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 In recent years, the Peoria, Illinois-based company has called the
178 independently owned businesses that distribute its earth-moving
products worldwide everything from "a critical competitive
differentiator" to "the foundation" of its success.
Now the world's largest maker of construction and mining equipment
is adopting a cooler tone with those dealers, asking them: "What
have you done for us lately?"
Caterpillar believes its distributors are missing out on somewhere
between $9 billion and $18 billion in easy-to-capture revenue each
year because they are falling down in at least three ways. They are
not tapping into the wealth of real-time customer data now at their
fingertips; they are not communicating with each other; and they are
not providing customers across the globe with a consistent
experience when it comes to everything from e-commerce to parts and
services pricing.
So Caterpillar, which is in a hunt for new revenue because of
weakness in key markets, is giving dealers until the end of the year
to come up with a three-year plan to capture those lost sales.
Distributors who fail to meet their targets could have their
dealership agreements terminated, though top executives insist a
cull of dealers probably won't be needed.
"That would be the last resort, the last outcome and certainly not
desirable," says Chief Executive Officer Doug Oberhelman.
Like its rivals, Caterpillar has integrated all kinds of diagnostic
technology into its machines that throws off a torrent of real-time
information about the health of the products. The data helps owners
track their equipment, optimize its utilization and manage fuel and
maintenance costs.
Better exploited by the dealers, the information could immediately
increase part and service sales to existing customers, Caterpillar
says. Dealers could anticipate problems, schedule preventive and
predictive maintenance and help customers manage their equipment
fleets more efficiently.
The company says its best dealers already do that pretty decently
and have, in the words of Stu Levenick, the group president in
charge of dealer relations, "an awareness of about 90 percent of
their parts demand by customer, have it very well segmented and
understand where 90 percent of the opportunity exists."
Many more dealers are missing out. "The average dealer, or
lower-performing dealer, he only knows 40 percent of his
opportunity," Levenick says. "And we demonstrated that if we just
take the best practices of the first group and apply it to the other
group, they automatically get a 6 to 8 percent aftermarket share
improvement ... just by doing something obvious. But they haven't
done it because we haven't directed them to do it or helped them to
do it."
BYPASSING BILLIONS IN SALES
Caterpillar is the latest company to see big dollars in so-called
Big Data. There are, by its reckoning, more than 3.5 million pieces
of Caterpillar equipment in the field, many of them fitted with
sensors that send out continual status updates about important
mechanical systems and operator performance.
Caterpillar believes dealers could be billing for billions of
dollars more each year if they did a better job of thinking of those
machines as smart digital devices, constantly pinging them with
sales and service opportunities — not just dumb pieces of iron.
The push, code-named Across the Table, was unveiled last month at a
private meeting of distributors and made public earlier this month
at an analyst meeting in Las Vegas.
Company executives say dealers are missing out on additional
billions in sales by not coordinating better with one another and
not offering consistent e-commerce solutions to customers who, in
many cases, work with more than one Caterpillar dealer across the
globe.
"Customer expectations have changed," says Levenick, who is in
charge of the initiative. "If they work with multiple dealers, they
want to have a common experience wherever they go."
Oberhelman says cooperation and communication among Caterpillar
dealers often is "disjointed," especially when it comes to locating
parts and serving customers. He cites the example of Australia,
where the four dealers that have carved up the country — and
Caterpillar itself, which sells a handful of specialized products
directly to customers — operate dozens of supply depots whose order
and inventory systems aren't meshed.
"I don't know how many individual parts warehouses there must be
among four dealers and ours," Oberhelman says. "But it's probably
over 100. And we don't really today … have those talk to each other.
You need a part in Perth. Our warehouse in Melbourne may not have
it, but it may not communicate with all the other places in
Australia before we have to go overseas to get it."
A big chunk of any incremental revenue the dealers pick up with the
push would flow to Caterpillar, says Levenick. "It can't go to them
without going to us."
A SCRAMBLE FOR REVENUE
Caterpillar is also challenging dealers to do a better job of
navigating the sea change that's taken place in the construction
machine market, where sales of equipment to rental companies now
outnumber sales to contractors.
That creates problems because the independent dealer model, which
Caterpillar embraced shortly after its founding in the 1920s, "was
never designed originally to handle the financial loads or the
operational capabilities of running a rental organization," Levenick
says. "If you look at a CAT dealer, they're not structured in a way
that United Rentals is."
Jason Marx, a director in the heavy-equipment practice of
AlixPartners, an industry consulting group, says the rental business
requires "a huge amount of working capital" and can divert money
away from other parts of a dealer's business that might require some
funding for growth.
Oberhelman acknowledges the strain the switch to rental is putting
on the company and its dealer network. "It moves the financial
pressure from the customer to the dealer and ultimately up to us,"
he says. "And we just have to figure out how to deal with that."
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The push is not without risk. Caterpillar has long touted its
independent dealers, whose 162,000 workers more than double its
global headcount, as a key competitive advantage, especially in
recent years as lower-priced Asian rivals with less robust dealer
support networks rose up to challenge its supremacy in the
construction equipment market.
Messing with that could sour the special relationship that
Caterpillar says has been critical to its success in remaining the
world's No. 1 maker of construction and mining equipment.
But the company is in a scramble for additional revenue. After
peaking at $65.9 billion in 2012, sales plunged nearly 16 percent in
2013 as capital investment by the global mining industry tanked. The
company has warned that sales could slip another 5 percent in 2014
in part because of the slow-motion recovery of the global
construction market. Analysts say that hasn't completely derailed
Caterpillar's goal of reaching $100 billion in annual revenues by
2020, but it has made the target a little harder to reach. Hence the
focus on dealer performance, which Caterpillar says is a way to
significantly lift sales even if construction and mining
fundamentals don't improve dramatically anytime soon.
Caterpillar is focused on nine or 10 dealer metrics, most of which
it refuses to discuss with analysts or the media. That has made it
difficult for investors to assess the likelihood the move will
deliver the promised results.
Ann Duignan, an analyst at JP Morgan, is among those who say they
have more questions than answers about the dealer effort and remain
dubious about the effect it will have on the company's top and
bottom lines. "It's hard to assess accurately because they didn't
give us enough detail," Duignan says.
But in conversations about the program with Reuters, top executives
have made it clear that dealers need to significantly increase the
performance of their parts and service departments and to boost
their share of the global parts and service market.
A key gauge here is something Caterpillar calls "the absorption
rate," which measures how long a dealership could keep its doors
open if it never sold another piece of equipment and had to survive
on the profits booked from servicing existing machines in its
territory.
If a dealer's gross profit from those parts and service sales can
cover its total overhead and interest expenses for a year, the
dealer is said to have a 100 percent absorption rate. For years, 100
percent was considered good enough.
No more. Dealers' new absorption-rate goals will be different, but
they have all been given until 2018 to improve performance.
Leveraging the insights the embedded technology affords them is one
way to get there.
Even the best dealers in the network are being assigned new goals
that Jim Parker, the owner of Carter Machinery, a Caterpillar
dealership in Salem, Virginia, says "won't be a lay-up."
Tapping into the technology already deployed on Caterpillar's
machines could make their task a little easier.
For years now, Caterpillar has been installing all kinds of cameras,
sensors and satellite-based positioning control and guidance systems
on its machines to help customers increase their productivity and
efficiency and eliminate workplace accidents.
Those electronic gadgets and the remote monitoring they make
possible have created a huge opportunity for dealers to move beyond
the equipment and parts and services sales and into the potentially
much-more lucrative fleet-management business.
Dealers already offer a tiered fleet-management program, which is
marketed as CAT Equipment Management Solutions (EMS).
Indeed a highlight of Caterpillar's exhibit at the recent ConExpo
trade show in Las Vegas was a demonstration of how the system works
for customers and dealers.
Caterpillar wants dealers to move more customers into higher-levels
of EMS, where dealers take over monitoring of the equipment and — at
the highest level — actually take over the management of customers'
fleets.
The company has tried to increase dealer buy-in to the plan by
asking 20 of its top-performing distributors — including Parker in
Virginia — to help design its carrots and sticks. So far, Levenick
says there has been little resistance to the basic goals. But Parker
says talk of raising performance measures has prompted some
nervousness among dealers.
"We have a common set of metrics. You know what they are, and you
know they're weighted. And that's how Caterpillar is going to judge
every dealer. It's very, very black and white. It's about market
share," he says.
"But I know some dealers — because they're friends of mine — are
saying, ‘I got some work to do.'"
(Reporting by James B. Kelleher in Chicago;
editing by Prudence Crowther)
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