T

he client is currently
one of Indias fastest
growing building solutions
companies. It produces and
supplies asbestos cement
(AC) sheets, fat 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
clients 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 diversifed
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
effciency for large
player 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 Effciency (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 frst 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
benefts of the engagement and the lessons learned.
39
Business challenges
Demand 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 fnished 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 fber 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 fber, which was imported
from Russia and Brazil, etc., were in
the clients 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 identifed
CFS. Thus the bargaining power on
prices did not lie with the importer.
41
Logistics case
CEO agenda
Based on the organizations strategic vision
and existing business challenges, the CEO
had a clear three-point agenda to attain
market leadership:
Proftable growth reduce overall
cost of operations, thereby increasing
EBITDA margins
Integrated growth enhance
geographical and market synergies
across zones for overall beneft 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 organization
The 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, fnance 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
Approach
A customized approach was taken to the
clients 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 identifed 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 Benet 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 organizations
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 identifed 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 around
time
Statutories
Stufng/
de-stufng
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
efciency
Tonnage
Return freight
Distance
Transport mode
Diesel cost
SLAs
% ne due
to 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 efciency
Tonnage handled
Loading/
unloading efciency
Outbound
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-export
cost optimization
Consolidation of transporter base
Turnaround time
Transporter contracts
Depot policy and costs
Freight credit
Location of depots and feeding pattern
Improvement in planning efciency
Transporter synergies and
reverse logistics
Cement contracts
Sea and rail transport for CPK and y 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 beneft.
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 Beneft Tracker Toolset. This was circulated,
along with fnancial projections, to respective plants
and zonal sales offces. The frst 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 confdence and support
of senior management in the implementation of
initiatives. Once buy-in had been obtained at the
zonal level, head offce 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 confdence in the savings
estimate was further strengthened.
Figure 5. bottom-up approach
V
e
r
s
i
o
n

r
e
v
i
s
i
o
n
Steering committee
Theme mentor
Business case document/
nancial working
Theme leader HO nancial head
Theme
owner
Zonal nancial
head
Source: Authors research
Engagement benefts
Hypotheses 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
signifcant 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 afeld 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.
Benefts. 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 proft margin
by 0.1% and an increase in operating proft
value by 1%. The computation of beneft
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 beneft was
computed as minimum estimated beneft.
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 identifed
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 identifed 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.
Beneft. 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 fber
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 defned 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 fber.
The importers bargaining power with port
CFS was low. Moreover, there was a high
level of comfort on the import clearing
agents 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 beneft
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
51
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 fber 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 specifc
metric.
Insight. Ernst & Young provided inter-
plant and intra-plant benchmarks for
measuring the attractiveness of existing
freight rates. Freight/MT/KM metrics
were defned for varying distance slabs
and sources of transfer (plant or depot).
Benefts. A large reduction potential
was identifed in secondary freight rates.
High volume lanes were segregated and
analyzed further. Targets were set based
on observed benchmarks and the newly
defned 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.
Benefts. This initiative has the two-fold
beneft 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 beneft.
A part-to-whole approach facilitates
greater focus and specifc 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 companys 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.
Benefts. 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