CATERPILLAR CASE

This case has been produced for assessment purposes only. It has been sourced directly from the articles indicated within the bibliography, which are available in the public domain. It contains a number of direct extracts and quotations, which have been referenced within the text.

The views and opinions expressed within the case are those of the authors of the reference material and are not necessarily the views or opinions of CIPS or the companies mentioned. The case may not reflect the actual situations of the specific companies mentioned.

This case was written in May 2015 and may not reflect the current situation. Candidates are advised to base their answers on the situation depicted in the case.

The Supply Chain

Caterpillar's machines are distributed principally through a worldwide network of dealers, 48 located in the USA and 130 located outside the USA, serving 182 countries and operating 3,454 retail outlets, including 1,202 dealing with rentals. Additionally, some of Caterpillar's subsidiaries operate their own dealer networks: Perkins Engines Company has 100 distributors located in 180 countries, Caterpillar Northern Ireland Limited has 264 distributors located in 145 countries, and the MaK brand has 19 distributors located in 130 countries.

Caterpillar sets tight standards for its dealer network and collaborates with it extensively to ensure that customer expectations are met. The dealers are responsible for not only selling machines to the end customer, but also for servicing machines that have been sold. To support dealer service operations, Caterpillar operates a large service parts business that warehouses and distributes components to dealers and customers. Caterpillar customers demand quick service to ensure that, if their equipment needs repair, they are able to get back into service as quickly as possible. As a result, Caterpillar's parts business maintains a large inventory to ensure high service levels to the field.

Because of global demand, Caterpillar produces its products in facilities distributed around the world. The company's general strategy with regard to machine production is to produce its products on the continent where they are to be sold. However, some of its larger and more specialised products are produced in a single location because of the level of capital investment required.

Shunko et al (2014) explain how, in 2010, Caterpillar unveiled a dramatic new strategy for pricing and marketing its BHL series of small backhoe loaders, one of the most popular products within its Building Construction Products (BCP) division. This new strategy has radically changed how BCP markets and sells its small machines, focusing the bulk of Caterpillar's customers on a few popular models.

Previously, BCP offered customers an almost unlimited variety of products, built-to-order, priced according to an itemised price list. This maintained very high customer satisfaction, but greatly complicated BCP's supply chain and service operations. With such broad demand, dealers had to hold large amounts of inventory to give a representation of the many possible choices. Moreover, Caterpillar had to maintain documentation and provide service for an extremely heterogeneous group of machines, driving up its costs. Finally, as demand was fragmented across thousands of configurations, forecasting was problematic, leading to frustration among Caterpillar's supply base.

Caterpillar's BCP division saw great potential for a rationalisation of its BHL product line. But there were three crucial questions that needed to be answered before such a new strategy could be devised and implemented:

1. How would customers react to a product line reduction? Answering this question required an understanding of how customers value different machines.

2. How much could be saved by rationalising the BHL product lines? Answering this question required an understanding of the cost of complexity.

The answers to these two questions could help Caterpillar answer the ultimate question:

3. How should the new BHL product line be configured? Specifically, which machines should be offered and at what prices?