The client is currently one of India’s fastest growing building solutions companies. It produces and supplies asbestos cement (AC) sheets, flat boards and pre-fabricated steel

buildings for the industrial, commercial and residential construction sectors with AC sheets accounting for around 90% of sales.

and amortization) as a percentage of sales amounting to almost 45% lower as compared to the competitor average. The client’s logistics cost accounted for 16% of total sales, which was much higher than its competitor average during the same period. In addition, in the last couple of years, the client invested in expanding its manufacturing footprint by setting up a new facility in the North and by doubling

The company boasts highly diversified manufacturing operations that are based in multiple locations across North, West, Central and South India. Its 60 sales districts across the 5 geographical zones produced a turnover of approx. INR550 Crore in 2009. Despite strong growth and sales, in FY 2009, the cost of operations of the client was very high with EBITDA (earnings before interest tax depreciation

Logistics cost efficiencyforlargeplayer in cement building products

Case study

Authors

Ajay Tiwari is a senior manager in the Advisory Practice, Ernst & Young, India

Adit Sharma is a senior consultant in the Advisory Practice, Ernst & Young, India

Accelerated Cost Efficiency (PACE) was initiated. In our discussions with management, it was decided that the program would be executed in three stages focusing on logistics costs, material costs and manufacturing costs. In September 2009, logistics costs were first targeted.

its capacity in the South. In the wake of the global recession, the client faced a twofold challenge of increasing sales to meet the newly installed capacity while, at the same time, ensuring that selling costs are reduced in line with industry benchmarks.

Against this backdrop, the client asked the project team to help it achieve cost leadership. And so, the Program for

Logistics case

This case study highlights the business challenges, CEO agenda, approach, improvement themes, stakeholder buy-in process, major

benefits of the engagement and the lessons learned.

39

Business challengesDemand seasonality

The AC sheets industry is highly seasonal: sales peak in the months May - August (summer season) when large-scale construction activity in semi-urban and rural areas reaches a maximum. During these months, demand is about 80-100% higher than average, which represents more than 30%-40% of annual sales. The overall demand in this period exceeds the supply which leads to a problem with inventory build-ups through the year to support demand and improve distribution to sales districts.

High transportation costs as percentage of sales

Visible transportation costs were 6%-8% of sales. However, the entire costs of logistics including raw material (RM) inbound and finished goods (FG) primary and secondary freight was 20%. This was primarily because AC sheets are bulky and their selling price per metric ton is low. Consequently, due to the low value of a single consignment, the freight cost per metric ton (MT) is much higher compared with other products like fruits, vegetables, consumer appliances, etc., Therefore, optimizing logistics costs would have an immediate and visible business impact.

Intricate structure

Clients’ products are sold across 5 zones in more than 60 sales districts through 35 stocking points (plants and depots). This complex structure created challenges in optimizing the network and supply pattern.

Since the majority of demand lies in interiors, vehicles are available only at a premium with respect to other commodities. The problem was further compounded by lack of visibility of the secondary freight costs as indirect reimbursements were made to the dealers for their last mile distribution in the form of discounts.

Damages

Another major area of concern for the client was the high percentage of damage to goods in transit and handling. The loading and unloading process was performed manually at all depots as it was not feasible to install forklifts/cranes due to relatively low volumes handled per month at all depots. This contributed to around 3% of pre-salvage handling losses.

Supplier controlled RM logistics

The major RMs, asbestos fiber and cement, were procured on a delivered basis which meant that freight costs were not controlled by the client. Only the import clearance and inland transportation costs for the asbestos fiber, which was imported from Russia and Brazil, etc., were in the client’s control. The RMs were imported to various ports in West, South and East India, and customs clearance was at the port container freight station (CFS). All consignments on a particular shipping line had to be cleared from the identified CFS. Thus the bargaining power on prices did not lie with the importer.

41

Logistics case

CEO agendaBased on the organization’s strategic vision and existing business challenges, the CEO had a clear three-point agenda to attain market leadership:

• Profitable growth — reduce overall cost of operations, thereby increasing EBITDA margins

• Integrated growth — enhance geographical and market synergies across zones for overall benefit of the organization

• Transparent growth for all stakeholders in the supply chain

The solutions developed during the engagement were aligned with the three-point agenda.

Program organizationThe project team was organized into several levels (see Figure 1). A steering committee headed by the managing director was formed to monitor monthly progress and set direction for future project execution. Key stakeholders across operations, sales, logistics, finance and production were invited to be a part of the steering committee.

A working committee and core execution teams were formed for idea generation, idea evaluation and day-to-day execution. Regular interactions helped foster organization-wide participation and accountability. Pre SCM (steering committee meeting) wiring meetings were conducted with theme leaders and owners to enhance endorsement of ideas during SCMs. Monthly SCMs were conducted which ensured that initiatives were continually aligned with the management vision.

Figure 1. Project team structure

Source: Authors’ research

Steering committee

Project sponsor, mentors, senior management

Engagement partner, Engagement manager

Client core project execution team (theme leaders)

Ernst & Young advisors

Client team leaders, client team members

Ernst & Young advisors

Working committee

Core execution team

43

Logistics case

ApproachA customized approach was taken to the client’s geographically aligned operations (see Figure 2). Spend base analysis and hypothesis generation was completed in the Identify phase. These hypotheses were then grouped under improvement themes.

The Diagnose phase was divided into two parts and was executed by following a part-to-whole approach, as follows:

• Select a part of the company for each improvement theme, i.e., south zone for outbound and west zone for inbound initiatives

• Adapt ideas the client developed in identified zones to the regional attributes, and replicate across the organization

Figure 2. Customized approach framework

Source: Authors’ research

Part-to-whole approach

Identify Diagnose Design Deliver

Business cases Benefit trackers

Spend area analysis

Develop hypotheses for

cost levers

Verify hypothesis in select region

Replicate in other regions

Create organization-wide buy-in

Remote management

Linkage with the CEO agenda

This customized approach was specially formulated to overcome the challenges arising from the organization’s geographical spread.

Subsequently, in the Design phase, business cases were framed and stakeholder buy-in was generated. The Deliver phase was ensured through remote support and regular follow-up with senior management.

Spend area analysis

Spend areas and contracts were analyzed together with the processes to identify areas where:

• Leakages in costs took place

• Operations, processes and planning could be integrated

• Greater transparency could be achieved in contracts

Costs were segregated across major logistics spend areas, i.e., domestic outbound, domestic inbound, import-export, losses, depot costs and interest on FG inventory (see Figure 3a,b). Cost baselines were set in agreement with key stakeholders. Subsequently, cost levers for each area were identified to get an understanding of impact areas where hypothesis can be generated.

Figure 3a. Logistics spend areas — import/export

Import/export

Inland freight

Agency charges

Ocean freight

Insurance

Port charges

Demurrage

Penalties

Tonnage

Return freight

Distance

Truck capacity

Diesel cost

SLAs

Turn aroundtime

Statutories

Stuffing/de-stuffing

Documentation

Custom clearance

Warehousing

Container handling

Surveyor charges

Miscellaneous

Volume

Distance

Shipping line

Scheduling

Documentation

Clearance

Source: Authors’ research

45

Logistics case

Figure 3b. Logistics spend areas — domestic

Domestic

Freight paid to transporter

Inbound

Cost of depot operations

Tonnage

Distance

Fuel cost

Agreement

Freight credit

Damages

Planning efficiency

Tonnage

Return freight

Distance

Transport mode

Diesel cost

SLAs

% fine dueto damages

TAT

Vehicle availability

Statutory

No. of handling points

Loading pattern

Road conditions

Stacking norm compliance

Driver/labor training

Minimum wage rate

Contract vs. permanent employees

Planning efficiency

Tonnage handled

Loading/ unloading efficiencyOutbound

Source: Authors’ research

Figure 4. Cost lever analysis

Domestic

Inbound cost optimization

Reduction in depot damages

Improvement in salvage realization

Reduction in in-transit damages

Reduction in losses

Import-exportcost optimization

Consolidation of transporter base

Turnaround time

Transporter contracts

Depot policy and costs

Freight credit

Location of depots and feeding pattern

Improvement in planning efficiencyTransporter synergies and

reverse logistics

Cement contracts

Sea and rail transport for CPK and fly ash

Agency charges

Ocean freight costs

Insurance, demurrages and penalties

Inland freight cost

Outbound cost optimization

Source: Authors’ research

Hypothesis generation for cost levers

Cost lever analysis led us to make a number of hypotheses around inbound cost optimization, outbound cost optimization, reduction of losses and import-export cost optimization (see Figure 4). We worked on these hypotheses further in the Diagnose phase to ascertain feasibility and margin of benefit.

47

Logistics case

Organization-wide buy-in

Organization-wide buy-in was created using a highly elaborate bottom-up approach (see Figure 5). Each initiative was assigned an initiative mentor (steering committee member), initiative leader (at HO, for regular monitoring) and initiative owner (at zonal level, for execution).

Initially, we prepared a business case using the Ernst & Young Benefit Tracker Toolset. This was circulated, along with financial projections, to respective plants and zonal sales offices. The first level of buy-in was created with the initiative owner and commercial personnel at the zonal level. This helped to generate strong ownership of ideas at the execution level. This, in turn, helped gain confidence and support of senior management in the implementation of initiatives. Once buy-in had been obtained at the zonal level, head office sign-off was obtained. Subsequently, the respective leaders and owners of the business case presented it to the steering committee. This phase was extremely important in ensuring organization-wide implementation of initiatives. In addition, management confidence in the savings estimate was further strengthened.

Figure 5. bottom-up approach

Vers

ion

revi

sion

Steering committee

Theme mentor

Business case document/ financial working

Theme leader HO financial head

Theme owner

Zonal financial head

Source: Authors’ research

Engagement benefitsHypotheses were developed in the following areas:

Integrated planning

Situation and complexity. It was found that, between April to June, demand exceeded production and there was a significant difference in price realization across sales districts. Thus, prioritization of supply to the sales districts was of great importance. There were two levels at which prioritization was possible: intra-zone and inter-zone. In the current scenario, 90%-95% of sales areas were catered for from plants in their own regions (see Figure 6a,b).

Insight. On deeper analysis, it was observed that there was a wide variation (up to 15%-20%) in contributions in various sales areas. Thus, there was great opportunity to prioritize high-contribution areas and cater to their demand using plants that were further afield as well. Such distribution had not been implemented before because there was a perception that the freight costs would be prohibitive. The project team helped blur the zonal boundaries by designing a model for “contribution enhancement through prioritization.”

Inputs for the model included:

• District-wise monthly demand

• Production cost

• Material availability

• Freight cost for each district-plant combination

• Distance proxies

• Region-wise taxes

Figure 6a. As-is regional supply planning (for 90% demand)

CZ EZ

EZ Plant

Figure 6b. New integrated supply planning

CZ Plant

CZ

EZ

NZ

CZ Plant

SZ Plant

EZ Plant

Source: Authors’ research

49

Logistics case

The model was based on the simple premise that, theoretically, it is possible that any sales area can be supplied by any plant. For instance, the possibility of supplying the Northern India from the plant in Southern India was evaluated subject to relative realization and demand.

Benefits. The results led to a change in supply across all zones, especially so in

the case of the central zone. Its production was used to meet the demand in the east zone where realization was higher. In turn, central zone demand was met from supplies from the west and north zones. Special provisions were made in the model to ensure that business imperatives such as minimum supply requirement of even a low contribution area and market development

plans (supply to new markets) were considered as part of the allocation process.

The model helped derive a minimum estimated increase in operating profit margin by 0.1% and an increase in operating profit value by 1%. The computation of benefit in this case was quite a challenge since it compared the distribution pattern that would have been adopted if the model was

not in place and, hence, the benefit was computed as minimum estimated benefit. Nevertheless, there was a belief within the project team that the real impact of the initiative could be as high as 10 times the minimum level. The model also helped to identify plants and respective quantities for stock build-up (for peak season). Similarly, high contribution markets were identified and contribution became a key metric for assessing markets for future sales impetus.

Outbound route optimization

Situation and complexity. This theme was driven by ideas around an increase in direct dispatch and reduction in backward freight. Most inter-state dispatches were routed through depots. This was done with the intention of saving on Central Sales Tax (CST) and convenience of sales. It was an established belief that multiple handling points led to three areas of cost increase — freight costs (due to segregated volumes), damage due to multiple handling points (3%-5% of total material) and variable costs at depots. Thus, direct dispatches as a policy were promoted across the organization.

Insight: Ernst & Young showed that there were more routes that could be covered by direct dispatches. To do this, a lane-by-lane analysis identified all existing routes with potential direct dispatches. Customers

were also short listed and any issues around C-form (if the seller is entitled to tax exemption) availability and capacity were resolved. During the lane analysis exercise, the routes from plants to dealers were mapped and alternate shorter routes were recommended.

Benefit. These initiatives led to savings of 2%-3% on outbound freight costs. The client succeeded in implementing and making 1% of these savings before the engagement had closed.

Import cost reduction by network redesign by use of ICDs (inland container depot) and alternative CHAs (clearing house agents)

Situation and complexity. Asbestos fiber is a key RM that is imported on a CIF (cost insurance and freight paid) basis. It is a hazardous material. The imports arrive at the ports in southern and western India. Thereafter, the clearance takes place at the shipping-line defined CFS (container freight stations) at the port. Earlier the material was cleared at the port CFS as the closest ICDs were not served by any of the shipping lines that carry asbestos fiber. The importers’ bargaining power with port CFS was low. Moreover, there was a high level of comfort on the import clearing agent’s service levels which have remained unchanged for the last 15-20 years.

Insight. Ernst & Young developed a two-pronged approach to address the high cost of import clearance. Firstly, the entire clearance process was studied to pinpoint exactly where costs are incurred and the ability of the importer or the clearing agent to control these costs. Thereafter, a request for quotation (RFQ) exercise was carried out to ensure that there are at least two to three CHAs available to the client at each port. This provided a short-term benefit that was realized by the client before completion of the project. Concurrently, the economics of clearing the material at the ICDs closest to the various plants was

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of import clearance at the ICD. Moreover, with material being cleared at ICD, the client would be able to develop a central warehousing location for fiber and redistribute it according to requirements and the timeliness of future shipments.

Reduction in primary and secondary freight rates

Situation and complexity. Freight rates were negotiated on a per MT basis and it was not measured against any specific metric.

Insight. Ernst & Young provided inter-plant and intra-plant benchmarks for measuring the attractiveness of existing freight rates. Freight/MT/KM metrics were defined for varying distance slabs and sources of transfer (plant or depot).

Benefits. A large reduction potential was identified in secondary freight rates. High volume lanes were segregated and analyzed further. Targets were set based on observed benchmarks and the newly defined metrics. An accepted savings of 1% of freight cost was thus achieved.

Reduction of storage and operations costs

Situation and complexity. While we targeted part of the variable storage costs at the depot for savings by

initiating direct dispatches, we helped the client to streamline operations further by improving the layout of the depot. It was one area where the client already knew what to do, but not how to do it.

Insight. We proposed a two bin approach to inventory management at the depot. A new layout plan was implemented at selected depots.

Benefits. This initiative has the two-fold benefit of space optimization and effective inventory planning at the depots. As the stock volumes increase, this initiative can help the client achieve scalability of operations.

Conclusions• Early involvement of all stakeholders in

developing and evaluating the hypothesis helps in creating an organization-wide buy-in to the initiative and benefit.

• A part-to-whole approach facilitates greater focus and specific solutions to enhance ease of implementation.

• Many times, business leaders know what the problem is, but they have not been able to focus on how to solve it. Ernst & Young helped the client by talking to the senior management to understand the company’s needs better and designing initiatives to meet them.

analyzed, to provide a long-term and more sustainable cost optimization, as routing material through the ICDs was found to be more economical. It was established that, both from a logistics perspective and an economics perspective, ICD close to their plant in the west would be most suitable for import clearance. Meetings were then held with the concerned shipping lines at the highest level, where they agreed to start service to this ICD.

Benefits. A 30%-35% drop in clearing charges was achieved through the RFQ process and a further 15%-20% reduction was estimated through the implementation

Logistics case