The CAT in the Town

Every once in a while, you find a company that is not high-tech or Web-based and whose products are not downloadable. Most people are familiar with the term "brick and mortar" for a company with a real, physical presence on the streets where we all live. If a brick-and-mortar company is doing well, then most likely it has a captured market, a very good product line, or a service that is in high demand.

I recently read a Time magazine article (subscription required) that made me nostalgic, happy, and a bit more at ease in my almost virtual world. For more than 85 years, Caterpillar Inc. has been making sustainable progress possible and driving positive change on every continent. With $60 billion of 2011 revenue, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. It is also the parent company of Caterpillar Financial Services, Caterpillar Remanufacturing Services, Caterpillar Logistics Services, and Progress Rail Services. It is on track to post $70 billion of revenue for this year, and it has a very impressive history on the stock exchange.

Of particular interest to me is Caterpillar's supply chain statistics. It has more than 2,000 suppliers in its home state of Illinois. Many of these support companies are doing very well designing and producing customized goods for Caterpillar. In every Caterpillar territory around the globe, the support-your-local-supplier policy is in play. As a result, the company has gained a firsthand understanding and appreciation of the needs of each local market. This allows it to react quickly with product changes and services. Sourcing locally has the added benefit of energy savings via reduced transportation and handling requirements.

The idea of sourcing local materials, labor, and transportation is summed up in the term "localnomics." We are seeing more companies add to their revenue streams by buying not just from their suppliers, but also from their customers. This round-robin supply chain phenomenon is getting more attention in business strategies. It is easy for IBM Corp. (NYSE: IBM) to use such a strategy, because it sells a lot of products to small and midsized companies. It created an online network that facilitates the sourcing of many of the products it needs from its own customers.

Caterpillar, Dell, AMD, and 13 other US companies are participating in IBM's Supplier Connection project, which was launched in March. The companies have booked tens of millions of dollars in new business from small firms through the project. This raises the waterline for everyone, and as the saying goes, a rising tide lifts all boats. In fact, the Time article mentions a study by the Center for an Urban Future that found "small businesses that became suppliers to multinationals saw their employment go up, on average, 164% within two years." When that kind of growth is evident, the spiraling effect soon follows, and the overall economy is improved.

When I was a kid playing in the sandbox, I sculpted mountains, valleys, quarries, riverbeds, and bunkers with a wonderful fleet of heavy equipment vicariously operated by little green plastic soldiers. I didn't take much notice of the decal on every yellow tractor door, but I know for a fact that Caterpillar was the brand of choice when parents had to buy the best gift ever for their own little crews of heavy equipment operators.

Localnomics will be the trend as foreign wages go up, transportation and fuel costs rise, and doing business abroad becomes riskier. Having a very close working relationship with local suppliers will help minimize the counterfeiting problem with components by fostering a shared product responsibility. Where green technology is concerned, co-developing with a trusted supplier will become a norm, because all parties will be moving toward promoting products that ensure a safer and healthier environment.