Executive Briefings

SmartOps Creates a Model Inventory Plan for Caterpillar

In 2001, Caterpillar's Building Construction Products Division (BCPD) initiated a project to reduce order-to-delivery response times to dealers and end customers, while also reducing cost and inventory. Faster, more predictable product availability could be a key source of competitive advantage for Caterpillar. But to plan inventory levels 26 to 52 weeks in advance required millions of inventory decisions driven by thousands of components, subassemblies and finished product configurations, hundreds of stocking locations across the supply chain from suppliers to dealer locations, and these decisions all had to be correct.

According to Dave Alberti, advanced pricing and scheduling analyst for Caterpillar in Clayton, N.C., the project started by assessing opportunities for improving the supply chain for backhoe loaders. The project then progressed to inventory analysis to optimize inventory to support current and future product availability objectives. A Six Sigma team assessed opportunities for improving the supply chain for backhoe loaders and for gathering and analyzing critical data.

The team concluded that BCPD did not have a comprehensive analytical capability for optimizing total chain inventory, given availability targets, supply chain constraints, and multi-stage supply and demand variability. They also realized that the capability to dynamically plan and optimize total chain inventory is critical to the goals of improving availability while reducing inventory.

The team decided to implement SmartOps Multistage Inventory Planning and Optimization (MIPO), a solution for solving time-varying, complex stochastic inventory optimization problems. By using MIPO's modeling framework, BCPD gained the flexibility to include service times; lead-time variability; time-varying inputs, including capacities, forecasts and forecast errors; different review periods and lot-size constraints. With MIPO in place, the team developed a practical implementation plan for the backhoe loaders supply chain to limit financial risk, reap early rewards, change and align mindsets and build trust and cooperation among divisions.

BCPD has realized significant, measurable benefits by implementing the MIPO recommendations and ongoing targets to include:

• Reduced total chain inventory: An initial recommendation to actually increase overall component inventories by 22 percent on a weighted average basis resulted in a change in individual components inventory ranging from -30 percent to +50 percent at various points across the supply chain. At the same time, dealer and plant inventories were reduced significantly, resulting in a total inventory reduction of 16 percent.

• Improved dealer and end customer satisfaction because of improved product availability: BCPD decreased the mean time for orders with identified end customers by 20 percent and the standard deviation by 50 percent. BCPD is now a leader in product availability within Caterpillar and in comparison to key competitors.

• Increased sales: BCPD has increased orders, particularly those dependent on short lead times.

SmartOps MIPO software has played a central, critical role in the success of Caterpillar's order lead time stabilization and improvement project, says Alberti. "The outstanding results for BCPD are now being replicated at other locations and divisions throughout Caterpillar."

In 2001, Caterpillar's Building Construction Products Division (BCPD) initiated a project to reduce order-to-delivery response times to dealers and end customers, while also reducing cost and inventory. Faster, more predictable product availability could be a key source of competitive advantage for Caterpillar. But to plan inventory levels 26 to 52 weeks in advance required millions of inventory decisions driven by thousands of components, subassemblies and finished product configurations, hundreds of stocking locations across the supply chain from suppliers to dealer locations, and these decisions all had to be correct.

According to Dave Alberti, advanced pricing and scheduling analyst for Caterpillar in Clayton, N.C., the project started by assessing opportunities for improving the supply chain for backhoe loaders. The project then progressed to inventory analysis to optimize inventory to support current and future product availability objectives. A Six Sigma team assessed opportunities for improving the supply chain for backhoe loaders and for gathering and analyzing critical data.

The team concluded that BCPD did not have a comprehensive analytical capability for optimizing total chain inventory, given availability targets, supply chain constraints, and multi-stage supply and demand variability. They also realized that the capability to dynamically plan and optimize total chain inventory is critical to the goals of improving availability while reducing inventory.

The team decided to implement SmartOps Multistage Inventory Planning and Optimization (MIPO), a solution for solving time-varying, complex stochastic inventory optimization problems. By using MIPO's modeling framework, BCPD gained the flexibility to include service times; lead-time variability; time-varying inputs, including capacities, forecasts and forecast errors; different review periods and lot-size constraints. With MIPO in place, the team developed a practical implementation plan for the backhoe loaders supply chain to limit financial risk, reap early rewards, change and align mindsets and build trust and cooperation among divisions.

BCPD has realized significant, measurable benefits by implementing the MIPO recommendations and ongoing targets to include:

• Reduced total chain inventory: An initial recommendation to actually increase overall component inventories by 22 percent on a weighted average basis resulted in a change in individual components inventory ranging from -30 percent to +50 percent at various points across the supply chain. At the same time, dealer and plant inventories were reduced significantly, resulting in a total inventory reduction of 16 percent.

• Improved dealer and end customer satisfaction because of improved product availability: BCPD decreased the mean time for orders with identified end customers by 20 percent and the standard deviation by 50 percent. BCPD is now a leader in product availability within Caterpillar and in comparison to key competitors.

• Increased sales: BCPD has increased orders, particularly those dependent on short lead times.

SmartOps MIPO software has played a central, critical role in the success of Caterpillar's order lead time stabilization and improvement project, says Alberti. "The outstanding results for BCPD are now being replicated at other locations and divisions throughout Caterpillar."