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 organizations 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 companys 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 Ansoffs 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 potters 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 BCPs 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 suppliers location and
transportation to POU were caterpillars 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 caterpillars 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 companys 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 carriers 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 peoples 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 its 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

competitive advantage over its competitors.

expertise

to

achieve

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 porters 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.
Its 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 Mendelows power-interest matrix, Mitchells 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 Lewins 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.