Cater Tractors Case Study
“By 2010, we think 75 percent of our sales will be outside the U.S. For several years, it's been 50-50. As our percentage of sales outside the U.S. grows, so will out outsourcing for specific products to sup-port this globalization. e-BI's system and support organization will allow us seamless conversion.“
Paul Flimes - Purchasing Director, Caters Tractor, Excavation Division
(Please note that due to the competitive nature of this product line, the actual product and company names have been substituted)
For more than 80 years, Caters Inc. has been mak-ing progress possible and driving positive and sus-tainable change on every continent. With 2008 sales and revenues of $51.324 billion, Caters is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. The company also is a leading services provider through Caters Financial Services, Caters Remanufacturing Services, Caters Logistics Services and Progress Rail Services.
During the 1980s, Caters appeared to be another rust-belt producer en route to demise, as had already happened with competitors International Harvester, Allis-Chalmers, and Euclid. With these once-prime competitors gone, Caters realized it was in danger of being knocked from its perch as world leader by non-U.S. companies from emerging econo-mies. Like many U.S. companies, it had operated for dec-ades in an ideal environment in which demand exceeded capacity.
But by the 1980s, higher interest rates and a pummeled dollar combined with closing mines and fewer highway construction projects. These cir-cumstances exposed weaknesses such as costs that were too high and the threat of competition from companies such as Japan's Komatsu Ltd. and Hitachi. Labor issues, such as the June 1994 strike and a five-and-a-half-month strike in 1991-92, led Caters to contracts with outsourcing companies. Caters‟s expanding outsourcing strategy has by now become an integrated approach to global competitiveness but has not, the com-pany asserts, had material impact on manufacturing. Asian countries represent the fastest growing area for outsourced resource, with Latin America and Central Europe expected to be strong growth areas for Ca-ters in the next decade.
Paul Flimes, Caters's Excavation Division Purchasing Director, says that the company‟s biggest advantage today is their worldwide distribution organization, which enables delivery of parts and service anywhere in the world within 24 to 48 hours. Flimes maintains that distribution - meaning logistics such as the distribution of after-sales, product-application, and service information, and the distribution of financing - will be what separates the winners from the losers in the global econ-omy.
Caters has spent several million dollars to install electronic communica-tion processes connecting all its dealers, factories, and distribution cen-ters around the world. Thus, a mechanic working on one of the com-pany‟s brand-new products in Calcutta will be able, through the interac-tive computers in the shop, to communicate directly with Caters parts distribution or service organization. The next step Caters will take is that each of these products will have a built-in capability to communicate to the dealer or to the factory how it's doing that day.
Caters‟s trend toward outsourcing began in the early 1990‟s, almost 20 years ago, in response to labor disputes. But Caters recognizes that a business cannot simply define outsourcing as a means to pay lower wages. Cost reduction, chasing talent globally, aligning product life cy-cles to critical natural resources all have made outsourcing the silver bullet for meeting financial challenges and achieving business outcomes.
Caters‟s Flimes‟ cautions companies who approach outsourcing with the common justification based on the price elasticity of labor. “This is short-sighted and just one of the conclusions we have seen over our 20 years evaluating outsourcing practices,” Filmes said. “There is a growing body of research that shows that there are three attributes one could use to predict where the next outsourcing geographic hub is going to emerge:
- Investment in technology, including a pro-government stance on new venture development
- Investment in higher education
- Wage inelasticity across mature industries
Simply put, and massively simplifying what academicians have spent years looking at, the wiring of the next India, Inc. is well underway and can be seen by focusing on investment in new technologies and new ventures in conjunction with investment in advanced education.”
Caters, sophisticated in its analytical approach to the economies of out-sourcing, sought a business alliance that could accurately, efficiently, and profitably help manage the Caters supply chain.
“In a flat world,” Flimes said, "it is critical to realize that you're most likely winning or losing business based first and foremost on the per-formance of your supply chain.”
Caters's well-articulated processes for selecting outsourcing partners begin with four steps put in place just to determine IF the company needs to outsource. If a component is in a tempo-rary strained condition, such as labor conflicts and temporary cost adjustments, the company will not consider outsourcing. Selection of outsource resource occurs after the following qualifi-cation procedures:
Step 1: Identify which components of your business are candidates for outsourcing
Step 2: Determine whether your needs in these areas are temporary and warrant outsourcing
Step 3: Try to identify what it currently costs to operate these areas
Step 4: Ensure that choosing the outsourcer is a cost effective and viable solution
Step 5: Interview several "outsourcers" before making a selection
Step 6: Prepare a written contract and review with legal counsel if you feel it is necessary. Ensure that the contract has performance metrics which outline the level of service or production ex-pected of the outsourcer
Step 7: Be willing to negotiate as needed
Step 8: Schedule regular meetings with those who work outside the company
Step 9: Review performance on a regular basis.
As Caters worked through the qualification and selection process, it identified competency in supply chain management as a major part of the company‟s commitment to product quality. Caters realized that its complex, global supply chain operations is the platform on which future growth would launch. “e-BI not only presented, but demonstrated, their supply management software here at Caters. It was impressive”.
We could see that it would give us a very easy, effective, method to look at ALL the processes at anytime, anywhere,” Flimes said. “We were also impressed with their almost fanatic, detail keeping with the Sigma Six approach, which is the same approach we integrate within Caters,” Flimes continued. “Once we understood their system, it was a snap to integrate their manage-ment processes with our own.
This was unique when we compared them with other outsourcing management firms. e-BI has the essential elements to manage a complex supply chain, including the ability to measure how accurately, efficiently and profitably products can be produced. What is impressive about e-BI is that they "get-it‟.”