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 {complink 2470|IBM Corp.} 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.

14 comments on “The CAT in the Town

    August 24, 2012

    Maybe I am just old fashioned, or just plain old, but I tend to favor companies that build physical stuff like Cat, John Deere and Emerson.  These companies make money by building useful things that positively impact people's lives and I can understand that.  Making money on financial derivatives or spread betting is not my cup of tea.

  2. bolaji ojo
    August 24, 2012

    Flyingscot, Brick and mortar companies have similar challenges as companies that make whati I call vaporware. Look at Hewlett-Packard. It is reeling now because it didn't change as quickly as consumers wanted. Caterpillar is in a business that doesn't for now require the same half way turn. Let's hope it keeps it up.

  3. stochastic excursion
    August 24, 2012

    One thing about brick and mortar companies making tangible goods is that they require skilled labor of the roll-up-your-sleeves variety.  Caterpillar just ended a four-month contract dispute with its machinists union.

    The end result is seen as a total win for Caterpillar's management, with the union achieving no concessions, and workers swallowing a six-year wage freeze and absorbing all increases in health care costs.  Observers point out that Caterpillar has seen stellar profitability and significant bonuses were reported for senior management.  Whichever way you look at it, that Caterpillar survived the strike and still has roughly half of its manufacturing facilities in the United States is good news.

  4. dalexander
    August 24, 2012

    @Stochastic, good comment. In 1954 Cat introduced their D9 bulldozer. They have upgraded it several times and the latest changes incorporated armor so it could go into neighborhoods under live fire and knock down thousands of homes. That's right. The D9 was used by Israel to mow down private Palestinian homes under live fire. It was also used to deforest Jungle areas in Viet Nam. It is a shame that good ideas and good products can be used in both positive and negative ways depending upon who possesses the technology. That is the world we live in.

  5. dalexander
    August 24, 2012

    @Flyingscot, I like the “reach out and touch” a brick business to. Have you noticed that fewer and fewer tech companies existing on the Internet alone, actually have a phone number listed under “contact us?”.

  6. _hm
    August 24, 2012

    CAT in town is quite tough. If you do not agree with top management, they easily take drastic decision. One example is they closed entire plant in London, ON, Canada for wage dispute. That was quite a shock.


  7. ahdand
    August 25, 2012

    Yes exactly _hm you should not try t over power what the top management says you to do so but you can always present what your findings are to them so they can consider them atleast in the future.

  8. _hm
    August 25, 2012

    @nimantha: CAT managment asked all workers to take a half salary! That is not tough but rather harsh management. Now, you can have feeling of other side.

  9. Taimoor Zubar
    August 27, 2012

    Interesting post, Doughlas. Having a decentralized setup with local suppliers and manufacturing operations has its own benefits but there are several disadvantages to this approach as well. For instance, if you're a global organization you can take advantage of the cheapest sources of supply across the world and have your manufacturing in areas with cheapest labor costs and other resources. This is the way most other global companies have been operating – particularly the auto industry. Don't you think Caterpillar is losing out on this aspect?

  10. Taimoor Zubar
    August 27, 2012

    @Bolaji: I agree with you. Although Caterpillar's business model may be successful right now, it does not mean that it will continue to thrive like this over the years if it doesn't change or innovate. The industry dynamics may not remain constant at all times so I think Caterpillar will be required to bring about a change in it's business model at some point in time.

  11. SP
    August 27, 2012

    Caterpillar has opened up a design office here in India. They were outsourcing earlier but I guess they want to operate directly now.

  12. Barbara Jorgensen
    August 27, 2012

    As Douglas points out, Caterpillar has a pretty good reputation for supply chain innovation. I believe they are a client of one of the cloud-based supply chain services sites and was an early adopter of this offering. The visibility Catperpillar is able to achieve is a big factor in its success.

  13. ahdand
    September 22, 2012

    _hm Yes I agree with you on it. This is bad management. I feel they have overlooked their employees and their duties just to make the boad secure and satisfied.

  14. _hm
    September 22, 2012

    @Nimantha: Yes, that was not very sensitive management judgement. This is not way to become great organization.


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