Is a Lean Supply Chain Strategy Practical?

Imagine that your company makes parts that are used in your own assembly plants around the globe. Do you:

a) Make all the parts in one place and ship them to your plants?
b) Construct a parts-making plant near every assembly plant?
c) Have a few parts-making plants, each serving assembly plants in a given region?
d) Use a combination of parts, some from your own plants, some from outside suppliers?

From a lean perspective, the ideal answer would be b), since that eliminates much of the waste of transportation. However, I recognize that building a whole series of plants to make parts is expensive and may not be practical.

For heavy-equipment manufacturer Caterpillar, the answer in at least one case was a), make all the parts in one place. A Caterpillar plant in Oxford, Mississippi, was the only facility making high-pressure couplings used in nearly every piece of equipment the company makes. And as a recent article in The Wall Street Journal notes, that strategy runs a serious risk of disruption if disaster strikes.

For Caterpillar, the efficiencies from centralized production of the couplings had made the decision make the most sense. Greg Folley, who runs the Caterpillar parts division that includes the critical plant, says were it not for the efficiencies, “we’d be less likely to put all of our eggs in one basket.”

In recent decades, more companies have farmed out production to cut costs and spread the risk of disruptions, says Susan Helper, a professor at Case Western Reserve University in Cleveland who has studied supply chains. But those which do may lose some production flexibility and control over their intellectual property, Ms. Helper says. At Caterpillar, “the general strategy is right, but maybe they did it to excess,” she says.

On Feb. 5 of this year, the Oxford plant was hit by a tornado. No one was seriously hurt (workers took cover after being warned), but the plant was disabled. Part of its roof was torn off.

Caterpillar sprang into action and quickly determined that it had about two months supply of the couplings spread throughout its supply chain, either awaiting completion at the Oxford plant, sitting in parts depots or en route to assembly plants. But those assembly plants, responding to strong demand, were, in many cases, operating at capacity.

Outside vendors were brought in to help manufacture couplings. An intense repair effort at Oxford got the plant working again in two weeks, though initially it made uncompleted couplings that were shipped and worked on elsewhere, then returned to Oxford for further work, then shipped and finished at a facility in Ontario (total travel about 6,000 miles).

So far, no plants have halted assembly, and the company says the disaster did not affect first-quarter earnings.

But the article, written by Ilan Brat, notes that Caterpillar is now reviewing its strategy.

The company is considering adding some machines at factories that can duplicate some of the couplings production. Managers also are reviewing operations world-wide to determine how to cost-effectively reduce risk at key points. Steven Wunning, a group president, says Caterpillar is considering building another plant outside the U.S. to supply future growth and help if there’s another calamity.

Was Caterpillar’s original strategy wrong? What should they do now? How is your company dealing with these kinds of issues?