Caterpillar bundles to win: operations strategy in action

Hello everyone. This is Sridhar Tayur, I am a Professor of Operations Management at Carnegie Mellon University. Today's lecture is on how Caterpillar changed its product portfolio and bundling strategy to be more effective in the marketplace. What I would plan to cover today is first give you some basic background on how firms are competing, and then use Caterpillar as a specific example of the use of mathematical methods and data-driven approach to figuring out what is the best way to go to market with their wide variety of products.

So, what are the key decisions for a firm like Caterpillar that produces physical products to be sold over a period of time in a competitive marketplace. One is availability. What availability means is if a customer walks into a store, how likely is it that the particular product that the person wants is already there? If it's not there, how long would it take that person to get it? So, availability is a measure of the likelihood of getting the product that a person wants about the time when they walk into the store or pretty soon after. Of course, the customer is also interested in the price. How costly is the product? And more importantly, how costly is the access to their product? If the product is a bit cheaper and they can wait for a couple of weeks, they may prefer it. Or they may say, "I want it right now, I don't mind paying a little bit of a premium." So, pricing has to do with the product itself but also if it's really what I call the access or the availability of the product that the customer is looking for. Very rarely does the company produce just one product. Apple is obviously very famous for producing a small set of products, but Caterpillar like many other manufacturing companies are known for producing an extremely wide variety of products. In fact, the total number of different configurations that Caterpillar can provide that could be useful to customers even within this product line, which is building construction products is over 500,000. Clearly, you're not going to make one of each and keep it in every one of the stores around the world. The question then becomes, what products are put in the store in what configurations and in what quantities? And for those that are obviously not at the store that a customer might want, how do we get it to them? Either because we have it in an upstream warehouse or because we can make it, customize it to order in a short period of time. Therefore, the problem of going to market boils down to four things. One, what are the products that are available off the shelf? What are those configurations? Two, for those configurations that are not available immediately, how do we get it to the customer fast enough so that they don't take their business elsewhere? What should be the price of providing this availability? And if there are 500,000 different choices, how do we bundle it in some rational form to not only explain it to the customer what is possible, but for us to be able at Caterpillar to provide these products in a very effective manner. So, what are the essential trade-offs? The essential trade-off boils down to this. I can keep a lot of inventory near the customer and therefore get a relatively high market share, but the cost of this inventory and the cost of not selling this product for a lot of time maybe too expensive. So, what companies like Caterpillar are looking for are really this, how can I grab the market share in the most profitable way? What I want to do therefore in the next several slides, is do a deep dive on what Caterpillar Building Construction Products division did, so BCP stands for Building Construction Products. And after we go through the deep dive, we will close with a discussion on, what is the competitor doing? One of the important competitors to Caterpillar is John Deere. It turns out that I have also helped John Deere figure out its product portfolio and go to market. And let's see what are some things that Deere and Caterpillar are doing similarly and what are some things that Deere and Caterpillar are doing differently and why is it the case that two companies, which are both very good, choose to compete in the marketplace with different strategies.