Creating High-Value Supply Chains

Heavy-equipment manufacturer Caterpillar Inc. bounced back from the recession in a big way. Driven by increased demand for mining equipment, fourth-quarter profit more than quadrupled to $968 million, and revenues rose 62% to $13 billion over the year-ago period, the company reported on Jan. 27. The gains led to the type of production ramp-up that is known to put major stress on supply chain operations.

But as the recession began winding down, Peoria, Ill.-based Caterpillar embarked on a sourcing strategy that allows customers to order from "lanes" with readily available options rather than responding to customization requests as they occur. The change has reduced the complexity of the company's supply chain and resulted in fewer disruptions, says Frank Crespo, the company's vice president of global purchasing. "It has toned down the energy level needed to work the supply chain, so we're less reactive and more proactive," Crespo says.

The success of the program helped Caterpillar earn a spot in 2010 on Gartner Inc.'s top 10 list of industrial supply chains. The list was part of an annual report published by AMR Research, which Gartner acquired in 2009, that ranks the top 25 supply chains primarily based on Fortune Global 500 companies.

This is one of several "lean sites" where agrochemicals producer Syngenta sends chemicals reaching patent expiration. The sites are heavily focused on lean manufacturing principles to drive down inventory and production costs.
Photo: Syngenta
So what qualifies a company as a center of supply chain excellence? The Gartner rating system is 50% based on metrics, including return on assets, inventory turns and revenue growth. The remainder of the score takes into account subjective evaluations. The top supply chains typically have moved to a demand-driven model, says Paul Lord, a Gartner AMR research director who covers the chemicals supply chain. That means moving away from only a supply focus to thinking more about customer value and developing capabilities to plan, sense and shape customer demand, Lord says.

One of the key attributes of a demand-driven supply chain is the use of "value-chain segmentation," according to Gartner AMR supply chain research director Jane Barrett. A value-chain segmentation framework bases supply chain responses on how customers interpret value and cost and complexity issues. AMR cites Caterpillar's lane strategy as an example of segmentation because of the company's effort to separate products into standard options that it stocks through custom build-to-order machines.

Fast Lane to Success

Caterpillar began its lane strategy about one year ago to improve its ability to meet customer demand, Crespo says. The system consists of four ordering lanes that serve a variety of infrastructure equipment models, including excavators and earth-moving machinery. Caterpillar provided information to its dealers specifying what options are available in each lane. The first lane is a standard model with basic options. Each subsequent lane offers a wider array of customization choices with different lead times, Crespo says.

Previously, the company grappled with its ability to forecast because of the complexity associated with some customer orders. The lane strategy provides a "playbook" that Caterpillar now uses to communicate to its dealer network and end users, Crespo says. "Having that spelled out and communicated succinctly through different parts of the supply chain, everyone can now plan in a different way, and we can synchronize in a more collaborative way with a higher success rate," he says. Since rolling out the strategy, Crespo estimates Caterpillar has tripled the number of end-user orders coming through the first lane.

Another critical measure of supply chain excellence is how well companies collaborate with their business partners, Barrett says. During the past summer, Caterpillar reached out to approximately 500 key suppliers globally with face-to-face meetings to discuss ways they could improve their partnerships, Crespo says. The companies pored over forecasts and discussed any potential issues, such as capacity constraints or the need for additional capital investments. "Although that process may sound fundamental, a lot of times companies, I found, have been at too high of a level or there's too much assumption in communications, as opposed to digging deeper, going more granular and getting a synchronization part by part, build material by build material, to make sure there's not going to be a disruption or challenge down the road," Crespo says.

Shift to 'Sourcing Organization'

"We started to view ourselves as a sourcing organization as opposed to an internal manufacturing organization."
-- John Riley, leader of Syngenta's North American supply chain
Some of the more successful manufacturing supply chains have become integrated with the manufacturing operations to improve alignment with companywide goals, says Lord. About six years ago Swiss agrochemical manufacturer Syngenta AG set out to redefine how the company views itself internally through a sourcing initiative. "We started to view ourselves as a sourcing organization as opposed to an internal manufacturing organization," says John Riley, who leads Syngenta's North American supply chain. Gartner recognized the company's efforts by giving it the top supply chain ranking in 2010 for a chemicals manufacturer.

Syngenta evaluated the role of each active ingredient manufacturing site and defined production roles for each facility based on where a product stands in its life cycle. The dedicated manufacturing sites ensure the plant is aligned with the unique needs of each product type. So Syngenta manufactures new products at designated sites and once those products are established in the market they move to "low-cost receiver" facilities, Riley says.

When a product reaches market maturity or patent expiration, the company either outsources production to a third party or moves the manufacturing to a "lean site." The mature product sites focus on lean manufacturing concepts to drive costs out of the production. Since 2007 Syngenta has achieved more than $10 million in cost savings related to continuous-improvement suggestions by operators and maintenance technicians, Riley says.

Syngenta also developed a system similar to customer relationship management models for its suppliers. The partnership involves collaborating to help manage risk for both stakeholders, Riley says. For example, Syngenta developed certain value-added services for key suppliers, including technical assistance and training in safe handling procedures for hazardous chemicals and special financing arrangements for small vendors, Gartner noted in its assessment of the company.

"It's about recognizing the risk-management aspects both for the supplier and ourselves as well as ensuring that as we go through the tough times that both sides are looking for a win-win solution as opposed to that win-lose solution that you often see in supplier/customer relationships," Riley says.