Case Study > Madras-Cements-MIS-Case-Report-final-1 (2) Dalhousie University COMM 3511

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MADRAS CEMENTS CASE STUDY 20th June 2017 COMM 3511 – MIS

Dan Martin Caitlin Ladd Connor Daley Jianghan Sun

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Introduction In the highly competitive and growing market for cement in India, Madras Cements was a smaller player in the industry during the early 2000’s, struggling to control costs. As outlined in the case, the then CFO named A.V Dharmakrishnan saw a huge amount of value and opportunity in the successful implementation of an ERP system. This was a point of focus for Dharmakrishnan, as Madras was running various manufacturing and delivery plants/operations through India, and often saw problems due to overlap and lack of communication between locations. Exemplified by Dharmakrishnan’s persistence in implementing the ERP system after a failed attempt, the second attempt, which was far more gradual and closely tailored to Madras, resulted in much higher operational efficiencies that made Madras the most cost efficient company within the industry. Overcoming some of the issues around the implementation, such as developing the system to work in real time with office locations, and getting all employees on board not only to use but trust the ERP system, resulted in large internal strengths for Madras.

This internal efficiency has put Madras in a position to aggressively pursue growth and gain market share, by utilizing its ERP system for aspects such as logistics (which can include a potential just-in-time inventory system) or a calculated acquisition of a company based on its output and location relative to Madras’ current operations, or aspects such as increasing sales through their high customer satisfaction (another result of their ERP system).

Issues After this successful implementation, and a focus on Madras’ cultural technology shift, Madras became an extremely efficient company with strong internal capabilities. The key issues Madras is now looking at surrounds the external environment. Although they cut huge costs, improved customer relations, and improved logistics, still sales hardly increased. The cement industry in India is quickly growing throughout the country, and now that Madras has strong internal capabilities, they need to decide how to utilize them in the external environment. Madras still has a relatively small market share, so looking at organic growth, or growth by acquisition, is a major point of focus. As demand grows for cement, especially in previously untouched regions such as the North, this is a problem, but as we discuss later, this is also an opportunity.

Another issue Madras must look at is the threat of substitute cement from competitors. They must decide if they should continue focusing on their current offerings, or look to add different cements to their product line such as ready-mix. These substitutes can result in broader customer reach, potential for improved logistics of the operation, or just more cost efficiency.

Regardless, this can also be viewed as an opportunity for Madras.

Finally, another important issue for Madras is deciding how they will move forward with the decision/decisions they will make. For example, with their ERP systems, Madras can look at designing a just-in-time system for their concrete through logistics. In considering this issue, Madras need to decide if it wants to focus on creating this system, or what cement to add to their product line, or specific locations to expand throughout India?

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Madras hopes to grow sales and market share, thus a key problem to review is how it will implement its strategy to ensure each alternative can impact and be beneficial to each other.

Analysis of SWOT When it comes to analysis of SWOT, Madras is building a better IT culture after its first ERP failure, enhancing management of information. The analysis of SWOT lists all possible outcomes that Madras faces, providing an internal analysis of the company. This will help minimize the threats, and open the company up to the best opportunities for expanding Madras Cements.

For strengths, Madras is establishing both pick-up point and drop-off points for transportation efficiency, which is greatly cutting down transportation fees. In doing so, they lower the cost structure in comparison to their national competitors. The ERP system also has a positive impact on sharing information amongst the plants, which helped to eradicate the inefficiency that previously existed. Meanwhile, Madras Cements also customized and processed their commodity in order to achieve consistency from top to bottom. The way it was implemented was quite helpful for gaining more customer satisfaction.

In terms of weaknesses, the workers at Madras historically resisted change, including senior management. At the onset of running of the system, older employees were not willing to accept the change that the system brought, while management had different opinions on the benefits of the system as well. Madras recognized it had not trained its end users sufficiently on the use of ERP data for decision-making. This resulted in resistance, due to the lack of effective, phased and ongoing training. Another weakness is that the company became almost too reliant on the successful ERP system, and may be missing alternatives should the system have problems. Madras is also very focused on its one product, without much diversification.

For opportunities, compared with other competitors, Madras can improve its market share in other product areas by implementing the ERP system in diversified product lines. It can use it just-in-time system to elaborate on the logistics of its product, but also maximize the satisfaction of customers. Furthermore, the Indian government is deregulating the cement market, and offering support for the growth of the industry in the country. Madras has established brand recognition and a good reputation, which can be used to acquire greater market share, and potentially the acquisition of other companies in the cement industry.

For threats, Madras may lose the market share from competition with domestic or international competitors. The other threat is price fluctuation that will affect their operations, particularly if the cost of inputs fluctuate. Furthermore, Madras may rely on the ERP system heavily, but ignore the other technological advances made by their competitors. Madras is also at a risk of being unable to quickly respond or address problems in case of system breakdown.

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Analysis of PESTLE PESTLE provides insight into how external factors can affect Madras Cements. Historically, the restrictions on limestone in India had a big effect on the cement market. In the past, India also experienced restriction of private companies, foreign trade and foreign investment.

Liberalization of markets helped Madras transform into its current state.

India's economy grew as it opened to international markets, and the price of cement has been fluctuating because of global trade. The demand for cement is increasing gradually, and a growing economy is dependent on reliable construction. This factor has also contributed to the transformation of the cement industry, and Madras’ potential for growth.

In social aspects, there is a global emphasis on easily accessible information, and information sharing which impacts resource allocation, which Madras’ ERP system provides. This allows Madras to keep competitive domestically (as competitors are increasingly adopting ERP systems) and to keep current internationally, as part of the global workplace culture, with its emphasis on sharing information. Therefore, Madras can increasingly use the ERP system to manage mass information. Thus it is important to constantly update the ERP system to meet new and growing needs.

In the legal aspect, when the company is using the ERP system, it may result in confidential information being stolen, thus security of information must be effectively ensured. If not protected well (e.g., with firewalls, etc.), it may expose the company to losing intellectual property or the secrets of industrial design, as well as private employee information.

Finally the impact of operations on the environment should be considered. The mining of cement could be licensed, or additional fees applied for land, and a large amount of industrial emissions will have a bad impact on the environment (and India has signed the Paris Accord).

Analysis of SWOT and PESTLE guides decision-making for the following three alternatives.

Alternative 1 The first alternative is for Madras Cements to maintain the status quo. After the first ERP implementation failed, Madras created a culture of information transparency and knowledge sharing, with more user-friendly, customized reports allowing end users to attain more tangible business results, while sharing of integrated information in real time generated cost savings.

Madras has the lowest cost structure in the cement industry in India. Madras could make the decision to focus on its existing operations, evolving as market needs change, to stay dominant in the industry. The cost-savings should improve the bottom line over time, thus Madras can retain its current position and market share without expanding, but focusing on internal efficiency instead. This may minimize risk, especially if there is a market collapse in the near future, but could lead to stagnation, and does not take advantage of market opportunities and the performance-enhancing ERP culture established.

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Alternative 2 The second alternative is for Madras to expand into other markets, exploiting the existing ERP system and experience. Dharmakrishnan wondered if Madras could leverage its IT architecture by scaling operations to other Indian markets. Successful entry into new or diversified markets can offer the potential for untapped sources of revenue, while exploiting Madras’ established cost-saving measures derived from the ERP system. However, initial costs of entry into new markets is capital intensive (requiring new equipment, plants, maybe loans), the acquisition of knowledge of new markets and procedures can be challenging, with unfamiliar government policy also impacting. Timelines have to be realistically set, meaning increased profit may not be quickly forthcoming, Furthermore, there is great risk of failure and potential income loss, though Madras can reduce its risk by diversifying into markets where they already have some knowledge or experience (e.g., ready-mix). There is also the risk that Madras will take on too much, and its existing IT architecture may not fit as well as it hopes, as customizing needs is key to ERP effectiveness. The risks may outweigh the benefits for Madras, as successful ERP implementation is only a small piece in the puzzle, when it comes to new market development.

Alternative 3 The final alternative for Madras to proceed with is to acquire unprofitable and inefficient concrete firms at a below market cost and use ERP systems to turn them around and create profit for Madras. This alternative is based on the idea that Madras suffered unprofitability and inefficiency prior to its own ERP system implementation, but was able to see great success in the industry after they integrated their systems. The strengths of this option not only lies in Madras’ experience with ERP systems, but also their relationships with providers and their knowledge of implementation in the concrete industry. As well as this, with the acquisition of competitors, Madras will have the unique ability to attain market positioning and distribution outlets that would be unparalleled in the industry. However, some possible weaknesses lie in Madras’ over-reliance on the concrete market due to volatile input and distribution costs, as well as the necessity for fairly large amounts of capital to make the acquisitions. These risks must not be ignored but can be mitigated and prepared for, thus should not outweigh the advantages of acquisition, or be considered major in comparison to the possible rewards.

Recommendation When analyzing the three alternatives based on profitability, market dominance and use of ERP systems, the clear course of action is pursuing the acquisition of unprofitable and inefficient concrete firms to grow Madras at scale. This option provides Madras the ability to use past knowledge, reputation and relationships in implementing ERP systems, lowering the competition, maybe moving north, while raising market share. Madras saw cost reductions in areas across the business of 22 million USD through the implementation of its ERP system. By taking the same process-based ideology to the acquired concrete companies, Madras will set a new industry standard in management of information, while increasing market share and profit.

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Implementation The implementation of this recommendation is broken into a short-term and long-term planning, both with goals to measure progress. It is important to note that the implementation of this strategic move is not without risks, but using the mitigation strategy below, Madras can better expect to remain fairly successful.

Short term 3 months: In the first three months of this project, Madras will conduct careful due diligence into a variety of possible acquisitions in India. This will be important as it will ensure not only the financial viability of a target but also the congruency of the company to Madras’ own process-based ERP system. While doing this, Madras will consult with Ramco on the most efficient way to implement Madras’ concrete specific information systems.

6 months: By the six-month point, Madras should be in the process of acquiring suitable targets so that the process of ERP implementation can begin. Using Ramco and Madras specialists, acquired companies will be trained thoroughly in ERP systems to ensure a smooth transition.

1 year: At one year Madras should have fully switched the acquired company's systems to their own, and should be starting to see efficiency gains and cost savings across all departments.

Long term 2 years: The two year point acts as a decision point for the newly acquired companies, as at this point Madras should decide whether to retain the assets or dispose of them. Seeing as this would probably mean Madras taking a loss on the disposal, careful thought should be taken into enhancing the effectiveness of the implementation and the possible ERP customizations, that could be used to avoid the loss.

5 years: Within 5 years of implementation, Madras will be seeing the true benefits of efficient ERP systems at scale. With this success it can be expected that Madras’ market share increase from just over 4% in 2011 (Ross School of Business, 2014) to closer to 10 – 15% by 2022.

Risk Mitigation Regulatory Approval: With any acquisition, the threat of regulatory approval is one that needs to be seriously considered, however with a careful approach to researching targets, Madras can assure investors that no anti-competition laws are being violated. Should this persist as an issue through acquisition, Madras can slow the project timeline down to allow for proper approval.

Input Costs: Due to the fact that with this project Madras is increasing their dependence on the concrete market, it would be wise to attempt to secure long-term pricing agreements for input costs to help absorb any market fluctuations that may occur.

ERP Implementation: Seeing as the most important part of this project is successful implementation of Madras’ customized ERP software, it is important to ensure that Ramco is aware of the ramifications. It is recommended that a performance-based agreement be entered with Ramco to ensure that successful and timely implementation of this ERP software is in Ramco’s interest as well. Madras would also be wise to have a third-party implementation firm on retainer to complete the job, should Ramco break the terms of the contract.

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Conclusion Thus Madras is positioned for growth due to its strong internal culture and ERP platform. Based on internal and external analysis, Madras has built a solid foundation to use its ERP systems on a larger scale, thereby increasing market share and expanding operations. Given the alternatives being considered, it is recommended that Madras expand on a countrywide scale, by purchasing at a good price under-resourced concrete firms, expanding its cost-effective ERP systems into similar companies, in an industry where the external environment is already known to Madras, and the internal procedures are already developed.

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Works Cited Ross School of Business. (2014). Madras Cement. Michigan: WDI Publishing.

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