Caterpillar is a Fortune 100 company that has experienced unprecedented growth since its establishment in 1925. Internal and external factors contributed to the company's success. The machinery manufacturing industry is never short of the competition, but necessary managerial decisions coupled with the strategic acquisition of competitors has propelled the manufacturing giant to new heights. External factors like rapid technological advances have also contributed. New markets have emerged for the company’s products and have increased revenue and created the need for the company’s direct presence in other countries apart from the US. Caterpillar already enjoys a considerable presence in Europe, South America, Australia, South Africa and other countries. The Asian market is also lucrative for the company with South Korea as the preferred location. Before venturing into another country, an assessment of the location’s supply chain management strategies is recommended. This report is a justification of South Korea as a location of Caterpillars new manufacturing plant and warehouse.
Organizational Analysis
Business planning functions of an organization are the key to the smooth flow of tasks within the company. Limited resources available in every business make planning inevitably. Planning determines where these resources will be applied and in what manner will be used to make the functions of the organizations more efficient. Follow-ups are also done to assess the suitability of the plan and identify areas where improvements can be made. In the case of Caterpillar, planning is crucial in determining the number of materials needed for the company's manufacturing activities, determining how the materials will be utilized to continuous production and in forecasting the future needs and demands for materials.
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Material Requirement Planning System (MRPS )
Companies utilize MPRS to manage and control the manufacturing process. The systems perform the function of ensuring raw materials are always available for production and production are readily available for customers. They also help to control inventories and also determine manufacturing schedules and times for making the purchase.
Caterpillar uses the MRP II system in its planning. This method translates the final demand for the company’s products into the total requirements for raw materials. With the MRP II system, the manufacturer can determine the equipment that will be needed and at what specific time (Drexl & Kimms, 2013, p. 6). This system cuts the need for speculation because the company knows the material that they need and go on to purchase it as opposed to buying the material that they think they will need in future. In addition to determining material needs, the system creates a schedule for people as well as machinery according to the capacity of the machines and workload. Planning of human resource is done according to the number of workers and available. Caterpillar’s MRP II system, therefore, encompasses planning of material requirements and demand, machinery, and workers.
The system provides various advantages to the company; the main advantage is cost-cutting. First, knowledge of the schedule of production together with the exact time when the materials will be needed helps to avoid downtimes which would lead to financial losses. Additionally, elimination of speculative acquisition of materials saves storage costs and prevents excessive purchase which could lead to misuse. Scheduling of workers’ availability and job times helps in the efficient utilization of labor. Thus, the company saves the cost of hiring extra employees. Another advantage is the continuous flow of production process. The MRP II system ensures that downtimes are minimized unless any other unavoidable circumstance causes them. Thus, company products are available to customers and production resources are well utilized.
Forecasting with the MRP II system is almost accurate. Manufacturing processes demand that calculations be made for all operations and activities where it’s possible. Therefore the MRP II system eliminates guessing in forecasting. For example, information on sales volumes or customer orders is fed into the logic, and the system provides feedback on the material requirement. Similarly, under capacity planning, orders are taken and fed into the MRP II logic. The capacity demand is then determined and decided if it’s appropriate. Finally, the plan is produced incorporating raw materials, labor, and machine capacity. Scheduling, on the other hand, is arrived at after considering the forecasts and capacity planning. Schedules provide detailed information of how production will take place in the given time frame all the way from material purchase to the final product. The system produces a schedule according to machine capacity and labor availability.
Future expansion for Caterpillar requires huge capital investment. That means that current expenditures need to be reduced to free funds for planned international development. One way to save money is through cutting current investments using planning function. One way that planning can minimize expenditure is by reducing overhead costs. Overhead costs take up as a significant percentage of Caterpillar’s total production costs. With careful planning, the entire time for working on orders can be reduced therefore make the company spend less on inventories and overhead costs. Such a move will save on costs and provide funds for international expansion.
Planning can also help the company avoid investment in labor. Labor utilization and efficiency are essential in reducing labor cost for any manufacturing process. Planning the production activities allows for fewer employees to work on a particular process thus freeing up others to carry out other activities. Reduced labor cost translates to fewer employees required in manufacturing processes. The company will, therefore, incur fewer labor costs. Additionally, the need for hiring more employees is eliminated. The saved costs provide the funds needed for international expansion.
Planning also saves storage costs. Raw materials for production and finished products of the company have to be kept in warehouses. Without a plan, more than the necessary amount of materials are ordered and have to be held in warehouses. In situations of the expected rise in demand, the materials requested have to be stored in hired warehouses, or the company has to build its warehouses. However, capacity planning and scheduling can help the company avoid this unnecessary investment by scheduling the production activities according to customer demands and expected timelines. This way, there will be no necessity to order all the materials at once, therefore, no need for additional warehouses.
Facility Location
Caterpillar’s decision on where to locate its manufacturing plant and warehouse is affected by some key factors. Although the reasons may vary from hundreds to thousands, a few critical factors bear more significance than the other minor factors from the perspective of a chain supply manager. As much it’s practically impossible to find a location which is the perfect combination of all the critical factors in consideration, finding a country with the conducive environment after assessing all the key factors is very important. A location that does not provide the correct environment considering all the key factors can adversely affect the company’s operations.
Important Factors
The market plays a vital role in deciding where to locate a manufacturing company. The fundamental purpose of any business is to generate revenue and make a profit. These two aspects rely on the ability of the business to make sales. In light of that, the location of Caterpillar’s plant and warehouse needs to provide a market for its machinery and other products. The area needs to have consumers of the products for the company to make a profit. For a supply chain manager, the goods need to leave the company are reach consumers. Even though the primary purpose is for the goods to reach the customers, other factors come into play like the cost of supplying the goods and the period it takes for the products to reach the customers (Tate, Ellram, Schoenherr, & Petersen, 2014, p. 385). The area for setting up the plant must enable access to customers at low costs and within the scheduled time. In the case of Caterpillar, the market should also be expansive. Caterpillar is an international brand that serves hundreds of thousands. The locations should, therefore, enable access to a greater geographical area with a large number of customers.
Infrastructure and transport are the other key factors that affect the location of a manufacturing company. For Caterpillar’s products to reach their customers, the means of transportation should be readily available and cheap. Materials also need to reach the plant for the company’s processes to run smoothly. Without the means of transport, the company’s products will pile up in the warehouse. This pile-up will be a problem for both the business and the consumers since storage costs will be incurred and will increase. A country with a well-developed transport system consisting of well-maintained roads, airports and sea transport will be a suitable location. An adequate power supply as part of the infrastructure is also critical. Manufacturing plant needs a constant supply of electricity to run machinery. If the country had a readily available supply of cheap power, plant operations would be much easier to run.
Availability of affordable and skilled labor is a significant consideration for setting up the factory. Unlike in the past when both skilled and unskilled labor was readily available on reasonable terms in many countries, most companies are struggling to find affordable workers that have the required skills (Tate, Ellram, Schoenherr, & Petersen, 2014, p. 388). This is a more significant problem in developed nations where increased cost of leaving has resulted in workers demanding higher pay. Because production costs have to be kept at a minimum, the cost of labor at the new location needs to be affordable. From a supply chain management perspective, labor costs are usually passed to the consumer. Expensive labor translates to the uncompetitive pricing of the company’s products which in turn leads to customer increased complains and eventually obstacles in the company’s flow of operations.
Ranked Factors
The factors discussed above bear the most weight in the decision-making process of determining the location of a manufacturing plant and warehouse. Still, there are factors that are more important than others among then crucial factors. The market is the fundamental determinant of the location of a manufacturing plant. Caterpillar is a business that is focused on selling its products. Finding a suitable area where the company’s products have a ready market is more important than any other factor. Transport and infrastructure come after the market. Availability of the market for the products needs to be transported by suitable transport systems. As stated earlier, materials need to reach the factory and products to reach the consumers. A good transport system facilitates these process and therefore goes hand in hand with the market. Availability of electricity is catered for by setting up a power generating station. Though still important, availability and affordability of labor may be catered for by importing labor or efficiently planning the factory and warehouse operations such that labor requirements are at a minimum.
South Korea
South Korea is the most appropriate location for Caterpillar to set up a manufacturing and warehousing facility. My choice of South Korea is influenced by all the three factors of the market. Labor and transport. Notably, the market is the critical driving force for the choice. Lee, Rho & Yoon (2015), in their assessment of the effect of investments in manufacturing process on efficiency explain that the economic status of the country has a tremendous influence on the effectiveness of the process. According to their study, a manufacturing facility has a chance of more success in a developing country than in a developed or less developed economy. Citizens in manufacturing nations have medium purchasing power but have fewer prejudices than their counterparts in developed countries. Its, therefore, easier for Caterpillar to find a market for their products in South Korea. Additionally, there is a chance for the company to penetrate new markets in Asia from the strategic location of South Korea. South Korea’s transport system is efficient for supplying materials to the factory and transporting finished products to the warehouse and the market. Products can, therefore, reach the customers on time and in good shape. Moreover, labor availability is not a problem in the country. Literacy level in South Korea stands at over 95% (Barro & Lee, 2013, p. 186). An educated population is likely to provide the required labor for the factory and the warehouse at an affordable cost.
Constraints
Bottlenecking Issues
Accumulation of products is a potential issue that may be witnessed in the new plant. South Korea is an already existing market for Caterpillars, but the company sees the country as a potentially more significant market for its products. Thus, there is the risk of production exceeding demand. Since the breakthrough in the potential new markets may not be instant, overproduction may cause problems with warehousing. The company’s MRP system may come in handy to solve the issue. By ordering only the material that is required, excessive production will be avoided. Another bottlenecking problem may be caused by machines not running at full capacity in initial stages because of low demand. This is an issue that needs to be solved at the design and set up level where different production lines are utilized such that periods of low production allow for shutdown of some lines.
Transport
South Korea’s advanced transport system of roads and railways linking cities and towns is unlikely to offer major problems. However, the initial stages of production may be affected if the location doesn’t have an established transport network. Bureaucracy issues may affect Caterpillar’s wish for a transport network to link the plant and warehouse to other networks because the government solely manages the country's transport. The transport problem needs to be addressed simultaneously with the setting up of the factory.
Push or Pull System
The pull system is suggested for small and medium enterprises for products with high demand uncertainty (Powell, Riezebos, & Strandhagen, 2013, p. 395). This suggestion is inappropriate for a production company of Caterpillar’s size. A push system would be more appropriate since production is based on demand. Therefore accumulation problems will be avoided. Full capacity utilization is also likely to be achieved using the push system of production based on need.
Warehousing Strategies
The best warehousing strategy that Caterpillar should adopt for the new plant is the synchronized system where the whole production process is synchronized with activities of the warehouse. Unlike in stand-alone warehousing, where the warehouse runs its operations independently, the synchronized system accounts for materials and finished products in the warehouses. Thus production activities are run with knowledge on the number of raw materials are finished products. Furthermore, warehousing of materials should adhere to customer demands. Global compliance with set standards is also crucial to ensure the goods reach customers in the right condition (Apriso, 2018). Synchronization of operations aids in reducing production and warehousing cost because there is no pile-up of products and materials while at the same time operations are run at maximum efficiency.
These warehousing strategies are also beneficial to customers since they facilitate delivery of orders on time. By availing materials on time, the requests can be worked on according to schedule leading to customer satisfaction. Synchronizing eliminates pile-up of products in warehouse thus saving costs which would otherwise be passed to the customers. Elimination of pile up issues is also vital timely manufacturing processes which do not delay customer orders. For example, a customer who makes an initial request but later orders extra products can be easily catered for using this system instead of keeping them waiting in line.
Location of warehouses next to the factory presents several benefits. First, the company saves the cost of transportation of the finished products to a different location. Another benefit that centralized warehousing will offer to Caterpillar is easier record keeping because the products are in a single location. Cost saving for the manufacturer directly pass the customers regarding pricing. Customers also benefit from better services due to ease of selection of products and shipment coasts because goods will be collected from a single location.
Quality Best Practices
Manufacturing
Management of logistics related to manufacturing affects all the company’s processes from material handling to the final product to the customer. Adapting quality best practices in the new facility is crucial in streamlining the company’s activities. Planning is an essential part of managing the logistics of manufacturing. Forecasting is part of planning where the expected demand is determining. In the new Caterpillar plant, forecasting demand with accuracy will help in scheduling manufacturing operations and ordering materials. Measuring to determine performance is a useful method of spotting weaknesses in inventories and many other manufacturing areas. The failings are then eliminated to avoid unnecessary costs. Sourcing is another best practice that should be flexible enough to accommodate changes in demand. For example, if demand for machinery in the facility goes up, the supply chain management should have the right ordering mechanisms to avail materials on time to meet demand. Best practices in delivering goods to customers are also tied to manufacturing. Timely deliveries create good relationships with customers and attract more business. The new orders keep the manufacturing process ongoing. Delivery schedules, on the other hand, creates space for manufacturing to produce more goods.
Warehousing
Best inventory keeping practices of finding weaknesses and errors are appropriate. If an error is found in inventories, it should be investigated and changes made in the warehouse to avoid the occurrence of the error (Westfalia, 2017). The integration of the warehouse activities with manufacturing aids in the smooth flow of the company’s activities. In the case of the new facility, its understood that orders may take longer to deliver thus a continuous stream of operations eliminates downtimes. Standardized warehousing procedures for the industry are appropriate to avoid damage to goods and accidents which may stifle the production process. Technological improvements also provide room for improvement in operations of the warehouses as well as quality offered to customers. At Caterpillars facility, customer satisfaction is crucial in maintaining the existing customers in the region as well as attracting others and penetrating new markets
Best practices in both manufacturing and warehousing contribute to the quality of the final product and services offered to customers. Forecasting to determine demand of Caterpillar’s machinery enables convenient ordering of materials so that the manufacturing process can go on with all the material available thus translating to a final product of superior quality than which would have been made in a hurry. Similarly, scheduling contributes to quality since the correct machines and labor are availed for production. For a process that requires highly skilled labor in the production of machinery, the programming can help to avoid compromise in quality in the final product. Best practice in warehousing like integration and synchronizing of the process contributes to production through the uninterrupted supply of materials. Similarly, accurate inventories aid in the elimination of process hitches which sometimes lead to losses.
Conclusion
In essence, the role of supply chain management in determining the location of the new manufacturing and warehousing facility cannot be ignored. Initially, an organizational analysis is conducted to assess the current planning functions and their strengths to the organization. Knowledge of the planning function then aids in securing funds for the future mega project. An appropriate location is then selected after considering the critical factors in supply chain management. As in the case of Caterpillar Inc., South Korea is a suitable location due to market, transport, and labor among other factors. Again, determining the constraints of the new sites for the facility is the duty of the supply chain managers who then come up with appropriate solutions to the issues. These limitations are likely to hinder the success of Caterpillar’s new facility. Finally, warehousing strategies and best practices contribute to product quality and customer service. It's therefore crucial that supply chain managers consider all these aspects when coming up with the location of factories and warehouses.
References
Apriso. (2018). Warehouse management for manufacturers/ Apriso . Apriso.com . Retrieved on 26 January 2018, from http://www.apriso.com/solutions/warehouse_for_manufacturers.php.
Barro, R. J., & Lee, J. W. (2013). A new data set of educational attainment in the world, 1950–2010. Journal of development economics, 104 , 184-198.
Drexl, A., & Kimms, A. (2013). Beyond manufacturing resource planning (MRP II): Advanced models and methods for production planning. Berlin: Springer Science & Business Media.
Lee, D., Rho, B. H., & Yoon, S. N. (2015). Effect of investments in manufacturing practices on process efficiency and organizational performance. International Journal of Production Economics, 162, , 45-54.
Misysinc.com. (2018). What is MRP? MISys manufacturing software . MISys Manufacturing Software . Retrieved on 26 January 2018, from https://misysinc.com/what-is-mrp/.
Powell, D., Riezebos, J., & Strandhagen, J. O. (2013). Lean production and ERP systems in small and medium-sized enterprises: ERP support for pull production. International Journal of Production Research, 51(2) , 395-409.
Tate, W. L., Ellram, L. M., Schoenherr, T., & Petersen, K. J. (2014). Global competitive conditions are driving the manufacturing location decision. Business Horizons, 57(3) , 381-390.
Westfalia. (2017). Top 11 warehouse operations best practices - Westfalia Technologies, Inc. Westfaliausa.com . Retrieved on 26 January 2018, from https://www.westfaliausa.com/blog/11-warehouse-operations-best-practices.
