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Caterpillar Expansion Final Project

Caterpillar Expansion Final Project Kendra Bellamy Southern New Hampshire University March 22, 2020

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Caterpillar Expansion Final Project Introduction Caterpillar (CAT) has been a long standing leader in the manufacturing industry and has continued to evaluate the way they support their clients with relationship to the management of their supply chain. “In 2005, Caterpillar realized that its factories was lacking in its efficiency and productivity. So Caterpillar launched a major effort – the Caterpillar Production System (CPS) – to raise its manufacturing game (Ranjanis, 2013).” CPS was implemented as part of factory improvement but it also supported the quality and supply chain’s success. Material Requirement Planning Systems Material requirement planning (MRP I) is a key process within managing extensive supply chains such as those of CAT. This process is defined as “a method used for the purpose of calculating the components and the materials, which in turn will be needed for the sake of making a product (n.d).” CAT utilizes material resource planning (MRP II) which “is an extension to MRP I that goes far beyond planning and acquiring the materials needed for production, but includes every other resource related to the successful operation of a manufacturing plant, including people and machinery (2020).” Through the combination of CPS and MRP II the company has been able to synchronize supply-and demand plans which has helped to boost service levels as well as assist in delivering defective-free products. This process in turn reduces waste and also aids in decreasing financial loss. It also assists in properly forecasting customer needs while controlling the quality of the product. Forecasting, Capacity Planning, and Scheduling Within the CPS initiative, Caterpillar’s strategy in its utilization is centered on “product design, demand management, quality management, process planning, supply chain/materials management which includes outsourcing and procurement, lean systems and capability building

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Caterpillar Expansion Final Project and training (Ranjanis, 2013).” Through this understanding leaders of the organization also “learned that better forecasting and integrated planning capabilities yield a nimbler, more costeffective, and more competitive engine-manufacturing business.” By focusing on items such as forecasting, capacity planning, and scheduling, CAT was able to reduce inventory levels, manufacturing throughput and bring down the amount of time that their employees spent at work. These operational improvements are continuing to bring down organizational costs while increasing revenue. As leaders began to identify flaws in their processes they implemented plans along with the proper usage of MRP to streamline their production. “Caterpillar could reconnect its machining operations with the assembly schedule. Now, information about assembly demand, current inventory and the operational capabilities of each machining area is loaded into the application (n.d).” Through these processes and implemented technologies they now save between $20-25 million annually in operations and has given them significate recognition globally. Current Planning Functions CAT has since focused on supplying custom needs to their customers’ globally and has utilized these new processes to improve business relations with their partners. Keying in on their goals to make energy more accessible these processes will allow them to go into areas that depend heavily on imports and give the ability to become more self-sufficient. Using the current factory planning, scheduling, and forecasting method they are also able to incorporate the just-intime (JIT) procedures to balance material plans and supplies. This will allow them to quickly identify bottlenecks and minimize the supply/demand changes while keeping delivery service timelines. Understanding all the aforementioned these current planning functions will ensure that

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Caterpillar Expansion Final Project they are able to push out services globally through the partnerships they have established. “That momentum showed up in Caterpillar’s results. Domestic sales surged, helped by stronger sales of equipment for construction and energy (Markman, 2018).” They met and exceeded the 3.7% increase in growth in 2018 doing exceptionally well in areas such as Europe and of course the United States. Expansion Facility Location As leaders with Caterpillar Inc. aim to bring energy to communities throughout the world there are many factors that they must consider. Is there a need in the chosen area? What are the political relations affecting that region? What policies and laws must the organization consider prior to doing business with selected country? Are there issues with corruption that the Caterpillar should consider that may affect business? These are key factors that should be considered prior to expanding into territories outside of the United States. With respect to the factors previously mentioned, we can use the factor rating method (FRM) to decide what area would be most appropriate to expand the business. When FRM we can determine the weight of each factor with all of them totaling 1.00. Starting with the highest rated factor, there is the actual need for services. When looking to expand its energy services CAT should look into areas that look to imports of its energy needs. We ranked the need of services .50 because it is imperative to ensure that the organization is able to go into a new area and be of assistance which will increase its profitability. The next factor is political and government relations with the rank of .25. With Caterpillar being a United States based company it is imperative that relations with the perspective country and the US are amicable. There are also many places where countries are dealing with threats of the surrounding areas, which can cause a strain on business. There are many issues stirring throughout the world and Caterpillar

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Caterpillar Expansion Final Project must ensure the safety of both the business and its employees. The next factor holding a weight of .15 would be the policies and laws of the area in which CAT plans to move into. Moving into territory outside of the host nation of an organization brings many new policies and laws that they must adhere to. Some of these factors may come at a huge cost to the organization if they are not incorporated properly. Non-adherence with another governments rules can affect more than the business, it can also cause issues between the two governments. Lastly is corruption with a weight of .10. With so many allegations of corruption flowing through the highest positions in the US it can severely tarnish the name of CAT and as well disrupt relations with the expansions. When taking all factors into consideration, Caterpillar Incorporated should look to expand into South Korea. With respect to South Korea “they are one of the United States’ most important strategic and economic partners in Asia (2019).” Though the threat of North Korea is a threat that still needs to be constantly monitored relations with South Korea would allow Caterpillar to be of assistance with support to the energy production. Leaders of the organization would have to deal with a different culture of people, along with many new policies and laws however, with an already established relationship it would be more effective for the organization to adhere to these changes. South Korea is also a traditional country that has strict regulations regarding corruption and though corruption is not nonexistent, Caterpillar will have to work to ensure that they do their part in remaining an upstanding company. Factor Rating Method (FRM) Russia vs. South Korea

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Caterpillar Expansion Final Project Bottlenecking Issues “Miscommunication and poor implementation identified as contributing factors to bottlenecks in supply chains (GTS, 2019).” Issues with bottlenecks can range from inefficiency, technology systems issues, human fault, and poor communication. In an effort to eliminate these problems CAT must ensure that there are both efficient workspaces as well as an enthused and informed work staff. Compliance rules must be understood factory wide and management must have open communication and aim for continuous improvement. Prior to the implementation there should be a team in place working effortlessly to identify these issues and work proactively to ensure that they are able to address these factors as the arise. With supply chain management incorporating many different aspects including items such as material management, quality, logistics and transportation there are many different reasons where there could be cause for bottlenecking even outside of the production of equipment. In order to avoid these issues the organization has to have the proper systems in place to analyze the production and delivery of their products. When a customer orders a particular product and has a time expectation, the company must not only track the production of this order but keep accurate account of other orders and how to best get all products out in a timely fashion. Organizations must have the technology systems as well as individuals that are extensively trained on how to interpret data analytics. They must also be able to take that data and forecast for future client needs. McKinsey & Company Operations explains that these factor are the major challenges restraining the supply chain. “Supply chain managers, even those with a high degree of technical skill, have little or no experience with the data analysis techniques used by data scientists and most companies lack a structured process to explore, evaluate and capture big data opportunities in their supply chains (2016).” To reiterate, Caterpillar must have a full range

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Caterpillar Expansion Final Project system in place to ensure they can track materials, production, and delivery. This will also help them to forecast efficient timeframes when preparing for future production and delivery of their equipment. Transportation Constraints Caterpillar continues to work with dealers in the local areas that they service and with an expansion into South Korea they would rely mostly on the partnerships they have built in their Asia-Pacific region. Much of South Korea has been built to support freight via truck, railroad, and air. Caterpillar however must ensure they understand and adhere to the policies of international transport set by the South Korean government. The constraints rely heavily on these policies and the costs that ensure these requirements are met. In an effort to minimize these constraints effect on business, CATs logistical department will have to make sure that they do the proper cost analysis and build those relationships with logistical entities in South Korea to give way to a smoother transition. It must also be understood that with transportation, especially internationally, many of the issues are inevitable. “International transportation is dealing with ongoing challenges of tighter capacity including: import space and export space tightening up and a hot drayage market causing capacity constraints to volatile air freight rates (Bailey, 2019).” Caterpillar will have to account for longer wait times at port locations as well as take into consideration particular holidays that will cause for an influx in things such as retail sales. Along with this, there must be consideration taken into the rates that different carriers may have for transport and when these costs fluctuate. Again, Caterpillar must be proactive and do the research to notate different trends throughout the industry as well as understand the daily shipping capacities of the carriers that they may use (Bailey, 2019).

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Caterpillar Expansion Final Project Push or Pull System When trying to understand what type of manufacturing and production system Caterpillar should adhere to, company leaders must understand the difference between push and pull systems and incorporate the chosen system efficiently. “In a push system, units are produced based on forecasted demand and then pushed into the market, whereas a pull system uses actual demand (n.d).” In an effort to minimize waste, along with the extensive cost and work that it takes to manufacture their products CAT has incorporated a pull system process which is the backbone of the Caterpillar Production System (CPS) which was briefly discussed earlier. CPS implementation created a remarkable transformation for Caterpillar and held true as its implementation helped them to successfully emerge with positives sales and revenue through the recession in 2009-2010. As the organization prepares to open the new facility in the South Korean province, they should continue to use the pull system that they have already incorporated with their already established processes. They have moved to a build-to-order procedure that has significantly driven down the costs of overstocking and waste of materials not being utilized. Caterpillar prides itself on providing quality products that appeal to their customer’s specific needs. In the business of energy, especially in areas outside of Caterpillars host country, there is no one size fits all product that can be produced. As a result, the company must utilize their local dealers to work with leaders in the supported areas of South Korea to understand what product can best meet their energy demands. Once these needs can be identified and an agreement can be made Caterpillar can produce the product and services necessary. Also with the tracking systems utilized through Caterpillar, the customer is able to follow the production process to ensure that they are getting a quality product in a timely manner.

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Caterpillar Expansion Final Project Cost Savings Most organizations that are in the business of manufacturing want to ensure that they are maximizing their profits and when in the process of expanding, it is important that the area that they are expanding into will allow them to continue positive revenue flow. As Caterpillar (CAT) aims to expand its energy services into South Korea they should first do a complete assessment over the positives and negatives of moving into South Korea. We have covered risks associated with moving into the area but again it is important to notate how this expansion will affect the organization financially. Once a thorough review is conducted, it is important to make sure that Return on Investment (ROI) is made a top priority as it relates to services being extended to communities in South Korea. “Often times, manufacturers go several years without a comprehensive audit which results in obsolete processes, procedures and technologies (Dunn, 2020).” As CAT moves into another area it is very important that problems that have affected the company not be brought into the warehouse in a new territory. As we look at the regulatory guidelines of South Korea, it is important that procedures and processes not go against standards of this area. This can result in fines and tariffs from that country which counters the goal of saving costs. As the organization is looking over their processes, procedure and technologies they should also consider ISO 9000 Standards. These standards “are guiding principles for any manufacturing organization focused on consistently providing quality products, improving customer satisfaction and improving system processes (Dunn, 2020).” These particular guidelines will ensure that the clients can mitigate issues with quality as well as drive down the probability of consumers being unsatisfied with their services. If an organization continues to provide an unacceptable service this will cause for repayment to customers as well as drive them away. This is damaging to an organizations image as those same customers will ensure that they 9

Caterpillar Expansion Final Project warn others about the services they received. The goal is to bring in more customers not drive consumers away. It is also beneficial to engage counterparts and employees to gauge the workload and ensure that costs have not exceeded value (Coyne, Coyne, & Coyne, 2014). As leaders evaluate the work processes they can also look into cross-training employees which will drive down labor costs and make for more well-rounded employees. Encouraging employees to stay up-to-date on training and changes will also assist in bringing down the cost for waste and deficiencies. Some organizations also utilize this information to see if it would be more cost-efficient to outsource portions of services as some contract services may be cheaper than paying in-house employees. Customer Needs Caterpillar has always prided itself on superior products and services. As they implement cost savings techniques this will make for better quality assurance. When we look at ISO 9000 guidelines, the mission behind these is customer satisfaction. It focuses on ensuring quality is at the forefront of manufacturing goods. This allows the company to continually improve and strive to ensure they are releasing a quality product. The ISO 9000 family “that customers get consistent, good-quality products and services, which in turn brings many business benefits (2020).” With the suggestion of a complete assessment this could also include the suggestion of looking through the workforce and eliminating processes that may not be cost efficient for the organization. They can also utilize the assessment to identify what training may need to be put in place to ensure that the employees are optimizing their skills. As the work staff is relieved of stresses and properly trained, this will positively affect the products and services that the organization is providing. Also outsourcing particular processes could make for quicker

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Caterpillar Expansion Final Project turnaround time as it allows the organization to cut down on time that it may take for production as the staff is given more time to shift focus. Lastly, when the organization prioritizes ROI they will critically critique their processes and their products to ensure that they meet the standards that the organization has set. With CAT being known for their superior products and services their leaders have always made sure that customer needs are a priority. The more customers they can acquire or customers that return for their services will make for positive return on investment. Though the procedures that were suggested aimed for cost savings the organization must ensure that the implemented strategies do not compromise the reputation of the organization of its products. Location of Manufacturing and Warehouse As the organization looks to expand into South Korea there are benefits of having the warehouse in the same location as the manufacturing facility. The organization should “find a location that offers both convenience and proximity to customers as well as a carrier service, making the shipping process easier and faster for both your company and the customers (Mai).” By having the warehouse and manufacturing in the same location this will cut down on costs of storage as well as time it takes to get products to the customer. The organization will not have to create items and then have them moved to a separate location. This will also assist with inventory management. One thing that CAT has focused on is their inventory management system and with expanding into another global location the organization does not have to take on another burden with managing the inventory that they have on hand. Along with inventory if the consumer has an issue with services they are able to quickly get replacement services quickly.

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Caterpillar Expansion Final Project Quality Best Practice Managing Logistics Relating to Manufacturing As CAT moves into South Korea it is important for the organization to uphold the same quality which has made them the top-ranked company they are. In an effort to maintain their reputation they must ensure that they first build an atmosphere that promotes teamwork a...