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Many companies undergo some form of proactive supply-chain transformation. But sometimes they don't have a choice.
Call it "emergency action." That's how Yogi Suryawanshi characterizes the upheaval at Finning Canada that followed the company's failed enterprise resource planning (ERP) implementation.
Finning Canada is part of Finning International, one of the world’s largest dealers of construction machinery, parts and service from Caterpillar Inc. Total revenues are in the neighborhood of US$5.3bn, more than half of which is contributed by Finning’s Canadian unit. (Other divisions cover South America and the United Kingdom/Ireland.)
Historically, Finning Canada relied on Caterpillar for ERP-type processes, through the latter’s Dealer Business System. Available to nearly all Caterpillar dealers worldwide, DBS supported basic functions related to their selling of parts.
The time came, however, when Caterpillar decided to shift its focus from providing DBS as a service to the building and selling of machines and parts. The move required that dealers find their own ERP systems.
Finning Canada was among the first to move in that direction, according to Suryawanshi, the company’s general manager of supply chain. In 2008, after reviewing multiple options, it began implementing an ERP from Lawson Software (which was acquired by Infor in 2011).
What became a three-year implementation effort did not go smoothly. Upon launch of the new system in July of 2011, the company began experiencing issues related to parts supply, warehousing and distribution.
The problem wasn’t with the software itself. It was a matter of inadequate training and testing of the new system, Suryawanshi says. Warehouse workers weren’t up to date on the use of radio-frequency guns for scanning product, let alone able to tie the resulting data back to the ERP. As a result, the physical and transactional pieces of the supply chain weren’t in synch. The wrong parts were being purchased from Caterpillar, and showing up in the wrong locations. (Finning Canada has upwards of 50 warehouses and branches for parts stocking, including five of its own fully equipped distribution centers, and a sixth operated by a third-party logistics provider.)
Freight and emergency shipping costs, along with excess inventory expenses, escalated to an all-time high. The margin on service shop work orders contracted. What’s more, the impact on Finning Canada’s customer-service levels was devastating. Customer satisfaction plunged to below 40 percent. Millions of dollars in revenue were lost. A business that had consistently placed among Caterpillar’s top five sellers sank to the bottom five among 55 North American dealerships. The worst-case scenario had become a reality.
Suryawanshi joined Finning Canada in 2013, two years after the ERP’s go-live date, with the task of closing performance gaps in the company’s supply chain and improving the overall customer experience. He had no idea how bad the situation was. The problems extended well beyond a poorly executed ERP implementation.
The ERP debacle “identified inefficiencies of the supply-chain operations that were long due for improvement,” he says.
The outside world concurred. A Sept. 2013 report by Raymond James Ltd. said Finning’s Canadian operations “have become much more complex, and thus prone to error, as its mining business has grown over the years. Improving the related processes, parts flow, and overall asset utilization therefore represents a big opportunity to raise the dealer’s financial performance, in our view.”
Following a comprehensive scrutiny of processes, technology and personnel at all of Finning Canada’s locations, Suryawanshi and his team began searching for “the critical levers that would get us out of this crisis moment.” With every piece of the business up for review, it was tough knowing where to start.
The answer was people. “If you put the right people in the right seats first,” says Suryawanshi, “everything follows naturally.” Still, Finning Canada didn’t have the luxury of time, whereby it could execute a step-by-step plan that might stretch over months or years. Such was the difference between “transformation” and “turnaround” — the latter word better describing the company’s immediate plight.
Realistically, Suryawanshi had six months to get critical processes in order, at which point he would have “some breathing room” to enact sustainable changes throughout the supply chain. In all, it took about two years to stabilize key processes. The company ended up implementing some 50 optimization initiatives, addressing warehouse operations, inventory management, transportation, sales and operations planning, supply-chain analytics and technology.
Caterpillar was an essential partner in the effort. “They wanted it as much as we did,” says Suryawanshi. Finning Canada lacked tight control over how Caterpillar parts got into the dealerships. Integration between the two companies’ supply chains was lacking.
Finning Canada teamed up with Caterpillar to align the supply-chain and parts-stocking strategies of its own DCs with those of the supplier. Then it worked with its transportation side to create more efficient routings and speed up the movement of parts from origin to destination. (Finning Canada’s portfolio of Caterpillar parts numbers some 400,000 unique SKUs.)
A Sourcing Shift
Finally, Finning Canada began drawing on Caterpillar’s DC in Spokane, Wash. Previously, it had been relying on the supplier’s facility in Peoria, Ill., resulting in a five to seven-day lag in getting parts. In turning to the Spokane DC, which was much closer to Finning Canada’s biggest hub in Edmonton, Alberta, it was able to shave that time to under two days.
Bradley Gile, logistics center manager for Caterpillar in Spokane, says the facility was previously unable to fully support Finning Canada because it was devoted entirely to emergency orders. In 2012, it underwent a shift to servicing dealerships on a regular basis. Today, it distributes Caterpillar service parts for western Canada, the U.S. Northwest and Alaska, handling everything “from a nut and bolt to fully completed engine assembly, ready to be put into a tractor,” says Gile.
The Spokane center reached out to Caterpillar inventory-management and ERP experts at the corporate level to advise Finning Canada on how to clean up its ordering system. The goal was to eliminate the company’s heavy reliance on emergency shipments, Gile says, as well as smooth out order variability from day to day. From Spokane, Caterpillar can reach most Finning Canada dealerships within 24 hours.
“We’ve optimized the routes going to them to save transportation costs, and taken out a lot of double handling of product,” says Gile. In addition, the supplier trained Finning Canada dealers on its Caterpillar Production System, a Lean and Six Sigma initiative inspired by similar programs at Toyota and Motorola.
Finning Canada wasn’t just out to fix its ERP problem; it needed to improve supply-chain performance over past levels. Suryawanshi suggests the company had become complacent between it had a monopoly on Caterpillar parts in its area of operation. “There was no reason or urgency to change,” he says. “When the ERP failure occurred, a lot of those inefficiencies came out.”
In the course of addressing the larger problem, Finning Canada’s supply chain went from being viewed as a back-end function to one that was considered critical to profitability and customer satisfaction. The change in company-wide attitude led to a significant boost in service levels. The same-day fill rate for parts rose from 66 percent to 88 percent. Emergency shipments fell from 54 percent to 24 percent. Turnover of parts stocks rose from three to nine times a year. Customer satisfaction climbed from a dismal 44 percent at the time of the ERP failure to 78 percent. (The company didn’t have a comparative baseline measure prior to the crisis, Suryawanshi says.) Financial savings from the initiative amounted to some US$38.2m, with nearly US$134m in working capital benefit. Parts revenue grew by more than US$150m.
Now back on track, and having achieved the necessary breathing space, Finning Canada is looking for further supply-chain improvements through information technology. It has implemented a transportation-management system (TMS) from Manhattan Associates. “We’re looking at other areas of the business as well,” says Suryawanshi, noting that efforts to date have been aimed primarily at parts instead of heavy equipment. The latter was relatively unaffected by the ERP snafu because it has always been managed manually through the use of spreadsheets. A new initiative focusing on equipment is underway, with the aim of improving the entire order-to-delivery cycle. Halfway through the project, the company has already achieved more than $120m in working capital benefit, Suryawanshi says.
The task ahead is to consolidate and sustain the progress that Finning Canada has made over the last two years. Also on the company’s radar is its growing e-commerce channel. How that aspect of the business can be merged with the brick-and-mortar operation remains a key question for the future. The effort will take the form of a customized e-commerce website for dealerships.
“As a supply-chain professional, it’s never done,” says Suryawanshi. “You always want to go for the next leg of the journey.”
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