How Caterpillar has increased fulfil rates and reduced inventory costs

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By Guest on 12 July 2018
How Caterpillar has increased fulfil rates and reduced inventory costs

Following five years of downturn, business is picking back up for construction machinery manufacturer Caterpillar. In an interview with 09 Solutions, Caterpillar’s senior procurement manager Andrew Lee was positive about what the future holds: “At Caterpillar, we’re especially interested in the move toward product-as-a-service,” he said. “We want to diversify our offerings from exclusively selling machines to selling total solutions. If you’re building a new runway at an airport, we want to provide and manage the whole fleet of machines. Not only does this enable us to more effectively manage operating hours, IoT components give us more insight into the effectiveness of our machines and help us predict machine failures.”

This change is especially important because of the cyclical nature of Caterpillar’s business. “As you may know, we saw a big rebound last year as business picked up in the fracking, oil refinery, construction, and mining industries,” Lee explains. “Unlike the last downturns in 2009 and 2010, where businesses recovered in six months, a lot of our suppliers didn’t see the rebound we did. This time it feels more like a permanent change, so S&OP processes are more important than ever.”

This also leads to an increase in supply chain complexity. “Because of the uncertainty within the market, it’s hard for us to communicate the right signals to our suppliers,” Lee says. “Often when we enter a downturn, people along the supply chain will try to zero out the safety stock to appease managers who expect to see inventory turn, but that only creates a bigger hill to climb once business picks up again.

“On top of that, our customers expect us to offer thousands and thousands of product configurations. Generally, we’re actually very good at predicting forecasts, but when it comes down to planning for specific configurations – whether to use a wide or narrow track, or what volume to include for a boom and stick – we have more trouble building accurate plans.”

And this is where 09 Solutions jumped in to help. “Since 2010, we’ve been looking for a more effective business planning approach, but it wasn’t until 2015 that we got in touch with o9. Sanjiv [Sidhu, o9 Founder and Chairman,] and my director Pat Murzyn, immediately hit it off, and we used our first ten weeks to come up with an operational proof-of-concept.

“o9’s solution was competitively priced. o9’s team also has a lot of business knowledge, putting them well ahead of other vendors we’ve worked with. Another major factor that attracted us to o9 was the solution’s flexibility and compatibility with systems we already used. From the start, the o9 platform had to interact with seven other systems that we were using on our supply chain, and it plugged in seamlessly. Last year, we tried to find a new solution to help manage the various product configurations we offer. We gave this challenge to o9, and it took them just ten weeks to design a tool that helped us rationalise inventory on our existing platform.”

The solution has had a huge impact on Caterpillar’s order fulfilment rate, by ensuring it has visibility into the supply of its machine components. “A machine can’t be shipped if it’s missing even the smallest nut or bolt, and it’s a testament to the system that our order fulfil rate is in the 99.5% level,” lee says. “I would say this efficiency has reduced our inventory costs by 10-15% this year, and that’s in North America alone. Once we’ve implemented the solution on our global systems, we will probably see another 10% or 20% drop in cost. I also expect our scrap costs to drop by 20% or 30% minimum.

Overall, the biggest benefit Caterpillar has seen for customer service has been faster, more consistent response times. “Even with the current upturn, we deliver most of our products within eight weeks on average. Compared to competitors in the mining industry who take over 18 months to deliver a new mining truck, we can produce and ship a fully configured machine within ten weeks.

“These response times are even more important in the age of increased customer expectations, but we want to take this one step further and offer dynamic pricing based the configuration the end user wants. If a customer has a specific machine configuration and we have a nearly identical machine sitting fifty miles away, we should be able to offer that machine to the customer in two weeks with a 5% discount. This is the next frontier we want to tackle with o9.”

 

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