CPS Deployment

Gerard Vittecoq Group President

August 4, 2009
Analyst Meeting

Agenda

Why CPS? Continuous improvement

What is CPS? 3 Sub-Systems and 15 Guiding Principles

The Road Map How we deploy CPS

Progress Report People, Quality, Velocity and Cost

CPS in Action Practical examples

Demand and Capacity Management 3 integrated processes

Purpose
To give you a better understanding of CPS and our progress

Key Messages

We have a very comprehensive plan being implemented worldwide in a
consistent manner

We have made very good progress on safety and quality

We have made significant reductions in inventory

Cost performance is improving very good considering the large decline in
production volume

We expect even better performance ahead

Why CPS?

Continuous improvement

Safe & Engaged

Accident Frequency
Employee Engagement

Better Quality

Reliability
Warranty

Faster

Inventories
Delivery Performance

Lower Cost

Manufacturing Costs
Capex

What is CPS?

CPS 3 Sub-systems and 15 Guiding Principles

Operating
System

Cultural
System

Management
System

Chase Waste: Drive for the continuous and

relentless elimination of waste in all processes,
with priority on safety and quality-related wastes

Put Safety First: Build a Safety First culture

by placing the highest priority on eliminating
safety-related waste

Actively Listen: Conduct process improvement

dialogues at all levels, demonstrating the value
peoples ideas by quickly implementing them

Pull: Use Pull replenishment to only build what is

needed, when it is needed, in the amount it is
needed

Take the Customers View: Make decisions

based on the customers view and the long-term
Caterpillar strategy, even at the expense of
near-term goals

Make it Visual: Build the visual workplace so

no problems are hidden and opportunities can
be realized

Make Value Flow: Simplify processes to quickly

identify problems and increase process efficiency
Drive Standard Work: Standardize tasks and
utilize common processes as the foundation for
Continuous Improvement
Even the Load: Balance the workload to level
production and reduce process variability
Validate Our Processes: Prove the process
and technology work before introducing them
into production

Go, See, Act: See it first-hand to ensure thorough

understanding
Stop to Fix: Cease production when a problem
occurs to correct it in process; this means we
build in-station as planned
Develop People: Identify, attract and develop
people and teams to build Caterpillars long-term
capability

Align the Targets: Deploy cascaded metrics and

targets across the value chain aligned to the
enterprise strategy supporting People, Quality,
Velocity and Trough
Act Decisively: Make decisions by consensus,
thoroughly considering all options, and implement
with a sense of urgency

The Road Map

How we deploy CPS ...

Dedicated organization

Deployment of the recipe

Assessment scoring

Capability Building

Align the Targets

The Road Map

Dedicated organization

Dedicated CPS division

Robust governance

CPS deployment champions

Leveraging 6 Sigma
CPS MBBs, BBs

The Road Map

Deployment of the recipe

Benchmarking

Outside consultants

Documented process manuals

Standard tools and metrics

The Road Map

Assessment scoring

Metric-driven assessment

Scoring: recipe compliance

Integrated corporate certifications

Baseline
(12/31/06)

YE
2007

YE
2008

Target
2009

Target
2010

12

31

48

52

60

The Road Map

Capability Building

CPS Simulated Work Environment

Operators training

CPS black belt training

Outside hiring

10

The Road Map

Align the Targets

Aligned to Vision 2020

Enterprise targets established

Business unit accountability

SMART goals cascaded to teams

and individuals

11

Progress Report

People Safety

Continuous
improvement

10
8
Recordable
Injury
Frequency

Actual

4
2
2010 Target

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

12

Progress Report

People Employee Engagement

CPS score Engagement correlated

100%
Employee
Engagement
(Production)

2010 Target

75%

Actual

50%
2004

2005

2006

2007

13

2008

2009

2010

Progress Report

Quality Machines

Defects
in the first
two days

Best quarterly results

Approaching target

Actual

2010 Target

Q100

Q101

Q102

Q103

Q104

Q105

Q106

Q107

Build Quarter
4-Qtr Actual

Last Qtr Actual

14

4-Qtr Target

Q108

Q109

Q110

Progress Report

Quality Machines

Defects in the
first year

Best quarterly results,

but far from target

Actual

2010 Target

Q100

Q101

Q102

Q103

Q104

Q105

Q106

Q107

Build Quarter
4-Qtr Actual

Last Qtr Actual

15

4-Qtr Target

Q108

Q109

Q110

Progress Report

Quality Power Systems

Defects
in the first
two days

Better than
target

Defects
in the
first year

Actual

Actual

2010 Target

2010 Target

Q100

Q101 Q102 Q103 Q104

Q105 Q106 Q107 Q108

Q109 Q110

Q100

Q101 Q102 Q103 Q104

Build Quarter

Q105 Q106 Q107 Q108

Build Quarter
4-Qtr Actual

Last Qtr Actual

16

4-Qtr Target

Q109 Q110

Progress Report

Warranty Machines

2008 build is a
historical best

2006 2007 Tier III

2005

Build year
warranty
to sales

2008

10

20

30

Months in Service
17

40

50

Progress Report

Velocity - Inventory

$1.6 Billion reduction

in last 2 quarters

$12B

$8

2010 Target
Actual

$4

$0
2005

2006

2007

18

2008

2009

Progress Report

Velocity Committed Ship Dates

46% point improvement

from 2006

2010 Target

100%
75%
50%
Actual

25%
0%
2005

2006

2007

2008

19

2009

2010

Progress Report

Cost - Variable labor and overhead

2006-2008

Cost rates increased

2009 Q1

Cost rates increased

2009 Q2

Cost about flat YOY

20

Tier III
Operating at capacity
Supply chain
Dramatic volume declines
Cost reduction activities accelerated
Continued low volumes
Significant cost reductions
Initiatives largely in place

Progress Report

Cost - Capex

Reduce Capex
faster than sales

Capex as % of sales

6
5
%

4
3
2
1
0
2005

2006

2007

2008

21

2009

CPS in Action

Akashi, Japan Assembly shop

CPS Actions ...

Continuous flow
Modular assembly
In-process validation

Results ...

22

WIP from 186 to 68

Throughput from 8 to 2 days
Staffing from 318 to 203
33% assembly cost reduction

CPS in Action

Kiel, Germany Throughput reduction

CPS Actions ...

Right parts, right time

Pull replenishment
Stop to Fix
Sub-assembly synchronization

Results ...

23

12 to 5 days assembly lead-time

Assembly WIP reduced $7M
30 to 50% block throughput improvement
Block WIP reduced $3M
50% reduction in defects per unit

CPS in Action

Mossville, Illinois Tech Center test cells

CPS Actions ...

6 Sigma RIW
OEE
Total Productive Maintenance
Quick change over

Results ...

24

Eliminated a Tier 4 constraint

OEE from 16% to 52%
Avoided $60M investment
15% reduction in testing cost per hour

CPS in Action

Rantigny, France Facility transformation

VISION

CPS Actions ...

Assembly captive flow

Internal pull
Kanban
Co-location of manufacturing / design teams

Results ...

MAY 2009

25

155% capacity increase

91% safety improvement
48% early reliability improvement
25 to 6 days assembly lead time

CPS in Action

Waco, Texas - Cat Work Tools

CPS Actions ...

CPS Principles at start-up

Captive flow
Team Leaders
CPS Assessment score of 62

Results ...

26

87% defect reduction

$3.5M inventory reduction
Process time 3 weeks to 24 hours
50% reduction in man hours

CPS in Action

East Peoria, Illinois Track-type tractors

CPS Actions ...

Visual
Stop to Fix
Sequenced - OSS
WIP Caps
Flow

Results ...

27

$20M inventory reduction

90%+ delivery performance
75% Prime product WIP reduction
24% early reliability improvement

CPS in Action

Worldwide WIP Caps

CPS Actions ...

Results ...

5000
4230 units

4000

3000

2000
1270 units

1000

0
Sept 08

Oct 08

Nov 08

Standard Work
Make it Visual
Daily governance
Pareto approach

Dec 08

Jan 09

Feb 09

M ar 09

Apr 09

May 09

Jun 09

Top 10 prime product facilities

28

70% WIP reduction

$300M inventory reduction
12% flow improvement

Demand and Capacity Management

3 integrated processes

29

S&OP 18 months demand management

EPP 3 year capacity management
GPNP 5 to 10 year manufacturing footprint

Demand and Capacity Management

Manufacturing footprint principles

30

Lowest landed cost

Mass market proximity
Supply chain capability
Product-line focus
Manageable facility size

Summary

Expected
continued returns on
CPS investment

Why CPS: PQVC

What is CPS: Waste elimination

The Road Map: Recipe and results focus

Progress Report: Initial improvement, significant opportunities

CPS In Action: Best Practice replication

Capacity Planning: Preparing for the upturn

31