Gujarat Ambuja - Redefining Operational Efficiency

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The Future

The continual capacity build-up in the Indian cement industry led to an excess capacity situation by the beginning of the 21st century. During the same period, growth in the cement industry declined from 21% (April-September 1999) to 11% (October 1999-March 2000) because of drought in many parts of the country. Prices dropped because people feared that construction activities would decline due to the drought. At the same time, the cost of production continued to increase because of hikes in power, rail freight, and coal and diesel prices. As a result of the above factors, cement companies were affected negatively. According to some analysts, even GACL seemed to have exhausted its armory of cost-cutting and productivity enhancing strategies. For the third quarter ended March 31, 2002, the company registered a 9.27% decline in net profit. Its profits had come down from Rs 600 million to Rs 544 million in 2002 for the same period last year.

This was despite a 11% increase in turnover: Rs 4.3 billion in 2002 as against Rs 3.9 billion in 2001 for the corresponding quarter. The operating margin also came down to 32% as compared to 38% in the previous year. Critics even commented that GACL's cost efficiencies were more driven by market compulsions rather than a strategic cost focus. GACL however did not seem to be very worried, because the decline in profitability was caused by factors that were beyond its control. Singhvi said, "We have put up a good show despite low cement prices during the quarter by around Rs 300 per tonne. Lower cement prices have not been reflected in the bottomline." At the same time, the company was not taking things lightly.

GACL realized that while its traditional cost-saving methods would continue to prove valuable, they were not enough. As stated in the company's Director's report, "The route to higher profitability lay elsewhere: Namely, better sales realization." Thus, GACL's marketing team began focusing its attention on the retail market. The company believed that the retail market offered it the opportunity to build loyalty through higher standards of service. The company asked its marketing teams to push for better prices.

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