Wednesday, September 29, 2010

Cemex Demand Forecasting, Inventory Management and Route Planning


Cemex is a 104 year old Mexican cement company, operating in an industry defined by  "asset-intensive, low-efficiency... [and] unpredictable demand." The cement industry handles mixing and JIT  delivery to construction sites, but up to 50% of customer orders are canceled on the delivery day due to project delays. This fact, coupled with rapid expiration for already-mixed cement, a poor communications infrastructure in Mexico, and the limitations that weather places on cement pouring, make demand subject to many variables. This translates directly into unpredictable delivery times, customer inconvenience and the imposition of additional costs for the customer. For example, when a work site waits an extra hour for a cement truck, the construction workers’ salaries are still paid, but more importantly, the financial value of being ahead of schedule quickly evaporates while waiting for cement delivery. This translates into additional financing costs (as most construction companies take out bridge loans to cover construction costs until it can be sold to a developer), and delays the receipt of first rents.


Telecommunications Investment: Data is the foundation of CAvQM. Although data quality and information decay are also important, accommodations can often be made to render them less significant. Before value could be extracted in the delivery process, Cemex needed communications capabilities that were robust, rapid, and fully connected. Given this prerequisite and the unreliable nature of telecommunications in Mexico, Cemex’s home market, they rolled out CemexNet “a satellite communications system.” The investment in satellite communications came about because "We saw it was almost impossible to deliver information in real-time, and we knew it was time to invest in infrastructure…" This system “electronically links all the firm’s production facilities and coordinates them from a central clearinghouse.”

Dynamic Synchronization of Operations: After upgrading their communications network in 1989, Cemex overhauled its “tracking, scheduling and routing system” in the “early 1990’s.” A computer and GPS were installed in every truck and then connected to a central dispatch center. The system transmitted every truck's "location, speed, and direction" which enabled dispatchers to dynamically incorporate traffic information, plant inventory levels, and customer location... giving Cemex the ability to reroute deliveries if an order was canceled and a nearby site was ahead of schedule.

Inventory Management System: "An inventory management system is also integrated which improves on-time response to customers by managing demand and allowing no 'stock-outs,' or running out of cement or concrete at the terminals."

LeanLogistics On-Demand Transportation System: Cemex owns many of the trucks in its fleet, but also rents trucks (sometimes on a daily basis) from local carriers. To ensure that the carriers can meet Cemex's needs though, Cemex needs to forecast the number of trucks they will require on a daily basis.... a practice only made possible by their exceptional demand forecasting ability.

Electricity Management Software: Energy represents a substantial portion of cement production costs... so Cemex "designed software to make it easier for company executives and plant managers to keep tabs on power use." By monitoring the energy consumption of the conveyors, electric grinders, and other equipment, they were able to shift consumption to times offering off-peak electricity rates.

Online Order Entry and Monitoring: Cemex also created a website for customers to enter order information, monitor status, billing, and revise orders if necessary. This produces several benefits:
  1. The Internet is a more reliable method of communication than telephone land line, because data will seek alternative paths to its destination if the shortest path is blocked. In contrast, telephone calls would just be dropped by the carrier.
  2. If a site is ahead of schedule, their request for a new delivery time can be automatically incorporated into the delivery plan.
  3. Reduction in order entry errors.
  4. Capacity issues with phone calls flooding customer service representatives cease to be an issue.


  • Pricing: “Customers are willing to pay premium prices to Cemex because they do not have to keep work crews idle waiting for cement deliveries to show up.”
  • Branding: Cemex guarantees delivery within a 20 minute window. This is so rare in the industry, that it has branded them as a high quality service.
  • Greater ROA: “Company executives say Cemex now uses 35 percent fewer delivery trucks than it did before overhauling the system, or 'one truck for every two' used by the competition.”
  • Speed: Cemex can accommodate orders with little or no notice (at substantial profit margins).
  • Productivity: Trucks and drivers can now avoid traffic. Routes are planned such that excess cement can be mixed when two orders are in proximity to each other, with the truck showing up at the second site immediately ready to pour.
  • Optimization: Cemex's systems now automatically optimize the performance of the company's factories, truck fleet, routes, delivery plan, electricity usage and inventory management system to maximize profitability and on-time performance.
  • Acquisitions: Cemex can acquire other companies because they can use these systems in turn-key fashion. The ability to charge premium pricing also has implications on their growth strategy, because they can outbid competitors based on the experience that they can generate more profit per order.

Performance Analysis

  • Pretax profit margins of 37% vs. 23% for their largest competitors.
  • $100 million in estimated annual cost savings on fuel, maintenance, and payroll
  • 9% average growth rate for the past decade.
  • Accurate delivery times enable premium prices to be charged
  • 50% greater cash flow than their largest competitors
  • Cemex cut its energy bills by 17 percent in the past four years.
  • Cemex is actively acquiring companies in emerging markets
  • Productivity grew sixfold over the 15 years spanning implementation