CATERPILLAR ANALYSIS

Caterpillar is an automotive company dealing in products such as construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel electric locomotives. It also provides services like financial, remanufacturing, progress rail. The markets served by caterpillar include North America, Asia pacific, Europe, Africa, Middle East, commonwealth of independent states and Latin America. The business divisions/ departments are; power systems, construction industries, resource industries and financial products. The organization’s main branch is in Illinois with 118,000 people.

The company is experiencing poor financial performance eg declining revenues, profitability that is operating and net profit. The company’s products are sold under Caterpillar, CAT, Electro-Motive, FG Wilson, MAK, MWM, Perkins, Progress Rail, SEM and Solar Turbines.

CONTENTS OF COMPANY VISION;

Global business leader, customer success with caterpillar products, competitive advantage through distribution, world class supply chain, superior business results, competent work force that observe company values, promotion of sustainability, financial performance through stakeholder motivation.

NB. Analyse the ways caterpillar can achieve its strategic intent.

SUPPLY CHAIN OPERATIONS AT CATERPILLAR.

Dealership is a mechanism of distributing the products worldwide in globally. Retailing and franchising through retail outlets and subsidiaries. Performance standards are set for the dealer to avoid deviation for company targets and goals Collaboration with supply chain partners to meet customer expectations. Empowerment of dealer towards selling the products and servicing of machines to ensure

responsiveness to customer challenges. Product availability by setting up of warehouses to store spare parts referred to as large service

parts business which provide components to dealers and customers. Responsiveness is supply chain performance measure as customers require quick service eg

repair that has led to caterpillar holding inventory to ensure high service levels. Localized production in that due to global demand, the company produces from facilities located

on the continents where the products are sold. Centralized production for example the larger and specialized products that are produced in a

single location because of the high initial outlay. Repositioning through vertical integration which backward and forward with suppliers and

customers respectively. Insourcing of critical components’ production especially the ones that add competitive

advantage of its products. Outsourcing production of non critical items from a large supplier base.

Stringent description of products to ensure high quality durable goods so as to improve performance and construction.

Low supply base due to the tight specifications that limit local sourcing resulting into global sourcing.

Limited supply of products due to production and sources of supply being in different countries owing to long lead times.

Discuss how caterpillar can deal with the supply chain challenges;

Strategic alliance, buffer stocking, closer relationship with suppliers, invest in production of these component, multiple sourcing, backward integration, demand forecasting.

SUPPLY CHAIN MANAGEMENT

Rapid response supply chain

Innovation through introducing P2000 product line to exploit expected growth which relates to the product development strategy of Ansoff. This new product line was smaller, medium to high volume, standardized product and selling cheaply at 200,000 dollars.

Stiff competition for the P2000 product line due to its market having very many market leaders eg Bobcat, Deere&Co and Case Corp.

Staffing challenges as the company was embroiled in workforce difficulties of disputes and strikes over pay and working conditions.

The economic down turn in Asia due to the financial crisis that cause uncertainty of future profitability and demand.

The network key performance indicators included; profit maximization, market share, flexibility. Surveys/ studies were conducted to find out the volume forecast demand, cost parameters and

routeing restrictions for the P2000. The models within the P2000 product line included; skid- steer loader, compact wheel loader,

min hydraulic excavator and work tools. Versatile work tools eg buckets, fork sets and grapples because they could be used with multiple

machines, even competitors’ products thus providing a platform of market penetration as per Ansoff’s model or matrix.

Dealerships were used to distribute and sell the P2000 products in USA and Canada and the company could provide demand forecasts for every district to ensure flexibility.

Feasibility studies were carried out to determine customers reaction in case of delayed delivery through gathering customer patience data so as to measure the cost of delay based on customer attrition/ reduction. This gave rise to a correlation between serve level and lost sales.

Making of informed decisions as a result of researching and providing cost and logistics data eg source cost, source capabilities, minimum order sizes, holding cost rates at different location, holding cost, shipping times and rates for transport modes.

Usage of transshipment nodes for both machines and work tools that was done at varying capacities and rate but prior these two had separate nodes leading to lack of consolidation and high costs of shipment.

The drivers for supply chain redesign/ configuration were; international nature of the P2000 supply chain, weight of the equipment leading high cost of shipping and long lead times.

The bases of competition for caterpillar were quality and service not price and this helped to differentiate its products as per potter’s generic strategies (cost leadership, differentiation and focus).

Product availability was key performance measure as it could generate demand for caterpillars products and satisfy demand of competitors’ products in case of stock outs. This necessitated monitoring and controlling dealers which increased cost by keeping optimal inventories.

Supply chain segmentation

Pricing marketing strategy for BHL series of small backhoe loaders in the Building Construction Product division.

Focus strategy has been adopted by concentrating on a few popular caterpillar models to majority o customers.

Prior the company had a complicated supply chain due to many product offering that were built to order and priced basing on itemized price lists but this could lead to customer satisfaction.

High demand/ customer base led to holding of large stock levels to provide choice for customers. This resulted into much documentation and service provision hence increasing operational costs.

Suppliers frustration was rampant due to the fragmented nature of caterpillars products demand as forecasting was a challenge.

Rationalization Building Construction product was made basing on customer reaction, cost saving opportunity.

Discuss the extent to which caterpillar lived by its strategic intent.

Demand analysis was carried out by dealers to understand segmentation, preference patterns and price sensitivities of the BCP’s customers.

Combining product sales history and demand analysis data resulted into customer preferences and substitution analytical model.

Cost analysis was also performed in line with direct and indirect costs using the cost data and surveys of engineering and marketing experts based on variety, attributes and benefits of product diversity for all the operations along the supply chain.

The right product mix was determined by amalgamating customer and cost models basing demand patterns and market conditions thus offering wide choice and controlling complexity costs.

The lane strategy was the deliverable of the two analyses thus the birth of express lane – built to stock, standard lane – built to order and A-La- Carte lane – customized built to order. The observable trait is that as complexity increases also lead time increases form days to months.

A phased roll out approach was adopted where by two price lists were used that is a-la-carte and lane price lists in 2010 but in 2011 transitioned to a single lane price list. This led to increased demand, reduction in warranty costs by 10%

Further expansion and refining of the BHL lane strategy by rationalizing lane 1 to two and implementing cost analysis to other divisions which a fundamental strategic change for caterpillar.

Using change management theories/ models, discuss how caterpillar might manage the transition from the old strategy to a lane strategy and explain the change management skills required for the exercise.

Supply chain integration

Designing of the integrated supply chain strategy to eliminate standardized processes executed in silos such that processes can be optimized throughout the company as this was segment of improving operational efficiency to enhance products’ demand.

Supply chain mapping as the integrated supply chain strategy involved assessing current supply chain activities, processes and resources plus process execution.

Adoption of a strategically managed inventory. This is an inventory management and replenishment mechanism by having strategic inventory buffers/ safety stock to enhance supply chain efficiency and flexibility due to availability at the point of use (POU), transition to a pull supply chain, and improving material flow. This is in line with vendor managed inventory and collaborative planning, forecasting and replenishment.

Prior to SMI, ownership of material at the supplier’s location and transportation to POU were caterpillar’s responsibilities leading high material inventory in transit capital being tied up for globally sourced products.

Inventory was held in pools at suppliers, caterpillar warehouses and POU. Single sourcing by all caterpillar facilities as inventory was not consolidated MRP system and purchase orders were used to coordinate replenishment, these systems are out

dated and delay information exchange thus increasing lead times and order variability. Decentralized decision making as both suppliers and caterpillar made their own production plan

and decisions with limited information sharing.

Supplier involvement by assigning the responsibilities for material transportation to central points where caterpillar could pull them for production

Ownership of inventory at central inventory pool was transferred to suppliers and after caterpillar pulling them, then payment could be effected depending on the contractual terms.

Production facilities could get inventory from the central pull hence eliminating inventory at the facilities.

Central stock locations could be suppliers’ or caterpillar’s premises but for provision of these service suppliers charged a fee.

Centralized demand forecasting by caterpillar to ensure JIT delivery as suppliers were aware of the quantity of material and time when they are required in the plant.

Sharing of POU consumption information helps suppliers to produce and ship products basing on actual demand/ material usage.

Buyer- supplier Communication led exceptions and shifts in production to be addressed swiftly thus flexibility and better working relationship.

Central planning and coordination of SMI reduces production cost, inventory, working capital tied up and strengthen relationships through better production planning.

GLOBAL SOURCING DECISIONS

Exoloader a dual-purpose equipment was designed for emerging markets that had features of an excavator and a loader.

Emerging market customers have limited resources that need functionality of the two caterpillar products.

Production location evaluation factors include sales opportunities in the emerging markets, local labour cost, logistical cost across hemispheres, additional supply chain costs and investment costs. This aimed ascertaining global exoloader production capacity, create a new market niche and improve profitability.

Caterpillar segmented its supply chain into raw material suppliers, external suppliers and internal suppliers for raw materials eg steel plates, engineered components and key components. Products sourced include steel plates, circuit boards, engines and transmissions.

The production process involves cutting/prepping raw materials for productions, assembly, inspection, logistics whose costs can break or make product line profitability.

North American production site evaluation: high shipping cost of exoloader to emerging markets customers, low acquisition and coordination cost for raw materials and components, skilled work force, cultural compatibility.

Asian production site evaluation: High acquisition and coordination cost for raw materials and components, low shipping cost of exoloader to emerging markets customers, unskilled workforce/ training cost, cultural differences.

The exoloader created a market niche but with stiff competition from excavator and loader makers resulting into low projected profits.

Expanding and refocusing an existing production facility to accommodate the new exoloader production volumes. The Japanese location was land locked, no space for expansion; the Aurora location had lengthy delivery times.

Building a new production facility in china; low delivery time to Asian markets, long delivery time to South America, challenge of coordinating delivery of raw materials and components.

The major concern of the study team is about costs and production quality no matter where production takes place.

Supply chain logistics.

Finished products have to be delivered safely, cost effectively and on time to dealers worldwide.

Products and components bulkiness and weight, complexity of supply chain are the major challenges.

Balancing sourcing, manufacturing and distribution strategy. Product cost optimization tenchniques include; reducing supply chain variability, minimum

transit inventory, achieving higher velocity, creating high degree of visibility of shipments. Third party logistics provider in the name of DHL has been contracted to manage inbound and

out bound air shipments. Global materials management software for EDI for tracking and booking material with accuracy

to manage land and sea shipments. Control towers are being used over the top of the network that considers the strategic design of

a supply chain, track costs, adapt supply chain in response to expected changes in the market so as to meet the company’s strategy.

DHL manages two control towers that bundle technologies, efficient processes and people together in a single hub to achieve visibility.

Caterpillar is a product driven company from design and procurement of material and components through to manufacture of finished products.

In logistics distance is a challenge as stated by O Neil that distance is an enemy but there must be the capability to deliver products cost effectively by consolidating and deconsolidating material.

Caterpillar operates on six continents and growth in South East Asia, china, India, Australia, and Central and South America.

The rapid expansion has led to challenges of how to evolve and develop a logistics network to meet the increase in capacity, and capability/processes which can be done through partnership and insourcing strategic functions, develop data and analytics, having talented people, technology.

Discuss how caterpillar can position itself in terms of technologies, partners, processes and people as key success factors.

Logistics in the Middle East

Product distribution centre for finished product that aim at increasing velocity and improve delivery time to dealers, high level of service and short availability.

Dubai PDC imports caterpillar machines globally and exported by road and sea to Middle East and East Africa destinations. This hub was chosen due to its strategic location and good port facilities.

Tendering exercise was used to have a competitive supply base to provide regional clearance, forwarding and distribution, customer brokerage, road transportation.

Al Futtain logistics selected using the evaluation criteria of capabilities, continuous improvement, transport experience, solid infrastructure base, strategic location, supply chain experience, competitive pricing.

Logistics in the UK and Ireland

Use of a dealer called Finning international with branches and engineers Use national distribution centre run by the CEVA logistics that holds inventory of Finning engines

for the next day delivery. Purpose built facility designed by CEVA with 33 staff to operate it over extended business hours

six days a week. CEVA committed to the next day delivery of all orders of 10000 items a week in the contract. Building/ warehouse is located at the lakeside Estate and covers 120,000 sq ft with wide aisle

and cantilever racking, floor-level storage and two tier mezzanine floor accommodating 90% SKUs.

Energy saving lighting, biodiversity area and electric car charging points are used to protect the environment.

Fire protection systems with 9.5km of pipe work and over 3000 sprinkler heads cover each level of racking installed to manage risks and ensure business continuity.

CEVA and Finning team consolidated stock from five Finning parts operations into the new central facility within five weeks while maintaining operational capability on time and budget. This partnership is expected to provide customer with operational excellence and class leading services plus inventory management and efficiency.

Logistics in the USA

Neovia logistics uses container cross docking operation. Uses the savannah port near Georgia, this port has known as a premier logistics and distribution

hub. Neovia logistics add a reputation that this port is the leader in importation and exportation of

goods. Neovia partnered with costal logistics group, a local service provider at savannah specializing in

manufacturing support services. Neovia ships to more than 190 countries delivering a nimble, cutting edge approach to supply

chain with the state of the art solutions provides speed, efficiency and global reach through 38 weekly container ship services.

Transportation

What customers want and what they will pay determines the transportation mode choices made product by product.

Achieving product cost saving of 400-500 dollars is possible with low cost transportation mode by working with customers on the price/ delivery tradeoffs.

Technology has facilitated use of low transportation cost modes utilization. Caterpillar built a control tower using visibility solution from GT Nexus to achieve end to end

visibility.

The control tower measure carrier’s performance and variability in different carriers’ performance. Lower variability translates into lower need to carry inventory.

Use of ocean and air shipment hubs to get scale on a lane which make caterpillar an important customer that can pre book ocean capacity with no dwell time and in air mode, it ships hub to hub to maximize cube.

Caterpillar changed from flying spare parts overnight to using many more three to five day flights where customer expectations were aligned on a lower cost but slower delivery.

Supply chain technology Recruitment of randy krotowski as vice president and chief information officer in 2012 who was

experienced by being at chevron for 30 years. He conducted consultative meeting to understand people’s goals Built relationships with dealers and customers Put an IT strategy and got top management support with completion date of 2018 Caterpillar hopes to provide customers with more IT solutions to help them use company

equipments more productively. Putting technical information in the hand of dealer technicians while in the field. IT priority areas include internal project focusing on manufacturing supply chain, customer

facing technologies by providing customers with commercial software solution . Learning from peers and competitors by integrating data sharing through cloud development,

service oriented architecture and agile development. Development of a fully integrated EDI solution to manage suppliers, products and parts Drop ships and inventory processes were established to optimize product flow and freight

logistics to facilities world wide. Group O was out sourced to design and host a web portal to integrate 600 global suppliers and

manege 3500 products and parts The portal provides controlled order acknowledgements, compliant electronic advanced

shipping notices,pack lists and shipping labels, integrated invoice processing and work flow alerts, mult-level security and role based administration, real time reports and operational metrics in an easy to read dashboard.

Group O worked collaboratively with suppliers to improve on time delivery in the noncore supplier base to eliminate shipping compliance issues between suppliers and 32 caterpillar facilities worldwide.

The solution provides visibility, transparency, simplification and standardization, reducing supply chain interruptions through documentation and execution across supplier network.

The Ground Transportation Operations Centre- Americas, a new freight optimization software allow GTOC-A to optimize ground shipping through dynamic load planning that determines optimal transportation modes and consolidates existing transportation movements.

Due to GTOC-A facilities have reduced transportation spend by 6-10 %, fewer travel miles through load consolidation, trailer utilization costs thus few trips, low fuel consumption and fewer CO2 emissions.

Supply chain sustainability

Producing sustainability report since 2005 Named on the Dow Jones sustainability index for 12 year Strong sustainability culture appreciated by Tim Lindsey Sustainability team though it’s small with 3 people responsible for supply chain, manaufacturing,

dealer network and customers sustainability issues. Sustainability culture can created through sustainability; training, policy, audit, evaluation

criteria , specifications, contracting, sensetisation, involvement, punishment, incentives, walking the talk.

Mentor ship programs with customers have been adopted Techonological breakthrough Job site solution program use in quarries and mining operations. Training operators and rebuilding engines to improve fuel efficiency of operations by 30% These are all added value customer relationships. Remanufacturing or recycling to preserve 85% of energy for making products eg in a 170 million

pounds material saving and 400 million kilowart hours of electricity while avoiding 180 million pounds of green house gases in 2011.

Partnerhips with waste management, world resource institute on a four plan to create sustainable cities and use of biogas to power equipments.

Achievement of a zero waste goal in Leicester and Desford UK due to recycling in 2010 Waste management goal and savings of 183,984 dollars were achieve through adding six waste

streams to the 30, bundling/ baling waste and providing workers with desktop containers for offices rubbish, development of a total waste management system at Leicester, consolidating shipments by use of large vehicles and use of plastic containers while phasing out steel ones.

This will reduce weight and packaging, improve routeing and scheduling, create opportunities for streamlining shipping protocols, reduce carbon emissions.

Supply management

Sales growth in 2000s due to rapid construction boom Profitability did not improve due mediocre supply management. Demand exceeded supply resulting into reactive sourcing thus payment of premiums for

additional volumes, expensive air freight or other expedited logistics services. Company promoted from within thus being without outside experience and perspectives and a

talent gap as there was no time to train managers. Hiring crespo, Robinson and Bozemann who operated in teams to engage suppliers, manage

demand, develop suppliers, manage inventory, using epos, running a parts supermarket, offer specialist training group to staff, conflict management, create a sense of urgency, measure performance.

Supplier relationships

Consulatative meeting with 500 suppliers Communication with supplier was irregular with need triggering contact

Currently there are scheduled conference calls or personal meeting each month. Communication based on assumptions without indepth analysis Collaboration was instilled by caterpillar Co-location with Tenneco to design a component that cuts emissions, and reducing product

complexities. Partnerships have led to innovation Reduction of diesel emissions is requirement under federal law. Involvement of supplier has resulted into supplier loyalty, optimed costs and added speed. Partnership with Tata steel Europe resulted into JIT by minimizing lead time and stock levels. Recession resulted into caterpillar requesting for price reductions from suppliers that the

resisted leading to termination of contracts and poor relationships. Discuss strategies that might be used to drive out costs of caterpillars’ supply chain and improve

the relationship with suppliers. Consortium buying, consolidation of purchases, use of ICT, competititve tendering, JIT

production, insourcing, finding cheaper source of supply How can caterpillar manage resistance of suppliers to its demands. Education and communication, negotiation and agreement, manipulation and co-

optation,facilitation and support, coercion.

Analyse the STEEPLE factors which might impact on the caterpillar supply chains

Social cultural factors: employment opportunities, lack of available skills, consumer demand, supplier and community resistance, national cultural differences.

Technological factors: supply chain integration technology, level of technological advancement, technological skills.

Economic factors: supply and demand, rate of inflation, exchange rates, taxation, interest rates, cost structures, level of competition.

Environmental factors: public awareness, environmental standards and laws,, degradation coused by mining and quarrying.

Political factors: government policy, political situation eg wars, incentives and restrictions. Legal factors: health and safety, employment rights, environmental laws. Ethical factors: sustainable practices, global supply chain issues, reputational challenges.

Assess challenges for transportation and physical logistics management in the caterpillar supply chains

Demand planning, coordinating inbound and out bound logistics, route and network planning, location of facilities, selecting the best transport mode, management of third part logistics providers, currency differences, legal differences, custom duties, long distances, security of items in facilities and transit, transportation costs due to the weight of the machines.

Explain the methods which might be used to measure performance in caterpillar supply chains in order to improve their efficiency and effectiveness.

Supply chain operations reference model ( SCOR model), benchmarking, balanced scorecard, joint performance appraisal, key performance indicators, performance pyramid, 360 degree feedback, and performance dashboard, performance audits.

Evaluate the contribution that effective supply chain management may make in achieving competitive advantage to caterpillar operations.

Reducing non value adding activities, reducing total cost, reducing cycle time, improving responsiveness to requirements, enhancing quality and service, improving communication, balancing service level and cost, improving supply chain relationships, cost and risk management transparence.

Analyse how caterpillar uses supply chain expertise to achieve competitive advantage over its competitors.

Logistics and physical management of stock control systems and processes, communication systems and information transfer between caterpillar and its suppliers, quality control, waste reduction through leanness, effective supply chain management, collaborative relationships, supply base rationalization, outsourcing, wide product variety, integrated information systems, innovation, hiring talent , team working, global operations.

NB: To gain higher marks for questions of competitive advantage, support your answers with porter’s theory of generic strategies that is cost leadership, differentiation and focus.

Discuss why and how the caterpillar uses segmentation to analyse its range of supplier/ customer

Segmentation is the process of dividing a potential market into distinct subsets of consumers/ suppliers with common needs or characteristics.

It’s done to understand the needs of customers groups, define value from their perspective, position the organization to meet need through tailored approaches. The segmentation was undertaken through product lines and market data.

NB: The tools for segmentation include Kraljic matrix, Pareto analysis, Supplier preferencing model

Evaluate approaches that can be used to meet the needs of stakeholders.

Consider the marketing mix: price, product, place, promotion

Discuss the main drivers of collaborative relationships between buying organizations and suppliers.

Globalization, technology development, supply chain competition, supply chain interdependence, brand protection, supplier development etc.

Evaluate the extent to which the supply chain of caterpillar was lean or agile.

Features of lean: low cost production, value chain mapping, forecasting systems, demand pull, stock reduction, waste reduction, continuous improvement, efficiency initiatives,

decentralization of tasks and responsibilities, integrated information system, empowered cross- functional teams.

Features of agility: streamlining physical flow from suppliers, information flows linking demand and market planning, scheduling processes, and responding quickly to market changes, optimal stock holding to achieve availability.

Features of leagile: distribution centres as de-coupling points, long term forecasting combined with short term scheduling, late customization.

Stakeholder management and communication.

Use Mendelow’s power-interest matrix, Mitchell’s legitimacy, urgency and power matrix. Also clarify the we have internal , connected and external stakeholders.

Communication methods include; advertisement, catalogues, focus groups, written reports, newsletters, emails, briefings, consultative meetings, workshops and conferences, press release, website and internet, questionnaires.

Explain how to assess supply chain performance of the organization.

Methods; balanced score card, focus groups, survey and feed back, KPIs, SCOR model etc Performance metrics: profitability, revenue, market share, time to market, stock availability,

savings, customer satisfaction, on time delivery in full, stock turn over, efficiency, order cycle time.

Using an appropriate model, examine the environmental influences/ factors of caterpillars supply chain. STEEPLE, SWOT.

Change management models include: Kurt Lewin’s behavioral modification of unfreezing, freezing and refreezing. Kotter reasons why change programmes fail and strategies for success. Force field analysis

Team development and management model are; Tuckman model of forming, storming, norming, performing, mourning. Belbin team roles.

Explain the basis/ sources of competitive advantage for caterpillar.

Discuss the key performance indicators for the supply chain management function of caterpillar.

Discuss the added value measures that have been undertaken by caterpillar along its supply chain.