Caterpillar supply chain system continues building on success

Caterpillar Building Construction Products, which received coveted Class ‘A’ manufacturing business accreditation for planning and control in June 2000, is developing a supply chain strategy that could become a benchmark for much of manufacturing industry. The company has already received a Manufacturing Industry Achievement Award and, after 18 months, the project’s success, in terms of user and supplier acceptance, return on investment and improved customer satisfaction, is outstanding. In a nutshell it involved a complete programme of supply chain redevelopment, including a new web-based demand pull system, supplier performance monitoring, and extensive plant layout changes with a complete manufacturing and logistics overhaul – and new roles for staff. On the supplier side in particular, it has hinged on new ways of doing business, which ultimately are proving better and more profitable for all. It started back in 1996. Caterpillar decided that a new range of compact wheel loaders and mini excavators would be built at its 60,000 square metre Leicester site. And it wouldn’t increase space for the lines. Allan Jenkins, now general manager of Caterpillar Building Construction Products Fabrications Division, but then in charge of supplier management, says it wasn’t going to be easy. “We knew we had to make dramatic performance improvements to meet this challenge so we developed a plan which included achieving Class ‘A’, making factory layout changes and manufacturing process improvements, and developing a logistics strategy to help release stored inventory.” To get started Caterpillar turned to Oliver Wight. “They helped provide the expertise for Class ‘A’ benchmarking, and to establish the process disciplines. These, we hoped, would impact reliability, cost, timeliness and the overall flow of material through our production unit and the distribution chain,” says Jenkins. But internal change alone was never going to be enough. “We needed to define and action a Right Part, Right Quality, Right Place, Right Time strategy focused to drive competitive advantage throughout the supply chain,” says Jenkins. Caterpillar UK defined four key logistics strategies. Business Process (BP) One concerned the most expensive fabricated items, main structure sets and so on that are machine order-specific – about 70% of the value, but only five or six per cent of Caterpillar part numbers. Employees and suppliers would need to be educated to respond to Just in Time (JIT) Kanban pull triggers for these, and deliveries would have to be made in strict build sequence using actual machine shipping order requirements as the process driver. Similarly for BP Two which involved lower value (but still expensive – 25% of the value, 15—20% of the part numbers) items like pumps and radiators, for which there would be no storage on plant. BP Three (concerning common parts like drive shafts) would then be unsequenced, running straight off MRP rules with flexibility through some local storage. And finally, BP Four (commodities – nuts, bolts, etc) would be handled by Caterpillar Logistics Services, set up for the purpose. In 1998 Caterpillar started presenting its concepts – before moving on to piloting. The firm put a lot of effort into visiting suppliers and talking not only to senior management but their workforce – the people who would be working the processes. Impressively simple Jenkins describes the initial effort as being around BP One. “We were putting across the sequence of materials for our daily build plan of the high dollar items, using our Chess ERP system sales order processing module (implemented by MDIS, but now under Glovia) which explodes components down through the bill of materials (BoM) to our supply base. They would get a 12 month forecast horizon, followed by firming things up 40 days out, and we would issue our daily firm schedule at 20 days.” Caterpillar developed what it terms a Supplier Community Web Site to improve supply chain communications. The site was to be used for communicating all kinds of data, as well as bringing suppliers closer into the ‘Caterpillar community’. Demand files (originally for faxed demand-pull messages – ‘Faxbans’) were created from the ERP system and copied over to a network drive, then up-loaded to the web site using a combination of Computer Associates ‘Remotely Possible’ and Microsoft Windows NT and Access. “We’ve designed the system so they see demand in build-slot sequence,” says Jenkins. “Our suppliers work with us and load the trailers in the reverse sequence, so that when deliveries arrive we can sequence materials off the trailers right to the required assembly line in the right order at the right time.” BP One and Two suppliers began to use the site to get access to the daily build sequences, while BP Threes got their monthly MRP schedules the same way. Suppliers were also given access to their performance measures, delivery and production time variances and general information useful to them. Jenkins says most – about 40 – have been using the web site successfully for many months. “Now we’re moving on to the second wave: getting the site updated collaboratively, with the concept of our suppliers uploading their actual production status directly on to the web page so we can actualise real time material planning and be more pro-active rather than re-active to problems,” he says. Currently it’s going through final pilot with a couple of key suppliers, and roll out is anticipated across the BP One supply base this year. “Many suppliers get that integrated right into their back end ERP systems, although those that don’t have ERP get the information on a PC via a browser.” It’s impressive. And according to Jenkins it’s all home grown. “Corporately, for the future Caterpillar has bought into i2 Technologies for total global order fulfilment. But for this project we used Microsoft Developer tools including NT, Site Server, SQL Server and MS Office Professional.” What about return on investment? “It’s very difficult to get your arms around ROI,” says Jenkins. “But I can tell you that when we developed our plan we put an investment analysis together and estimated the value of improvements on inventory, downtime and quality. Caterpillar has a tendency to hold you to that. While I won’t give you figures, there is absolutely no question that the results of the implementation of our logistics strategies have been excellent: the process improvements we made have more than paid for the £25 million we invested over the two years. “For example, in 1997 when we first started on the journey to Class ‘A’, the Leicester plant built 25% of machines complete, the other 75% were stored off-line awaiting retrofit, with the obvious consequences on quality and reliability. Today, 98% of machines are built complete, because the right material is in the right place at the right time. In 1997 we didn’t even measure our machines launched to plan so we couldn’t guarantee on-time delivery. Today 99% of machines are launched on the day we said we were going to launch them, ensuring that we are able to deliver on time.” The new figures speak for themselves. One of the toughest measurements to achieve was Bill of Materials (BoM) accuracy. With 12,000 active part numbers and 16,000 actual, BoM accuracy was around 40%: it’s now 99.9%. “On top of that our DRF (dealer repair frequency – the measure of average returns within the first 1,000 hours of operation) has improved hugely. They’ve fallen from four and a half to just two today – the industry average is three. It’s a direct result of quality material being available to ensure machines are built complete.” Jenkins explains that it’s an ongoing picture of process change and improvement. “The more work in progress (WIP) you have in the system, the more it slows down your processes. Our plan is to get from where we are now, at firm orders 20 days ahead, down to five. We’ve got to streamline our supply chain and our suppliers’ processes further to do that. If we can streamline WIP, we can be even more flexible and responsive to our customers.” Caterpillar is not alone in benefiting; Jenkins insists that the benefits have been passed right down through the supply chain. “Many of our key suppliers also supply our competitors and others, and we’ve helped them to improve their processes and deliver better value to them too. It’s helped them improve their WIP and throughput, and also their inventory turns.” And he adds: “They are benefiting from improved control, reduced shortages, reduced space requirements and reduced inventory. One supplier has seen its inventory turns improve from 16 in 1997 to 50 in 1999 with more improvements anticipated.”