Meet Doug Oberhelman. He is announcing that he will “step down” as CEO of Caterpillar at the end of the 2016. He made a bold bet in 2010 and lost. He could be you.
There are lessons from the story. At the end of 2010 the economy was rebounding and Chinese markets were red hot. The market potential for earth moving, construction, and mining equipment from Caterpillar was high. Doug led a strategy to build market share and spent $10B in manufacturing capability between 2010-2013. However, there was a problem. 2012 was the peak of the market. As the market potential for heavy equipment fell, Caterpillar did not respond; and as a result, the company experienced its fourth straight year of falling sales. It’s the longest decline in the Company’s history.
Oberhelman recently stated, “There will not be a recovery this year, but when the industry emerges , we’ll be a very key player and a very solid performer for our customers.” Due to the fall of Caterpillar stock, if the market returns, Doug will not be at the helm.
You may be scratching your head and asking, “How can a company not respond to falling demand in a market over a four-year period?” My response, “This is a good question.”
My take is that Doug is not alone. Many companies are at risk. Growth is slowing. Markets are cooling. My advice? Let Doug be a symbol and a wake-up call for you.
Let me explain. Sales-driven and marketing-driven processes are internally focused on historic sales. As a result, a company can convince itself for an exceedingly long period that through the execution of a great strategy they can lift a declining market. My warning: it is the exception, not the rule. Caterpillar’s story is a failure of business and supply chain strategy. Here I give my thoughts.
1) Improving Performance in a Down Market Is Tough To Do. In our annual study of public companies in the industries of manufacturing, distribution and retail companies, we find that only 12% are making progress on the critical metrics of growth, operating margin, inventory turns and Return on Invested Capital (ROIC). Over 88% of companies are stuck like gum on the bottom of a shoe on a hot summer day. (For a full analysis of supply chain performance check out the report Supply Chains to Admire 2016.) We found that only one public company drove improvement in cost, inventory turns, and ROIC in a down market. It is a very hard thing to accomplish.
2) Sales-Driven and Marketing-Driven Political Engines Only Feed the Corporation Good News. Internally, within a company, the commercial processes of sales and marketing flame good news. As a result, when there appears to be a marketing downturn, there is always a campaign or a promotion, or a new product launch that will reverse the market trend. Bonus programs, egos, and internal processes firewall market data. Commercial engines within the company are good at spreading good news quickly. As a result, good news travels rapidly; but in contrast, bad news moves very slowly within a corporation. Companies have not built the sensing engines to listen and identify market shifts and respond objectively. In the 2007 recession, it took the average company six months to sense the market shift and make adjustments. For the laggards, as shown in Figure 2, it took 15 months. Today, as Doug’s story portrays, not much has changed. In fact, despite the preponderance of data, companies today may be in worse shape. Due to the flurry of M&A activity, many are bigger. They are more global and more political.
Figure 1. The Time It Took Fortune 500 Companies to Sense the Market Downturn and Make Changes in the Recession of 2007-2009
Today’s global supply chains are big and bulky. They are hard to shift. In the words of a supply chain leader, “It is hard to turn a big ship.” It is also hard to shift a global supply chain strategy from an up-market to a down-market.
3) Inside-Out Processes Are Insular. To reverse this trend, companies must change their processes and investments to be outside-in. They must realize that marketing-driven programs are not the same as market-driven processes. To reverse this trend companies must decrease demand latency (the time to read market data) and leadership must encourage team discussions of bad news.
Within each company and industry, there are distinct rhythms and flows for demand. It is a river that flows deeply within the supply chain. Each supply chain is unique. The tributaries of the river start deep in the channel. The river flows from the customer’s customer and continues through the extended supply network. To meet the needs, and navigate the volatility of global markets, leadership teams must carefully navigate the river flows. The better the horizontal alignment–through Sales and Operations Planning (S&OP) and Revenue Management–the better the results. These horizontal processes need to focus outside-in, from the customer back into the supply chain. When they are connected, demand data moves quickly and without bias. When they are not, the demand data pools and becomes stagnant within the functional silos of sales, marketing, distribution, manufacturing and procurement.
Leaders also must accept that sometimes the river of demand is dry, and demand falls. When this happens the organization needs to pivot and expect lower growth rates. Sometimes the river overflows the banks and the supply chain must ramp quickly to respond. When demand is high in the supply chain world, it is hard to keep in perspective that high demand is a good thing.
Successful leaders learn how to dance with demand. Through experience, they learn that they cannot force sales, and they cannot fight market forces. A great leader senses market downturns quickly and communicates a new strategy. They also recognize that in times of revenue shortfalls, sales-driven initiatives only offer short-term results. Push-based sales strategies initially increase revenue, but quickly fade based on market potential.
Why can companies not flex with the shifts in demand? It is deep in the base DNA of the functional organization. Traditional supply chain processes are supply-centric. Demand is seen as a fixed set of numbers based on item-based forecasting; and as a result, the team’s focus is on numbers without an understanding of the drivers of the underlying markets. Thus companies have the wrong discussion. Within today’s organizations there is a better understanding of supply than demand flows.
Actions to Take
1) Realize That You May Be Doug. Your market strategy can be in jeopardy because you are not aligning your business strategy and core supply chain capabilities with market potential.
2) Face Facts. Traditional demand planning processes are not sufficient. Collaborative sales forecasting, use of statistics to mine order patterns, or traditional Customer Relationship Management (CRM) tools are inside-out. These technologies and processes will not help the company be market driven. Instead build outside-in processes based on market drivers and channel data; and ensure that bad news can travel as fast as good news. Encourage it.
3) Build Strong Horizontal Processes.And, Make Them Outside-In. Horizontal processes based on market listening, and mining of market data, help the functions to align.
If you see Doug on the golf course, thank him. He may have done you a favor. If you act quickly, you may be able to respond quickly to the next market downturn for your company. Let Doug be a lesson for all.
For me, Doug’s story is a strong reminder that we have not learned important lessons from the last recession.
*Story data sourced from the Wall Street Journal, October 17, 2016
Lora Cecere is the Founder and CEO of Supply Chain Insights