Concrete Solution

SAN FRANCISCO (08/25/2000) - What's the worst business in the world - one characterized by commodity products, asset intensity, low growth and unpredictable demand? Well, Amazon.com Inc. founder Jeff Bezos has been quoted as saying he'd like to position his company to sell anything at all - except concrete.

Yet it is Cemex SA, a company in northern Mexico devoted to this old, gritty industry, that has become one of the world's most sophisticated and innovative digital businesses.

Operating out of Monterrey, Mexico, Cemex CEO Lorenzo Zambrano and CIO Gelacio Iniguez have used digital technologies to transform the economics of this 90-year-old supplier into the world's third-largest concrete manufacturer, with revenues in 1999 of more than $4.8 billion. They've demonstrated that even a commodity supplier in a low-tech environment can become a financial and strategic powerhouse through the smart application of digital tools. By applying technology to the issues that matter most to customers, Cemex has staked out a strategic position that competitors are hard-pressed to overcome.

Like every company in the construction industry, Cemex is plagued by unforecastable demand. Half of Cemex's orders are canceled on the day of delivery. Weather changes, traffic jams, labor disputes and building permit snafus require constant rerouting of orders. Given that a load of premixed cement is never more than 90 minutes away from spoiling in the rotating cylinder on the back of a delivery truck, erratic demand can drive a supplier crazy.

And customers can get worked up, too. We once presented the story of Cemex to a group of U.S. manufacturing executives. During a break, one of them told us he used to work for a construction company. "I can tell you," he said, "that when you have 300 guys standing around a big hole in the ground and the cement's not there, it gets real personal, real fast." Multiply a two-hour delay by 300 idle workers earning $25 an hour, and you're talking real money.

DIGITAL SOLUTION

When Lorenzo Zambrano, a grandson of the founder, took over the business in 1985, he decided to take a fresh approach. He could have taken the traditional route of trying to compete by driving down the price of labor, rent and other costs, or simply relied on Mexico's protective tariffs to keep foreign competition out of local markets. But Zambrano recognized that these tactics were stopgap measures at best.

Instead, Zambrano hired Iniguez in 1987 with the mandate of developing an information technology system that would allow Cemex to manage unforecastable demand better than any competitor.

The two men faced a daunting task. Cemex dispatchers took orders for any of 8,000 grades of cement and concrete, then forwarded those orders to one of six regional mixing plants, each with its own fleet of trucks. With phone service in Mexico unreliable, Cemex's phone lines frequently jammed with calls from customers, truckers and dispatchers, resulting in lost or delayed orders. As a result, the best Cemex could offer its customers was a three-hour delivery window - standard in the industry, but a source of frustration and high costs for customers nonetheless.

To learn how to anticipate demand, Iniguez and Zambrano made an intuitive leap.

Instead of asking themselves who else has their problem, they asked themselves who has solved the problem and how. They visited the Memphis, Tenn., shipping hub of FedEx, which has built a business around the ability to guarantee fast, reliable package delivery. They checked out Exxon, which has developed an advanced system for tracking, scheduling and rerouting oil shipments. And they visited Houston's 911 dispatch headquarters, which coordinates hundreds of police, ambulance and fire vehicles responding to unpredictable emergencies.

Using ideas gleaned from these and other sources, Cemex built its own digital solution, piece by piece.

One piece is a satellite communications system, called CemexNet, which connects all of Cemex's production facilities. Rather than operating independently, often in ignorance of the supply-and-demand situation at other plants, each facility is now coordinated from a central clearinghouse. Back-office functions such as the dissemination of financial data were automated and streamlined, and the time it took to process an order was significantly reduced.

Then, during the early 1990s, Cemex developed a digital system, Dynamic Synchronization of Operations, to more efficiently manage customer orders. Each truck was outfitted with a computer terminal and a global positioning tracker like those used on ocean-going vessels, and folded into a single fleet. Now centralized dispatchers know the location, speed and direction of all vehicles at all times, and can quickly choose optimal combinations of truck and mixing plant locations to fill concrete orders.

With trucks acting less like trucks and more like fast, switchable packets within a data network, Cemex could quickly dispatch the right one to pick up and deliver a particular grade of cement; reroute trucks when chaotic traffic conditions demanded it; and redirect deliveries from one customer to another as last-minute changes were made.

THE PAYOFF

Gradually, Cemex reduced the three-hour delivery window to 20 minutes, with the goal of 10 minutes now in sight. This guarantee is so rare in the industry that it has helped create a strong brand for Cemex, as well as a relatively high market valuation. For building contractors who no longer have to keep work crews idle while waiting for the cement truck to show up, the reduction of cost and risk is worth paying Cemex a premium price. Cemex benefits in other ways as well. With the phone lines no longer jammed, fewer orders lost. The company requires one-third fewer trucks and saves on fuel, equipment maintenance and payroll costs.

Learning to manage unforecastable demand allowed Cemex to vault to the forefront of its industry in Mexico, and it has replicated its digital business design in a systematic expansion abroad. Targeting developing economies in Central and South America and Asia, Cemex has acquired one company after another. In each case, a team of internal consultants flies in to integrate the new company into the Cemex digital business design. Within two to three months, the new plants and delivery vehicles are linked to the information network, company managers are trained and overhead is reduced.

Cement companies in Spain, Panama, the Caribbean, the Philippines, Indonesia and, most recently, Egypt have all gone through this careful integration process. Profits have continued to rise even as more capital is generated for further expansion. While Cemex's expansion strategy is not in itself digital, it was made possible by the company's digital strengths.

Cemex, with an annual production capacity of more than 65 million metric tons (a sixfold increase since 1985), has seen productivity and profitability that outstrips any major rival: Pretax profit margins run 37 percent (vs. 23 percent for its largest competitors), and Cemex generates 50 percent greater cash flow.

Traditional incumbents and dot-com startups alike should take Cemex's experience to heart. Digital technologies can transform any business as long as they are deployed to address customers' top priorities. Zambrano and Iniguez didn't get seduced by technology or digitize Cemex in a haphazard fashion. They started with the critical issues faced by their customers, then focused their IT development on those issues.

Cemex's reinvention is by no means complete. Iniguez wants to extend its digital information systems into the hands of customers. Construction remains a chaotic business, so applying Cemex's digital processes to help customers manage all their activities - from labor scheduling to supply management - could create new niches for the company to occupy.

Starting from ground zero technologically, Cemex built a powerful digital business by asking customers the right questions and looking outside its industry for solutions. Having leapfrogged competitors once, the company appears to be poised for a second round of innovation, following the same precept: Business issues first, electrons second.

(Adrian J. Slywotzky is VP and David J. Morrison is vice chairman of Mercer Management Consulting. They are the co-authors of The Profit Zone, Profit Patterns and How Digital Is Your Business, to be published this fall by Crown Business.)

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