Hard as it is to tear one’s attention away from Toyota’s travails these days, we wanted to highlight a recent article in the Wall Street Journal concerning a pattern to anticipate in 2010 (“’Bullwhip’ Hits Firms As Growth Snaps Back,” WSJ, 1/27/10 [sub]). Caterpillar Inc. is used as an illustration of how the need to replenish depleted inventories is likely to create a production jump even if overall demand (whatever the product) remains flat. Given Caterpillar’s projections for growth in 2010, it has launched an organized campaign to prepare for ‘the bullwhip effect.’ We think this falls into the category of ‘good problems to have,’ but the article describes the challenges that OEMs and suppliers face in coping with a significant swing in orders, and the measures that Caterpillar is taking to forestall potential snags in the supply chain.

Caterpillar estimates that it will need to raise production at least 10-15%, but suppliers would see increases in the range of 30-40% as they help Cat restock inventories in addition to meeting the base level of ongoing demand. The challenges and concerns for suppliers faced with these sudden shifts are many - will they be able to finance the purchase of raw materials; should they re-hire workers yet; if they can’t get credit should they just say no to new orders, etc. – and the effects travel up and down the supply chain. Caterpillar has seen it all before, so it has launched a campaign to absorb the whiplash. Steps cited in the article include:

• Visits to 500 major suppliers around the world accounting for 80% of purchased goods and materials to present their forecasts and discuss preparations;
• Instituting a program to allow suppliers to borrow money from a bank against their receivables at a favorable interest rate within five days of delivery of goods to Cat, vs. a typical 60-day wait;
• Requiring suppliers to prepare a detailed written plan for each part produced on how it plans to respond to the bullwhip on that part;
• Committing to a freeze period as it transitions to growth, where Cat will not change an order for a three-month time span, so suppliers and their banks can plan with greater assurance;
• An internal risk-assessment team that meets weekly to rate and monitor suppliers’ viability.

Caterpillar’s deliberate and proactive approach is laudable and it’s encouraging to look forward to the coming upswing in heavy equipment and other industries. We had to grimace a little over one point in the article, though, when a company that supplies metal tubing for engines and hydraulic systems was commenting on its experience. The article says, “The company [Morton Industries LLC in Morton, IL] is also adjusting to probing questions from Caterpillar. “They asked us things like, ‘How much affiliation do you have to the auto industry?’”… says Steve Leitch, an account manager.” Although it is discouraging that automotive exposure can be seen as the kiss of death in certain circles, we are confident that well-managed supplier companies will succeed in any of these transportation equipment sectors.