

and liquefied petroleum gas, which mainly used for firing the burners. A key aspect of the

process involves drying, which is followed by firing at temperatures between 800 centigrade

and 1,250 centigrade. Surplus heat is often recovered from ceramic dryers, using hot air

recovered from the cooling zones of tunnel kilns, supplemented with hot air from the burners.

This requires careful consideration of plant layout, because low-temperature excess heat can be

managed usefully, provided that the distance between excess heat generation and use (and

therefore piping length) is limited. Over the last few years, the Morbi ceramic cluster (CERACO)

had been experimenting with Carbon Based Feedstock (CBFS), Liquefied Petroleum Gas (LPG)


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and Coal Gas for firing the kilns that also shifted from conventional tunnel kilns to roller kilns

over the years. Between 1992 and 2002, CERACO units were largely roller kilns based, using

LPG as a fuel, which was a cleaner and less polluting fuel that also addressed the issue of

consistency of temperature required in the kilns. However, in 2002, the price of commercial

LPG increased to the extent of 130%, and suddenly the ceramic units found the LPG

economically unviable as it resulted in a substantial increase in their cost structure.This led to a

fuel crisis.

2.2.3. CustomersValue Expectations: Looking inwards for solutions

CERACO manufacturers taking a cue from their Chinese counterparts, explored the technology

available in China and looked at the option of adopting the coal gas based gassfier mechanism,

for kiln firing. The CERACO units had a unique distinction for adaptability, and true to this

spirit, within few years of the fuel crisis; a majority of units converted their kiln firing process

into coal gas based gassifiers, and also developed indigenous technology for manufacturing these

gassifiers. However, the coal gas fuel failed to bring about a consistent kiln temperature, which

resulted in variation in the quality of their product range i.e. vitrified, floor and wall tiles. This

inconsistency in product quality led to higher rejections, and dropping revenues from the

customers, most of whom purchased in bulk. The customers of CERACO further used their

bargaining power to drive down the contracted price with the CERACO units, who were left with

little or no option to wriggle out this situation. Moreover, coal gas production involved multiple

mechanical steps, which made the process complicated. Between 2002 and 2007, while the

installed capacity went up by almost 40%, the CERACO units were still struggling with finding

an appropriate fuel solution to fire their kilns. The fuel crisis was blowing out of proportion, and


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the solution seemed out of sight. This was a latent opportunity for GASCO to engage in CVE-

SVP interaction process.

2.2.4 GASCO

GASCO is a subsidiary of a large public sector petroleum company (2009-10) sales, USD 1.6

billion) promoted by the state government of Gujarat, India. The role of the natural gas

marketing company is complementary to another group company that operates one of the largest

gas transmission pipeline networks in India. At every location where the transmission network

ends, GASCOs retail network starts. This has resulted in a strong synergy in network

management besides ensuring that gas is adequately available to all retail segments in Gujarat

that comprise industrial, commercial, transportation and residential customers. GASCO provides

last mile linkage to small consumers by way of networks. The company is supplying Piped

Natural Gas (PNG) to nearly 30000 domestic households, 125 commercial establishments and

about 400 industrial customers. It handles sales volume in tune of 2 MMSCMD (Million Metric

Standard Cubic Meters per Day). Understanding the complexities of Natural Gas business, the

promoter company, apart from collaborating with Canada based Niko Resources, has forged

strategic business alliances with international partners like Heramec Limited, UK, GeoGlobal

Resources (Barbados) Inc, Canada, Hallworty Shipping Limited SA, Panama, Oilex, Australia,

Petrogas E & P LLC, Oman and Silverwave Energy Pte Limited, Singapore.

2.2.4.1 The New Service

Natural Gas is a safe, efficient, and economical fuel to use in different forms by different set of

users, either as Piped Natural Gas (PNG) or as Compressed Natural Gas (CNG). Unlike LPG,

CBFS and Coal Gas, the PNG Fuel Service needs an extensive infrastructure for reliable service,

which means substantial upfront investments. Natural Gas is supplied to the customers at the


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usage point through linear gas pipelines, as this cannot be stored in cylinders like LPG. Gas

flows to customers premises going through various stages of pressure reduction. These pipelines

take their supplies from cross-country trunk pipelines. Apart from these trunk lines, the PNG

infrastructure include heavy-duty compressing units at various points, a deodorization plant, and

a city gate station from where the trunk line is connected to pipelines for intermediate and last

mile connectivity. The pipelines network, and the city gate station requires a continuous

monitoring with state-of the -art hardware and software. Though PNG was seemingly a logical

fuel for CERACO units because they have already traversed on the Liquid (CBFS) to Gas

(LPG/Coal Gas) curve, and with minimal need for retrofitting, the SVP was still not free from

challenges.

For ensuring the switch to an alternative core activity in the manufacturing process for

CERACO, in this case from the usage of Coal Gas to Natural Gas for kiln firing GASCO crafted

its SVP in the following way:

1) Adequate distribution infrastructure for consistency in supplies: Unlike oil that can bemanaged in batches, gas requires a constant flow and requires complex pipeline networks

right through upstream (exploration & production) and midstream (transmission at high

pressure) to downstream (distribution at last mile) even for minimal usage. GASCO being a

downstream company needs to create the infrastructure to handle the high-pressure natural

gas coming from the cross-country trunk line transportation network of midstream

companies. Thus GASCO takes the rights of natural gas at the city- gate- station (CGS) and

distributes gas to end-consumers at low pressures through an intensive network of low

pressure pipelines.


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At a very conservative estimate, CERACO entails an investment of USD 60 Million for

creation of a city gas distribution network. In addition, the creation of such distribution

network also involves tackling a host of regulatory issues and managing Health, Safety &

Environment (HSE) norms.

2) Justify relatively high prices for natural gas: Natural Gas is benchmarked with

international crude oil prices and hence relative to Coal Gas and Carbon Based Feed Stock

(CBFS), is priced higher. The higher price in part also stems from a substantial investment in

infrastructure. Its price may be at par with or slightly higher than LPG. However, a customer

making a decision about choice of fuel only because of price grossly overlooks the other

advantages of natural gas, i.e. high calorific value, clean (less polluting) fuel and above all the

assurance of adequate supplies at all times.

3) Availability of adequate quantities of natural gas for CERACO:/ Consistency ofNatural Gas Supply:

Reliability of gas supply is a paramount issue for a ceramic customer. As also

discussed earlier, it is relatively expensivefor both, the buyer as well as supplier- to

store adequate quantities of natural gas. Therefore, in the event of disruption of

supplies, the customer shall be at a loss-both in terms of downtime in manufacturing

operations, and costs involved in maintaining and (short-term) switchover to alternate

fuels. For reliable and secured gas supply, city gas distribution networks should have

a network system with minimum of two sources from different trunk lines.

GASCOs marketing strategy of diversifying its natural gas supply sources such as spot gas etc.

to hedge against volatility of natural gas prices combined with the professional and forward

looking approach of the top management also helps in contributing to a unique SVP of ensuring


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perennial gas supply. GASCO has a lot of support from the government the majority

shareholder- to enable it to take calculated yet bold business risks on gas sourcing and

distribution infrastructure creation.

4) Safety issues: The properties of natural gas at times makes its customers vulnerable topotential mishaps and hence it is imperative that a downstream company (GASCO) adopts good

industry practices in design and construction of facilities, laying of pipelines, infrastructure and

in selection of equipment. These practices are as also per the mandate of Oil Industry Safety

Directorate (OISD) of the government of India. Further, it is also required to implement

engineering and management measures based on the outcome of internationally accepted tools

like Quantitative Risk Assessment (QRA) and Hazard & Operability Studies (HAZOP). Other

measure- which is also mandatory- such as use of odorants is also a safeguard to enable early

detection of leakages of natural gas. Consumer safety measures are required to be implemented

including provision of information on safe practices, emergency response, dos and donts at the

time of connection and in subsequent customer-visits.

To address these concerns, GASCO regularly engages with key CERACO customers in order to

understand the salient features about fuel consumption by the units. GASCO also has a stateof

the -art Supervisory Control & Data Acquisition (SCADA) mechanism in place which aids to

better monitoring of the gas distribution networks.

To address these concerns, GASCO regularly engages with key CERACO customers in order to

understand the salient features about fuel consumption by the units.

The following are the identified aspects from the perspective of customer value expectations

(CVE):


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a) The fuel usage patternsb) Details of kiln firing mechanismc) Their cost structure, rejection rate and associated opportunity costs.d) Ceramic manufacturers end -customers expectations in terms of quality & consistency.The CERACO units were well networked among themselves, extremely cost-conscious, and

were always looking to improvise their processes by rising up on the learning curve. These

factors made GASCO to take a deep look into their operational details, since given the distinct

nature of its customers who have high prior knowledge, any new proposed fuel based solution

would need to be sustainable and of higher perceived value. It is imperative or any supplier to

develop a solution that is perceived valuable by its customers, besides being sustainable in the

medium to long-term horizon. This perceived value also needs to be successfully communicated

e.g., the short-term price differentials need to be explained with reference to the overall

customer-benefits. This also presented another challenge for GASCO- in terms of dealing with

customers influenced by their intense prior knowledge and experience. This prior experience of

customers aspect is an important one when dealing with such customers and has implications for

customer judgments (Jiewen and Sternthal, 2010), and value expectations.

2.2.5. CVE-SVP Interaction process

GASCO engaged with its customers on a continuous basis, tackling the concerns enlisted above,

and looked at the issues from the customers perspective, as well as from customers end-

e.g. At the intermediate Spray Drier stage (that involves drying of raw material and intermediates and which has

no direct bearing on the quality of end product), the ceramic units can continue with the option using Coal Gas due

to its economical availability.


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consumers perspective, to arrive at the following salient issues that needed to be addressed to

match the CVE with SVP:

1. Look beyond the short-term profitability of CERACO manufacturing units. ;2. Bring down rejections due to inconsistent quality, and to ensure consistently good quality

and to be able to compete internationally;

3. Ensure that high initial investment are set-off by the benefits such as zero storagerequirements for LPG, or the need to install and operate complicated mechanical

processes required for coal gassifiers;

4.

Ensure that CERACO units need not make any major process related changes for

adopting the new proposed fuel solution based on natural gas for kiln firing.

The interaction process was perceived by one of the key customers as:

The gas company (GASCO) officials have been very proactive in working with us,

understanding our problem-areas and devising solutions that were customized for our

operations.

In addition, another customer mentions:

Sometimes, we do have anxiety over probable increase in natural gas prices and its

consistent availability. But that is certainly less than the one we used to have when we

used LPG and Carbon feedstock for our kiln firing earlier. Moreover, we are confident

that after having made a substantial investment in creating huge gas transportation and

distribution infrastructure, the gas company shall do all the needful to address our

anxieties.


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2.2.6. CVE-SVP Interaction results

GASCOs efforts indeed brought some encouraging results. Within a year, almost 80% of the

CERACO units in Morbi signed up for Piped Natural Gas supply by GASCO. 64% of the total

units use PNG for up to three-fourths of their total requirements. The consumption of Natural

Gas increased from zero to 0.9 MMSCMD in about two years time. In the meantime, the gas

transmission company from the GASCO group, which is into pipeline transmission network

business, was working simultaneously to ensure the availability of adequate supply infrastructure

for the CERACO ceramic units. GASCOs endeavour of working closely with the customers

therefore transcended from mere transaction based interactions to long-term win-win customer

partnerships. Thus, besides co-creating a new value (in form of PNG) that had more long-term

benefits, the business marketer also advised the customers to continuing with maintaining LPG

storage facilities (with marginal investment). That was because in the eventuality of disruption

in natural gas supplies, the last-mile pipeline network can carry LPG and rotary kilns can

alternatively be fired by LPG, reducing the possibility of another business discontinuity, as faced

by customers earlier. GASCO realized that any disruption in manufacturing activity due to

disruption in the supply of natural gas could be much more costly for CERACO units than

temporarily switching to a competing fuel (LPG). As GASCO was not supplying LPG,

suggesting LPG as an alternate fuel to avoid business discontinuities meant that the supplier was

de-facto decreasing its customers switching costs. Therefore, accepting competition(from

alternate suppliers or product substitutes), even in the face of creating value for customers is also

an integral aspect of matching CVE with SVP, since customers perspective out sizes that of the

suppliers own perspective.

The CERACO units were a happy lot. Another customer for instance mentioned:


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After switching over from coal gas to natural gas, the rejection rate per box of manufactured

tiles has reduced drastically! In addition, our clients are extremely happy with our production

quality, which, now is more accepted in terms of premium grade rather than relatively sub-

standard as was the case earlier.

Morbi Case: Exercise

Note: For the sake of brevity and avoiding repetition, you are expected to NOT mention any kind of

background etc. to the case while answering the following questions.

Exercise:

Having gone through the case in detail, you are required to answer the following questions:

1. What is the key learning from the case?2. Enlist major concerns/issues that you feel that have not been addressed in the case but may be

crucial for the success of such efforts.

3. What according to you are the challenges to be encountered by either of the entities i.e. naturalgas marketer as well as consumer in the process of co-creation of such natural gas based

solutions? What, in your opinion can be done to make this more effective?

4. Enlist a few successful examples of such natural gas/LPG based novel applications that may (ormay not have) involved the processes of co-creation of solutions.

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Morbi Case for Class Discussion