Ambuja cement final

Gujarat Ambuja: Cost Leader in Indian Cement Industry

Growth

- A Concrete Story..

TEAM MEMBERS

Sonal Arya Sarjak Kikani Shailja Kapoor Shalu Weling Shivika kanchan Shashank Rai Sanket Bhatia Shailesh gupta Shivani maheshwari Shakti Dash Shazia Tasneem

CONTENTS Introduction

Background Note

Indian Cement Industry

Manufacturing Process

Total Cost Management

Logistics

Order Processing Systems

Inventory Management

Packaging

Transportation

Warehousing

Future Outlook and Conclusion

AMBUJA CEMENT

Sea terminals

Cement factories

Started production in 1986 1986 2002

Capacity 0.7 13.0

mn tons

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:-

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

Use of substitutes instead of coal to cut energy costs.

Ship transportation to cut down freight costs.

Low cost funds helped to cut the cost capital.

Picked up best practices during oversees visits.

BACKGROUND GACL was established as APCL in 1981 by Narotam S

Sekhsaria. Originally a 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.

In 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.

CONTD. 3rd plant at Ambuja Nagar named Guj Line – II (1 mtpa). GACL also established grinding and packing units at

Ropar & Panvel. In 1997, it acquired sick 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.

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.

CONTD.

In December 1999, GACL acquired 7.2% stake in ACC for Rs 4.55 billion.

ACC has 14 manufacturing units in India with a total capacity of 11 mtpa.

In December 2001, GACL began trial production in Chandrapur, Maharashtra with 2 mtpa, taking its total capacity to 12.5 mtpa.

In FY 2003, the company recorded a sales figure of Rs 2173 crores and a PAT of Rs 293 crores

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 Italicementi

Gujrat was the largest cement producing state.

The demand was closely linked to performance of Indian Economy.

Indian Government was a major consumer of cement

Top 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(2003)

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 decisions

Significant barriers to entry Product could be homogenous (similar) or differentiated Potential for economic profits in the long run Incentive for illegal price setting Competition can be vigorous among the few firms

Stable price conditions under Kink Demand Curve

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.

Manufacturing

Location Capacity (‘000 tonnes)

Production quantity

Ambujanagar(amreli,GUJ)

4150 4876.45

Bhatinda(PUNJAB) 520 335.42

Chandrapur(MAH) 1730 1734.67

Daburji(PUNJAB) 1400 1918.96

Suli(HP) 1200 974.8

Plant locations and their capacities(June 2003)

Basic raw materials used for manufacturing of cement are :

– Limestone

– Clay

– Silica

– Gypsum

Process Capacity %age to total

Dry 3,21,695 94

Semi-Dry 5,930 2

Wet 13,220 4

Total: 3,40,845 100

Cement Capacity in India(break up by process)

• 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

Dry 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 process Rotary 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.

MANUFACTURING

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

Cost 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:

1. Power cost

2. Fuel cost

Dec.. Dec.. Jul-sep

2003 2002 2003

Units consumed

85 86 90

Cost (Rs/Ton)

180 187 183

Dec .. Dec.. July-sep

2003 2002 2003

K.Cal/Kg of Clinker

718 729 727

Cost (Rs/Ton)

229 224 230

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.

THIS CLEARLY SAYS THAT BY REDUCING THE DIFFERENT COSTS ON THE RAW MATERIAL, POWER COST, REPAIRING COST, SHUTDOWN COST, TRANSPORTATION COST GUJARAT AMBUJA HAS BROUGHT DOWN ITS AVERAGE COSTS WHICH HELPS IN INCREASING THE PROFIT.

CLASSIFICATION OF COSTS

ECONOMIES OF SCALE

Cost advantages that a business obtains due to expansion.

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

Types of Economies of Scale: a) External Economies b) Internal Economies

INCREASE IN THE SIZE OF INDUSTRY

End year of plan

Capacity (Mt) Production (Mt)

Capacity Utilization (%)

4th plan (1969-74)

19.76 14.66 74

5th plan (1974-79)

22.58 19.42 86

6th plan (1980-85)

42.00 30.13 72

7th plan (1985-90)

61.37 45.42 74

8th plan (1992-97)

105.26 76.22 72

9th plan(1997-2002)

145.37 106.90 73

10th plan(2002-07)

177.83 161.66 91

INTERNAL ECONOMIES OF SCALE

GACL is executing Rs. 2200 Crore capacity expansion and aimed at hiking its capacity to 20 million tonnes over next three years, from 13.7 million tonnes.

By rationalizing the use of vertical shaft technology in Mini units of cements and rotary klin technology in large plants.

The Company used Zero error Electronic Rotary Machines, which helped them to minimize the wastages.

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 transpotrers, 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.

….

Packaging cement was packed in 25-50 kgs 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.

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.

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.

The cost of transporting were as follow: RAIL – 580/tonROAD – 670/tonSEA – 190/ton

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

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 its in its factory premises provided flexibility in the mode of transportation

WAREHOUSING AND DISTRIBUTION

The Company used to types of warehouses – Dumps and Transhipment point storage.

Online connectivity for facilitate efficient delivery of goods.

Bulk cement terminals located at 1. Surat 2. Vashi 3. Galle

GAME THEORY

Game theory is mainly concerned with predicting the outcome of games of strategy in which the participants have incomplete information about the others' intentions.

A game occurs when there are two or more interacting decision-takers (players) and each decision or combination of decisions involves a particular outcome . The fate (or the payoff) of a player in a game depends not only on the actions of that player but also on the other players!

The Prisoners’ Dilemma

Game theory analysis has direct relevance to our study of the behaviour of businesses in oligopolistic markets

IMPLICATIONS OF GAME THEORY

•.

2003 2004 2005 2006 2007 2008 2009 2010AMBUJA

PRICE

235 235 235 235 232 262 275 270

N P 222 293 468 1503 1971 1402 1218 1263

ACC PRICE

250 248 242 242 242 257 273 270

N P 350 450 544 1231 1438 1212 1606 1120

Constant Decrease

Constant 1503 , 1231

1971 , 1438

Decrease 293 , 450 1263 , 1120

AMBUJA

ACC

By game theory, we can conclude that constant price is desirable. So, now price of both the cement bag is 270 per piece in 2011

FUTURE OUTLOOK OF GACL

• GACL has been pursuing a combination of strategies like

Strategic alliances Capacity expansion New plants Aggressive 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.

CONTD…

It had also set up a one million ton grinding units, one at Bhatinda and another one at West Bengal.

Also to enhance its presence in the south , the company had planned to set up a Rs 600 crores, two million ton Greenfield project in A.P

GACL has also started offering ready mix cement.

As 2004 got under way, GACL looked well placed in the Indian Cement Industry.

…..

Best quality cement Good packaging Higher customer satisfaction Strong distribution network Eco friendly operations such as Use of agro waste and bio gas as alternative fuel Use of surface miners- blast free mining. Restoration of mines – green spots and water reservoir Global standards of environmental measures.