From dumb iron to Big Data: Caterpillar's dealer sales push

Reuters
Workers walk past Caterpillar excavator machines at a factory in Gosselies
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Workers walk past Caterpillar excavator machines at a factory in Gosselies February 28, 2013. REUTERS/Eric Vidal

By James B. Kelleher

(Reuters) - Caterpillar Inc has a long tradition of proudly - and publicly - proclaiming how much it loves its dealers.

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."

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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