Cementos Argos (CemArgos), a multinational player in the cement industry, faces great challenges in Colombia, its core market. Changes in the local industry have caused its margins to almost halve in the past two years. Although operational efficiencies are being pursued intensely, they might not be enough. Could digitalizing its supply chain become a lever to recover lost profitability and build a sustainable competitive edge?
CemArgos is an integrated cement and ready-mix concrete (RMX) player with operations in the U.S., Colombia, and 12 other countries. In 2016, the company reported revenues of 2.8 billion USD . In the past two years, CemArgos Colombia – the company’s subsidiary in Colombia, which in 2015 accounted for 38% of total revenues and 58% of total EBITDA – has taken a great hit in terms of profitability. Its EBITDA margin fell from 29.5% in 2015, to 17.6% in the third quarter of 2017 [2,3]. High local cement prices coupled with surplus installed capacities in Asia and historical low international freight rates fostered the appearance and growth of local players that import cement and/or clinker to produce cement locally. This led to a “price war” among cement players in Colombia. In 2016, local prices fell 17%-27% below the region’s average . The profitability of most companies was seriously affected.
As a response to this, in 2016, CemArgos Colombia launched BEST, an ambitious operational excellence program that seeks to generate efficiencies throughout the company’s supply chain. BEST includes initiatives such as: divestment of non-core assets, usage of alternative fuels, etc. [1, 5]. Although the program has been advancing well, increasing competitive pressure will push the company to explore other levers. Could digitalizing its supply chain be one such lever? Definitely!
Today, digitalization enables the automatization and integration of discrete steps of a complex supply chain. “The chain can become a completely integrated ecosystem that is fully transparent to all the players involved – from the suppliers of raw materials, … to the transporters of … finished goods, and finally to the customers…” . For CemArgos Colombia, digitalizing its value chain makes special sense for two main reasons:
First, this could generate additional and significant cost efficiencies. The potential is particularly high for CemArgos given the breadth and complexity of its supply chain. Small operational issues in a limestone mine can generate delays or backlogs in the delivery of RMX to hundreds of development projects in the big cities. This can be very costly for the company. According to a recent PwC study, digitized supply chains (DSC) can generate efficiency gains of 4.1% annually .
Second, a DSC could also increase the top line, improving margins. Digitalization can enable a closer integration with customers through better and/or additional services, more compelling customer experience, etc. . This could help CemArgos become more “sticky” and, thus, defend market share in a highly commoditized and competitive industry. According to PwC’s study, a DSC can boost revenue by 2.9% per year .
As part of BEST and a few other internal projects, CemArgos has started to work on digitalization initiatives. Among them are the following :
- Monitoring mine inventories with drones
- Automated cement packaging with robotics
- “Live” tracking of orders
In addition, the company states having a few other digital initiatives in their medium-term pipeline, including :
- Self-driving vehicles for mines
- BIM (Building Information Modeling)
- Exploring AI and AR
Although these digitalization initiatives seem to point in the right direction, CemArgos should focus on two principles in order to build an effective DSC:
1. Be more ambitious/ aggressive in digitalization. CemArgos could go much further with DSC, proactively identifying, assessing, selecting, and implementing cutting edge digital technologies. To do so, they should be asking questions such as:
- What cutting edge digital technologies are being implemented by key competitors and other players in the global industry?
- For example, Cemex – its main competitor – is developing and integrated App with IBM to improve client experience .
- What cutting edge digital technologies are out there? Which could be relevant for CemArgos?
- For example, Joy Global offers connected mining systems that, with thousands of sensors, enable centralized monitoring and control of operations, optimized maintenance, etc. .
2. Have a more holistic and structured approach towards digitalization. DSC cannot be archived through isolated initiatives. In order to truly integrate the supply chain through digital technologies, a holistic and structured approach should be considered. To achieve this, the following steps should be considered:
- Define digitalization objectives and priorities
- Design methodology to identify, asses, select, and implement new technologies
- Define required capabilities, organizational structure, and operating model
- Design implementation roadmap, including required cultural changes
- What type of organizational structure and operating model would CemArgos need to pursue a DSC?
- What key capabilities and cultural aspects would CemArgos need to adopt? How can gaps be identified and closed?
- Cementos Argos (2016). Integrated Report 2015 – Cementos Argos. [online] Colombia. Available at: https://www.argos.co/ir/en/financial-information/reports [Accessed 14 Nov. 2017].
- Cementos Argos (2017). Argos BEST Day. [online] Colombia. Available at: https://www.argos.co/ir/en/financial-information/reports [Accessed 14 Nov. 2017].
- Cementos Argos (2017). Integrated Report 2016 – Cementos Argos. [online] Colombia. Available at: https://www.argos.co/ir/en/financial-information/reports [Accessed 14 Nov. 2017].
- Cementos Argos (2017). Memorandum – Cementos Argos Reporta los Resultados Financieros del Tercer Trimestre 2017. [online] Colombia. Available at: https://www.argos.co/ir/en/financial-information/reports [Accessed 14 Nov. 2017].
- Cemex (2016). CEMEX to digitally transform its customers’ experience in collaboration with IBM. [online] Available at: https://www.cemex.com/media/press-releases/-/asset_publisher/nnqyAoJ3dM7x/content/about-us-press-releases-cemex-to-digitally-transform-its-customers-experience-in-collaboration-with-ibm [Accessed 14 Nov. 2017].
- Hernandez, M. (2017). Cemento local: una competencia mas roja que gris. La Republica. [online] Available at: https://www.larepublica.co/infraestructura/cemento-local-una-competencia-mas-roja-que-gris-2510991 [Accessed 14 Nov. 2017].
- Porter, M. and Heppelmann, J. (2014). How Smart, Connected Products Are Transforming Competition. Harvard Business Review.
- Schrau, S. and Berttram, P. (2017). Industry 4.0: How Digitization Makes the Supply Chain More Efficient, Agile, and Customer Focused. PwC.