Caterpillars Supply Chain Strategy and Results

Ron Kruse President, Client Services Caterpillar Logistics Services, Inc.

Caterpillar Products: Leaders On Every Continent

Caterpillars Global Footprint

Europe, Africa, Middle East & CIS North America

106 64 39 373

Company facilities Dealer main stores FG Wilson, MaK, Perkins & Solar distributors Cat dealer rental outlets

Asia-Pacific

Latin America
19 36 63 93 Company facilities Dealer main stores FG Wilson, MaK, Perkins & Solar distributors Cat dealer rental outlets 38 45 78 83 Company facilities 70 Dealer main stores 258 FG Wilson, MaK, Perkins & Solar distributors 720 Cat dealer rental outlets 90 Company facilities Dealer main stores FG Wilson, MaK, Perkins & Solar distributors Cat dealer rental outlets

Caterpillar Parts Distribution: Right Part, Right Place, Right Time

19 facilities on 6 continents 10M sq. ft. 550,000 P/Ns serviced Highly integrated systems 24x7 coverage

2,360 employees 3,500 suppliers 50+M lines shipped/year 875,000 receipts/year 210,000 dealer calls/year

Caterpillar Goals Drive Our Supply Chain

Caterpillar Strategy Caterpillar Strategy
(Critical Success Factors) (Critical Success Factors)

Supply Chain Strategy

Supply Chain Execution

Caterpillars Strategy & Critical Success Factors

Vision
Be the global leader in customer value

Critical Success Factors

6 Sigma Growth Cost Reduction Product Support Rental Leadership Best Distribution Quality and Reliability Best Products, Services, Solutions Order Fulfillment People Social Responsibility Emerging Markets

Mission
We provide best value to customers We grow profitably We develop and reward people We encourage social responsibility

Cats Focus And Supply Chain Action Areas Chairmans Focus

Profitable Growth

Supply Chain Actions

Expand in Asia-Pacific / China Integrate Supply Chain Functions Develop Enabling Technologies Broaden Global Diversity Increase Global Sourcing Generate Cost Reduction Improve Order Fulfillment

People

Performance thru 6 Sigma

Profitable Growth: Focus on Asia/PacificEmerging

Business Opportunity
42% of worlds population 44% of worlds coal reserves 62% of worlds iron ore 40%+ of worlds gas production Electrical demand and generation capacity about equal to Europe Economies and machine industry growing twice as fast as in rest of world Construction spending last year alone reached nearly $150 billion

Profitable Growth: Expansion in Asia/Pacific

Manufacturing
China
- Five plants today -- Cat Xuzhou shipped 10,000th excavator in 2004 - Memo of Understanding with wheel loader producer is signed in late 2003 - In discussions with other local firms to pursue machine and engine opportunities

India
- Acquired engine company - Manufacturing Cat backhoe loaders

Logistics
Logistics for product sourcing in 2003 Caterpillar Logistics China Limited: Joint venture to
pursue China opportunities signed in 2004

Parts facility by second quarter 2005 Discussions with numerous automotive companies

Profitable Growth: Integrate Supply Chain Functions

Corporate Strategy
Supply Chain Strategy Supply Chain Strategy
Network Design Channel Strategy Asset Planning

Supply Chain Design Supply Chain Design

Transportation Modeling Inventory Simulation Facility Design Bus. Process Engineering

Framework For Integrated Supply Chain Solutions

Systems & Technology Systems & Technology

IT Planning Application Selection Systems Integration Application Maintenance

Execution Execution
Order Management Customer Services Order Entry
Order Allocation / Processing

Materials Management Demand Planning

Distribution Requirements Planning

Transportation Management Transportatio n Planning

Carrier Selection Management Outbound / Inbound Management

Distribution

Global Compliance Customs Management

Fiscal Representation

Reverse Logistics Asset Recovery

Returns / Exchange Management

Manufacturing Logistics SubAssembly & Kitting Sequencing Line-side Delivery Postpone To Build

Business Support Financial Services

Sales & Marketing HR Services Supplier Performance Management Program Management

Warehousing Crossdocking
Product Marking / Labeling

Purchasing / Expediting Inventory Optimization

Inventory Accuracy & Control

Tax Management Tariff Management

Repairs Processing Remanufacture Disposal Management

Technical Support Claims Management Invoicing

Track & Trace

Freight Bill Audit & Payment

Packaging Kitting Quality Assurance

Service Loss Analysis

Freight Forwarding

Performance Management

Profitable Growth: Develop Enabling Technologies Service Parts

Leverage Ford and Cat Logistics processes and technology to develop to a world-class service parts logistics system Build technology on a SAP platform to provide global capability and infrastructure Share risks and lower costs of development and implementation

Dealer Business Systems

Provide technology to re-engineer distribution channels to keep pace with changes in customer expectations Improve dealers business processes and capabilities Support marketing companies with best distribution, rental, and product support

People: Broaden Global Diversity

Formed Corporate Global Diversity Council Tracking and setting goals on diversity metrics - External experience - Cross-functional experience - Global experience Increase mid-career recruiting Current status: Inside U.S. Cat employees Dealer employees 35,260 33,663 Outside U.S. 33,909 59,566

People: Increase Global Sourcing

Products: Access Competitive Cost Products
Started formal efforts in 2003 Analyzed >200 suppliers in Latin America, Europe and Asia-Pacific Sourcing >$1 billion From Asia-Pacific in 2003; will increase to >$2 billion in 2004 Landed cost savings typically >30%

Processes: Provide Effective Business Support

Started Logistics Technology subsidiary in 2003 Backroom support of repetitive processes Support Cats growth initiatives in Asia-Pacific Provide global Follow the Sun support

6 Sigma: The Unifying Framework of Strategy Implementation

What is it?
A methodology to reduce defects and eliminate waste through the use of statistical analysis, quality tools and a structured approach to project management A strategy to reduce costs and generate growth while providing a high-quality product or service which exceeds customer expectations

Results
More than 40 percent of Cat employees are involved: 15,000 projects, 2,600 black belts, 208 master black belts, 17,900 green belts In 2003, 6 Sigma results far exceeded the companys aggressive goals and was the key enabler of significant improvement in core operating costs

6 Sigma: Cats Supply Chain Improvement

Suppliers

CAT

Dealers

Suppliers

CAT

Dealers

Cost as a Percent of Sales

Cost as a Percent of Sales

Improved Service from 94% to 96%

35+% Cost Reduction

Inventory Availability

23% Cost Reduction

2000 2001 2002 2003

2003

2004

2005

2006

6 Sigma: Cat Logistics Client Success Stories

Client Sector Automotive Geography NA to ROW Function Transportation Client Sector Geography Function Hi-tech Europe Distribution and Transportation
Gage R&R (ANOVA) for M_Fare
Components of Variation
100 %Contribution 100

Business Case
Poor shipping container space utilization inflating quantity of ocean containers shipped

Business Case
In a collapsing semi-conductor market, reduce the total cost of logistics by 20%

Gage name: Date of study: Reported by: Tolerance: Misc:

TEE Fare Calculator 13.08.02 Mathias Knaupp N/A

By M_Part

Percent

50

50

0 Gage R&R Repeat Reprod Part-to-Part

Parts

R Chart by M_Operator
0.0010
DHL TEE

By M_Operator
100

Sample Range

0.0005 UCL=1.57E-05 R=6.10E-06 LCL=0 0

50

0.0000

Sample Mean

Results
Diverted air shipments to ocean Consolidated to increase load density Recycled client containers Implemented a higher value air service for freight to one country

Results
Presented facility relocation Diverted road shipments to air Consolidated shipments Rationalized packing suppliers

M_Operator DHL

TEE

Xbar Chart by M_Operator

100
DHL TEE

M_Operator*M_Part Interaction
100

M_Operator
DHL TEE

50

UCL=39.75 Mean=39.75 LCL=39.75

Average

50

0 0

Parts

Benefits Client savings $1.4m

Client Sector Geography Function Automotive Europe Distribution
Cart Sort and Audit Area:
Pickers Responsibilities: 1) Drop parts into totes staged in fixed locations or "pigeon holes" (bins, racks...some type of fixed locations) 2) Move to flight area to pickup the next bundle W ITHOUT SORTING.

Benefits Client savings $2.0m

Client Sector Industrial

Geography USA

Function IS

Business Case
Client facility achieving lower productivity than other Cat Logistics operations

Business Case
Reduce the cost of electronic data interchange between the client and Cat by 25%

Results
Sorted pick tags by zone Installed conveyor in sort area Implemented TRACKS in pack area Matched labor to work volumes
Staging Cart

Results
Changed from mailbox to FTP Utilized NDM instead of mailbox

Staging C art Staging Cart

Staging Cart

Shipping Auditor Responsibilities: 1) Check part descriptions & qty 2) Match pick tags with p ackwith # on cart 3) Manage pick completion status for each order 4) Control wave completion process by chasing pickers that need to bring "de livieries" to carts...

Staging Cart Staging Cart

Staging Cart

Staging Cart

Benefits Client savings $0.3m

Benefits Client savings $0.3m

6 Sigma: Improve Order Fulfillment

Goal: To implement an industry-leading order fulfillment process to build competitive advantage throughout the value chain.
Whats in it for the customer & dealer? Better Customer Satisfaction & Loyalty Less Dealer Inventory Less Dealer Reconfigurations
Configure Configure & Order

As Is:To Be: Execute to Orders Execute to Forecast & Slot

Forecast Forecast Dealer Order Dealer Order Queue Queue Order MSO Order MSO (2-5 days) (2-5 days) Review Acknowledge Review / /Acknowledge Receipt of Order Receipt of Order (1-2 Days) (1-2 Days) Slot Slot (1-2 days) (1-2 days) Order Problems Order Problems Changes / /Changes Suppliers Suppliers Queue Queue (1-45 days) (1-45 days)

Fax/E-mail/ Fax/E-mail/ Phone Order Phone Order

Financial Financial Check Check

3 6 Week Uncertain Sustained Availability Availability

Attachment Attachment (1-2 days) (1-2 days) Ready To Ready To Ship (RTS) Ship (RTS)

Issue Purchase Issue Purchase Validate Orders Orders Schedule Schedule

Issue Work Issue Work Orders Orders Sequence Sequence (1-2 days) (1-2 days) Assembly Assembly Order Order Changes Changes Supplier Material Delivery Pull

Test & Paint Test & Paint

Firm Attachment Firm Attachment Schedule Schedule

Expedite Expedite

6 Sigma: Improve Order Fulfillment

Goal: To implement an industry leading order fulfillment process to build competitive advantage throughout the value chain.
Grenoble and Gosselies Operational Excellence

Higher Velocity
Weeks

less assets
Months

(Availability) From order to shipment

16.5

(Cash Flow) Value chain inventory

7.2

18 16 14 12 10 8 6 4 2 0

8 7
11.5 8.4

6 5
7.5 6.5 4.5 3 **

4.9

4.7

4.5 3.7 3 2.4

4 3 2 1 0

1996

1999

2002

2003

2004

2006

2008

1996

1999

2002

2003

2004

2006

2008

** Availability bold goal will be refined by product

Production Stores

PP inventory

Dealer Inventory

Summary: Linking Supply Chain to Business Results

2003 Profit Per Share

Expected

Without Supply Chain Improvements With Supply Chain Improvements

Supply Chain Improvements Benefit Shareholders and Customers

Conclusion

Methods of Differentiation 1960s - Marketing 1970s - Manufacturing 1980s - Quality 1990s - Customer Service 2000s - Supply Chain

Supply chain is the next frontier to unlock shareholder value Supply chain activities must be linked to achievement of business goals

Thank You!