3 Problems CAT Solved to Save $250 Million in Excess Inventory
Where’s my stuff, and when is it going to get here? Is the item I want in stock or will I have to wait for more to be produced?
These are fundamental questions for any of the millions of shoppers who make online purchases each day, where brands like Nike and Gap are expected to be able to deliver customers what they want at the right time, place, and price, complete with full transparency into the shipping process. That type of experience conditioned customers to expect the same high-touch service from their business partners as well, explains Tom France, director of transportation and supply chain solutions at Caterpillar:
“Our dealers were complaining, saying things like ‘why can I ship a pair of tennis shoes all over the world and track it to my grandmother – retailers are pretty good at this – but no one can tell me where my multimillion pound machine is at any one time? How can you lose it? How can you not know where it is?’”
Caterpillar is no stranger to moving millions of dollars of inventory around the world at any given time. As the world’s largest heavy equipment maker, Caterpillar works with more than 28,000 suppliers and ships to 170 dealers serving 180 markets around the globe. However, with a vast, global supply chain, things tended to get complicated a few years ago when it came to making sure everything got to its destination on time.
“We didn’t have a mechanism to enforce compliance and drive quality at origin. We didn’t know what that was. We had limited visibility to everything in motion. We didn’t have a platform to do it,” France said during a presentation on Caterpillar’s journey to attaining supply chain visibility.
Because of its size and the nature of its business, Caterpillar is often seen as an economic bellwether. When the business of selling earthmoving and construction equipment is good, it’s a sign the economy is heading in the right direction. When it’s not, that might indicate economic growth has slowed down. It’s a highly cyclical industry, and Caterpillar is sensitive to the peaks and valleys that come with fluctuating demand. The company had worked to improve visibility across its logistics in-house through the early 2000s.
“When we started this process, we found things were sitting in ports for long periods of time because we were not matching our flows to ship sailing schedules,” France told American Shipper. “What was really killing us was the variability and that’s the real enemy of the supply chain.”
A typical Caterpillar mining truck might be sourced from two locations in the US and another in Mexico, requiring two railcars, four trucks, and two containers to move it to a port. The company requires all parts to ship on the same vessel for duty reduction on entry to a foreign port. Most of these complex orders ship overseas, where they often serve in some of the toughest environments imaginable.
“Distance is the enemy of manufacturing and logistics,” France says. “We’re sourced pretty far afield, and I don’t ever see that changing.”
Transportation variability was among the chief problems standing in the way of Caterpillar’s goal of improving velocity in its supply chain. Parts would arrive in an up to 18-day range, with a standard deviation of more than nine days. In other words, the unreliable nature of parts moving through the supply chain led Caterpillar to carry excess safety stock. “No one wants inventory because of cash flow, but everyone wants to be resilient and agile,” France says.
To improve the movement of parts through its supply chain, Caterpillar identified three problems it had to fix first:
- No end-to-end visibility of individual parts in-transit
- Inconsistent overseas transit time
- No validation of parts before moving
Once parts left a manufacturing site or were packed in a container, Caterpillar couldn’t see where they were until they arrived at the next destination. With long lead times and specific requirements for shipping equipment overseas, that contributed to the need to maintain high buffer stock and excess inventory. Without the ability to see a true picture of inventory all the way down to parts in motion, Caterpillar couldn’t validate whether it was actually shipping complete and accurate orders to its dealers and customers.
The Control Tower Approach
For Caterpillar to be able to reign in the need for excess inventory and reduce variability in its transportation, the company turned to the idea of supply chain control towers as a means to match the physical supply chain to the data in its supply chain.
“It gives you all the data so you can manage a supply chain effectively through big hubs and spokes because transportation responds to scale – you want to have scale-based deployment wherever you can because that enables the best velocity and the best cost,” France says. “But decentralized execution so you can get wherever it is you have to go, whether it’s a distribution facility, a manufacturing facility or the customer – the ability to make changes but with real data, so we’re all looking at the same data. Not anecdotally, but all the same data. That’s really important.”
In order to get there, Caterpillar chose to go with a visibility tool that was cloud-based and could quickly connect all the data flowing through the supply network to give the company a better picture of what was going on.
“Most of the big ERP systems didn’t have exactly what we wanted,” France says. “Cloud-based is very fast to rapid value creation, very fast platforms to get up on, very low cost. And the other thing is everyone else in the supply chain can be on it. So when you get EDI connections between all your partners, most of those partners can already be up on it. So you can get to where you want to get a lot faster. That was the key for us, at least in that decision process.”
Linking all the data together on a single platform gave way to a single view of the truth, he adds. It removed the uncertainty about where parts were, or what was dwelling too long at a port, and why. It connected the physical supply chain to the digital supply chain. “Since we launched this in the last couple years we’ve taken over $250 million out of inventory,” France says.