BU-203-01

December 8, 2006

Make Your Dealers Your Partners

A decade ago, Caterpillar, a manufacturer of heavy equipment for construction and mining, suffered some losses from 1982 through 1992. Many observers even predicted that Caterpillar would enroll the list of U.S. corporations that fell to the Japanese. However, Caterpillar's marketing strategy helped the company to rebound financially.

According to Donald V. Fites, chairman and CEO of Caterpillar, there were several factors that made Caterpillar rise to the challenge. They included the weakening of the dollar relative to the yen, the value of the brand name, quality of the products, new-product introductions, big investments, responsiveness to customers' needs, reorganization of the corporation, and the most important the system of distribution and product support which led having close customer relationships.

In 1980's, sales dropped 40% because of global recession. Caterpillar was facing difficulties because the dollar was weaker than the yen. Its costs were too high, and competitors were establishing higher standards for manufacturing and product development processes. Instead of letting die its dealers by themselves, Caterpillar decided to bear the responsibility. Fites stated that from 1982 to 1984, the company lost $1 million a day or $953 million in total. Caterpillar preferred to lose money two years in a row that to lose dealers around the world. It would cost Caterpillar five times more to get them back. Since then, dealers are an important part of Caterpillar's business.

Caterpillar had a terrific value of the brand name which helped the company to stay at front. Even though customers know that there was a $16 billion-plus company they could trust, dealers were the ones who created the image of a company. Caterpillar recognized that dealers know more about the customers' needs. Now, Caterpillar follows very close dealers' movements. Every year, the company reviews all the dealers' performance, and dealers work on next year in order to enhance the brand name.

Fites believes that quality of products is an essential given factor to be in business. Every company must achieve this factor to get repurchases. Customers will repurchase a product if the product accomplishes customers' expectations. Otherwise, the product fails. Fites points out that their machines are expensive, but they are worthy. They last long for 10 to 12 years on average, and even many of them would operate for 20 to 30 years. In order to know the quality of the product, Caterpillar involved dealers in programs on product quality. Dealers and manufacturers meet quarterly to discuss whether the product possesses high-quality. If there is something wrong with the product, the factory immediately deals with the problem before any failure. As a result, Caterpillar saves more money and keeps an excellent image in front of customers' eyes.

Not only dealers helped Caterpillar on product quality, but also they contributed with innovative ideas for new-product introductions. By 1995, Caterpillar had introduced 49 new models. It was possible because its dealer network produced exceptional market intelligence. Dealers' information enabled Caterpillar to build better machines. Caterpillar even made its systems more modular. It was very helpful for customers because they could remove any damaged part of the machine and get a new one from a dealer's parts inventory. Caterpillar maintained 22 parts facilities around the world which served 480,000 line items.

Besides, dealers had made huge investments in Caterpillar. According to Fites, dealers' investments ranged from $10 million to more than $100 million. They could even employ 19,000 more people than Caterpillar. Dealers had investments in parts inventories, warehouses, fleets of trucks, service bays, diagnostic and service equipment. Dealers stocked between 40,000 and 50,000 line items.

Through dealers, Caterpillar is responsive to customers' needs. In 1982, when they had a problem with its machine called D9L, dealers helped Caterpillar to design and put into service a comprehensive program for repairing machines. It ensured customers that Caterpillar was on the top of the problem. Caterpillar also developed the fastest parts-delivery service. It guaranteed customers that dealers would provide the replacement or the part would be delivered within 48 hours. Its latest innovation “information system” checks machines remotely and notifies the local dealer that a specific part needs to be replaced. It allows dealers to deliver a part before a customer needs it.

Because Caterpillar thinks that dealerships should stay in the family, it reorganized the corporation. Fites points out that CEO's term of five or six years is not enough for the company. So, dealerships stay in the family members' hand for more than 50 years. Caterpillar helps dealers to keep the business in the family by having seminars on tax issues and succession planning, attracting children of dealership owners, encouraging owners to involve their children in their dealerships from early age with summer jobs and then full-time job after graduating from college.

The most important reason for Caterpillar's success is its system of distribution and product support, and the close customer relationships it fosters. It is the biggest advantage over its competitors. Caterpillar has 186 independent dealers that sell and service its machines around the world. Dealers help the company to build and maintain close relationships with customers. Also, dealers can improve Caterpillar's products and services to satisfy customers' needs. Caterpillar's delivery system is fast within 48 hours a customer gets any part to be replaced. Its distribution operations are linked by a worldwide computer network which allows Caterpillar to check how many machines in the world are waiting for a part.