Dell and Caterpillar Reduce Freight Costs with Mode Shift

The CSCMP Annual Global Conference, the most important supply chain conference of the year, had some nice mode-shift case studies. Speakers from Dell (Rob McIntosh, Global Reverse Logistics Director) and Caterpillar (Tom France, Director of Global Transportation) shared their insights and experiences last Monday.

In the case of Dell, a manufacturer of personal computers (PCs) and other electronics-based technology products and solutions, the shift meant moving from flying international bulk air to increasingly making use of 2 to 5 day air, rail (particularly in China), and ocean. This shift would not have been possible without a shift in business strategy.

Historically, Dell’s supply chain was famous as a build-to-order (BTO) manufacturer. Customers went to Dell’s website and ordered exactly the components they wanted in their PC. The result was a very fast and responsive supply chain with almost no inventory. However, as the prices of PCs fell, and PCs became ever more powerful, customers no longer felt the need to wait a few days for a specially-tailored PC. They went to retail outlets and bought cheaper products off the shelf.

Dell responded by moving to a segmented supply chain. One segment involved selling lower cost products based on a smaller number of configurations (approximately 300) directly to large retail chains. This involved shifting a large portion of the production from BTO to make-to-stock (MTS). Once Dell became a MTS manufacturer, forecasting and customer analytics (what do customers want and what will they pay?) became more important, and the supply chain slowed down. The company now holds more inventory, but it can also engage in much less costly and greener modes of transportation.

Caterpillar (CAT) is the world’s leading manufacturer of construction and mining equipment. Tom France of Caterpillar made an interesting point. When supply chain professionals think of mode shift they think of moving from faster and higher cost modes, like truckload, to a totally different mode, like rail. But you can also stay in a mode and achieve the same thing. In CAT’s case, that meant moving from flying spare parts overnight to using many more 3 to 5 day flights where customer expectations were aligned on a lower cost, but slower, delivery.

At CAT the ability to utilize lower cost modes has been facilitated by technology. The company built a control tower, using a visibility solution from GT Nexus, to achieve end-to-end visibility. This tool allows it to measure not just carrier lane performance, but also the variability associated with different carrier’s performance on specific lanes. What this means is that a carrier that delivers a number of shipments five days early or late has higher variability than a carrier that consistently delivers within a day or two of the scheduled arrival time, even if on average its on-time performance is the same. Lower variability translates into a lower need to carry inventory.

CAT also uses a number of air and ocean transshipment hubs. These hubs give it better scale on a lane. With scale CAT becomes a more important customer that can pre-book ocean capacity with no dwell times. In the air mode, it ships hub to hub to maximize cube.

CAT got the visibility solution up first, then put the hubs in place. Tom believes that was the right approach because putting in a robust process based on “trusting but verifying” what their 3PL companies were telling them needed to proceed changes to the network.

And at CAT, the question of what customers want and what they will pay also influences what sorts of modal choices it makes on a product by product basis. Tom made the point that engineering $400-500 out of a product is almost impossible. However, in a global supply chain with heavy equipment products, achieving this with a lower-cost mode is quite doable. Transportation can be a “huge lever” in lowering products costs. It is just a matter of working with customers on the price/delivery tradeoffs.

In conclusion, one of the things that most struck me was Dell’s business strategy transition. Much of the rhetoric in supply chain management today is about becoming “demand driven.” The poster child for this was the old Dell. There is no better way for a manufacturer to get demand signals directly from the customer, and then reacting to those demand pull signals, than engaging in a MTS e-fulfillment supply chain. Dell’s experience shows that sometimes survival involves becoming less demand driven.