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Timothy Aeppel, who often covers the procurement and supply chain area for The Wall Street Journal, published an extremely informative piece this morning that details how Caterpillar, perhaps the ideal industrial bellwether company to consider as a thermometer to gauge the temperature of the economy, is preparing itself and its suppliers for the “bullwhip” effect of an economic recovery. The article is a must read piece for anyone in procurement or operations. It includes insights into specific supply risk management strategies and programs that CAT is deploying. The article suggests that Caterpillar is extremely involved in monitoring the operations of suppliers to insure that they can meet increased demand in 2010 even in a slow recovery situation. The entire situation reminds me of a real world simulation of the supply chain beer game which I previously wrote “teaches the challenges of managing and communicating supply and demand signals across multiple tiers of a supply chain — and its impact on availability and inventory as a result. Besides its educational value, the beer game can be fun, especially on a Friday afternoon, when you can drink the game pieces once the demonstration is over.” But in this case, there will be no toasting or office high-fives if Caterpillar does not get things right.
Consider how “Caterpillar recently told its steel suppliers that it will more than double its purchases of the metal this year — even if the company’s own sales don’t rise one iota.” This forecast, even under a less than rosy economic scenario, is due to the bullwhip effect where “even small increases in demand can cause a big snap in the need for parts and materials further down the supply chain” due in large part to the rapid leaning out of CAT’s inventory and supply chain in 2008 and 2009. Moreover, “even if demand for its equipment is flat this year — an unlikely projection it [CAT] calls its ‘Great Recession scenario’ — it would still need to boost production in its factories by 10% to 15%, just to restock dealer inventories and meet ongoing customer demand.” And even at this level, the WSJ suggests, CAT’s suppliers would have to increase production 30% to 40% just to keep Peoria’s production lines running. More optimistic scenarios (e.g., a 15% spike in demand) would force many of CAT’s suppliers to “more than double their shipments,” according to one source the article quotes…
