Want to manage logistics like Caterpillar?
Friday, July 06, 2012
Heavy machinery manufacturer Caterpillar believes that its internal logistics processes, which manage supplies of 620,000 spare parts, are so good that it is offering them as a service to oil and gas companies
Caterpillar Inc, the famous machinery and engine manufacturer, has to manage 620,000 different spare parts.
The company believes that its expertise in managing the delivery and inventory of spare parts is something the oil and gas industry could find useful.
CAT's expertise, making sure critical spares for heavy, expensive equipment are quickly available, is something very relevant to the oil and gas industry. 'If the $4m truck is down, the guy loses his sense of humour very quickly,' he said. 'It's kind of within our DNA, we know how to manage that.'
Cat Logistics's service offering for oil and gas companies is to try to understand their strategy for supplies of items, understanding the current supply chain in depth, looking at the accuracy of records, and putting together a proposal which will include an opportunity to improve the current set-up.
'This assessment we do is pretty accurate,' said Moe Iverson, Commercial VP for Cat Logistics, speaking at the Digital Energy Journal 2012 conference in Stavanger on Optimising supply chains.
'It allows the client to understand the benefits and what the benefits might be.'
To make sure people in the field can get fast access to the spare parts they need, you need to look at your system as an entire network. 'It's one thing to run the warehouse, it's another thing to run the network efficiently. That's kind of what we do.'
'We play very well in the industrial, mining, oil and gas capital asset area.'
Since 2002, Caterpillar has offered logistics services to outside companies, following a deal to manage global parts distribution with Land Rover.
Now Cat Logistics serves 65 companies, in the automotive, heavy industrial, mining and oil and gas sectors, employing around 12,000 people. Other external customers include Ford Motor Company, Harley-Davidson, Mazda, Cadillac Europe, Mosaic Fertilizer, Newmont Mining Corporation.
In 2005 Caterpillar acquired the logistics business RelayStar NV, which was previously an affiliate of ChevronTexaco Technology Ventures LLC.
The company does not operate any transportation vehicles itself but purchases a large amount of transportation services around the world.
Inventory 'drives pretty much everything,' Mr Iversen said.
'It drives the store size, real estate, buildings. It has an influence on operations, how many people you have, what are the processes you've employed, all of the equipment you have in place to manage it.'
'You have to make sure you have the right part, right place, right time to maximise your business. It helps create a competitive advantage for your operations.'
A good inventory management system will also help you manage business changes, such as new regulation, natural disasters, business cycles, new competition, increasingly complex sourcing networks, he said.
Caterpillar has to make as many of its spare parts as possible available at short notice anywhere in the world.
It approaches this task using sophisticated computer simulation, to make an optimum statregy for stocking for each item, and decide how to play off the need to reduce capital tied up in inventory, against the need to have parts quickly available, stored close to where they might be needed.
The computer simulation tool can also adjust spare part inventory very quickly if there are changes, for example when the recession forced customers to postpone acquisition of new machinery, so they kept older machinery in action for longer (needing more spare parts).
The simulators forecast what CAT terms 'independent demand', ie the demand which cannot be easily predicted.
This is the same as the type of predictions your local supermarket makes. It does not know exactly what your neighbor will purchase tomorrow, but can make a fairly good guess of its overall sales based on past overall purchasing history.
'A simulator is a tool that allows you to understand and model the changes in your inventory profile before you pull the trigger, so you're able to simulate the actual results prior to implementation and execution,' he said.
CAT's simulator model works with 3 years of demand history for certain items, and studies the transactions that were made.
You can model different routing strategies for spare parts, whether to store all items in one central location or in distributed warehouses.
'We create a profile of the inventory investment and a profile of your service,' he said.
CAT Logistics is so confident in the results of its simulation process, that it can sign contracts with customers where it guarantees that specific items will be available where needed, otherwise the client doesn't pay.
When doing simulations, getting clean data can be much harder than running the actual simulation, he said.
'It's a bit of an arduous task - you spend a lot of time in making sure that the data is not in any way a problem. It is a lot of hard work - but that is kind of what we do.'
Capital and service availability
A useful task with the simulator is to test what is possible by either reducing capital tied up in inventory, or improving service availability times.
For example, say you currently have $18m of items in inventory, and a service availability of 85 per cent (the part you want is available 85 per cent of the time).
After running the data through the simulator, you might get an improved inventory set-up, which will mean you still have 85 per cent service availability, but only $11m tied up in spares.
Of you could keep $18m in spares, but get a 95 per cent service availability.
Or go for something mid-way, with say $13m in spares and 90 per cent service availability.
People (as well as computers) can also do a great deal to optimise inventory, particularly as complexity levels increase.
'The technology can do wonderful things but it requires the human touch and human intelligence that goes with it.'
Humans are better at computers at forecasting 'dependent demand' - where items are purchased for a specific reason, such as a planned shut down or process.
Caterpillar employs 90 inventory specialists, working for both external and internal clients, who help work out the best place to keep inventory.
'It's one thing to operate one warehouse but a different thing when you have multiple warehouses in different locations and be able to understand and effectively maximise the inventory,' he said.
'Managing inventory is a very collaborative process.'
Items or lines
Oil and gas companies also have a choice whether they want to manage based on lines (groups of items) or specific pieces.
Lines are better in many circumstances.
'If you're missing one part, if you need 6 pistons and you've got 5, you're out of business, you can't repair the engine,' he said. 'So lines are much more important in supporting that maintenance rather than pieces.'
If you do your analysis by line instead of by piece, then you can get different results, because the value of individual components is higher.