Caterpillar has opened a 47,030m² spare parts hub in the Jebel Ali Freezone in Dubai. Group president Stu Levenick, and vice presidents Nick Lewis and Steve Larson were on hand to discuss why the company needed a new spare parts facility in the Middle East
In a recent profile by Forbes in its list of ‘World’s Most Admired Companies’, a few statistics about Caterpillar were reeled off: revenue growth of 17% annually between 2002 and 2008; best performing stock in the Dow Jones Industrial average in 2010; and record revenues in 2012 of $65.9 billion.
But as all machinery manufacturers know, in the equipment world there is no time to rest on ones laurels. A working machine needs constant support from distributors and manufacturers.
The more units a company sells, the more capital it needs to invest in service networks, training, and spare parts availability, to keep customers happy and working, and to hold off competitors.
Despite being the largest supplier of mining and construction equipment in the world, Caterpillar’s value proposition is very simple, says group president Stuart Levenick: namely, to deliver the lowest cost of operation, and the highest return over the life of the machine.
“It’s a pretty easy statement to make, but in practice it’s pretty difficult to deliver,” he observes.
Last month, Levenick visited Dubai with other top management to officially open a new spare parts warehouse in the Jebel Ali freezone.
With a covered spare parts area of 43,786m², as well as offices and technical support, the Middle East Parts Distribution Center (MEDC) will support Caterpillar’s operations in the Middle East and East Africa.
While dealers may see savings in their inventory departments, the real winners are Caterpillar’s customers, who will experience a vast improvement on the speed of delivery on emergency parts, which previously had to be air freighted from a distribution centre in Grimbergen, Belgium, taking at least three days.
“For dealers and customers, this really shifts Grimbergen’s capabilities and puts it right in their back yard,” explains Levenick. “Our customers recognise right away what this kind of a commitment means – intuitively. It’s a big deal.”
The newly-opened Dubai hub is the latest step in a process that began in 2007, when the company made a decision to increase its global spare parts footprint, starting in North America where there were significant distribution bottle necks.
Steve Larson, president of Caterpillar Logistics, says that sophisticated modelling was responsible for decisions about where to build centres, influenced to a large extent by the location of field populations.
Dubai’s logistics capability and infrastructure also played a role in luring the company to the Jebel Ali free zone.
“In 2008 we started to study this part of the world and the geography, so the origin of this facility goes back to 2008-9, when first started to plan this transformation,” says Larson.
While the Global Financial Crisis may have significantly slowed down the investment programme, ultimately it did not impact on the final size of the planned facility, only its delivery date, says Larson.
On the sales front, Nigel Lewis, vice president of EAME Distribution Services, says that the company is anticipating growth of 40-50% in the spare parts business over the next three years in the Middle East and wider region.
The increased demand for spare parts will come from a number of areas – improved machinery sales, a higher share of the aftermarket by squeezing out ‘second-tier’ suppliers, and a shifting age profile of the Caterpillar machinery population.
Better spare parts availability can also encourage up front sales, says Levenick, in a region where they see good growth prospects.
“Once someone buys a Caterpillar product, the single biggest driver of loyalty to Cat is parts availability,” he explains.
“We see balanced growth across the region. And we see great business prospects in Africa, we see a lot of growth coming from there,” says Levenick, noting that machinery sales have recovered quickly in this region.
The company wants to take a larger slice of the aftermarket, and believes it can leverage off its business model to do so.
“We have a very simple business model we call seed, grow, harvest,” says Levenick.
“The harvest part of that is once you create all this population, we’re much more vertical and we have a much more captive control of components and parts than anyone else in
our business.
“We think it is better value for customers, and part of the key to being able to deliver on that is having the footprint out there to deliver on parts.”
Another reason the company is focusing on spare parts is related to the underlying dynamics of the machinery market, as the global economic climate continues to remain lacklustre.
There are approximately 3.5 million Caterpillar machines and engines in use through-out the world. With rates of replacement having dropped after the credit crisis, the average age of these machines is increasing.
Larson says that the flipside of lower unit sales is higher demand for spare parts. “When you go through a downturn in the prime-product sale side of the business, you see a drop in utilisation, certainly, but you also see customers running equipment a little bit longer, past what they typically would in terms of the life of a machine.
“That’s the good thing about the parts business – it’s really steady when you’re in the bottom of a cycle. It’s a very important business for us and for the dealers, it really helps even out those swings in the business cycles,” he explains.
And as fleets age, demand for the less common parts needed for large overhauls rises too says Levenick
“As they’re going through their first life, the profile of the parts inventory that the dealers would carry would changes significantly as the machines get older and require engine rebuilds and power train rebuilds, rather than maintenance parts.”
“[The age of the fleet] rises and falls depending on cycles, and when it’s getting older and they get into their second lives, that means generally you’re going to see more parts consumption – provided we have a relationship with those customers.”
The Chinese market is a good example. 10 years ago there were very few Caterpillar machines operating, whereas now there are a huge number – but these all fall within a very narrow age band.
As a result the demand for parts is concentrated around the faults that commonly develop around these age points.
Levenick says that through its telematics products, the company can monitor likely parts requirements, as well as aim to predict future buyer demand.
“We’re able to understand how many hours a machine is being utilised each month, and we track that – by model, by industry, and by geography – so you can get ahead of how much these machines are being used, how much fuel they’re burning, and that correlates back to future parts demand. so it’s giving us a leg up to understand with our supply base when to start to dial up capacities, and when to ease back.”
Spare Parts Galore
The new parts warehouse is one of only eight outside of North America, though two further facilities are under construction in Mexico, and Brisbane. With a storage area of 43,786 m², the hub will help to relieve the pressure on the Grimbergen site in Belgium.
And with 130 staff working in the warehouse, as well as offices and technical support, there is space for further expansion of up to 20%.
While labour costs may be lower in the Middle East, the facility’s set up and level of automation mimics other distribution centres.
Steve Larson says the set-up replicates existing systems and the layout, of pre-existing facilities – “more of a ‘McDonalds’ operation”.
There are clear metrics for measuring the improvements brought by the new site in the region.
Caterpillar dealers measure success in delivering spare parts not by the number of spare parts available, but the number of customer orders that can be filled completely.
If a customer requires 20 parts, but only 19 are available, then this counts as an unfilled order, since the customer requires the complete set of parts to carry out the maintenance process.
Another advantage for the company is that greater spare parts availability may also encourage dealers to push models that are less common, at the fringes of their main product range, since they are confident that they can quickly source back-up parts.
