CATERPILLAR PINS EXPORT HOPES ON MODERNIZATION OF ITS PLANT

CATERPILLAR PINS EXPORT HOPES ON MODERNIZATION OF ITS PLANT

To get a part at Caterpillar Inc.'s factory here, a worker punches a command into a computer. Within moments, an automated system places the part on a station next to the computer.

As the worker walks away with the part, the computer tabulates the remaining inventory and, if necessary, orders additional parts from the company's supplier.The automated retrieval and order system is one small example of the sweeping changes that Caterpillar is making in its effort to compete better internationally.

"We have to modernize; we have to become more efficient. Because if we don't, our competitors will," said Chuck Gates, manager of the Aurora factory.

Since the mid-1980s, plant modernization has been the cornerstone of Caterpillar's international strategy. By 1992, when the first stage of its ''Plant With a Future Program" is completed, the company will have invested $2 billion in plant redesign.

Caterpillar, the world's largest maker of earth-moving equipment, produces tractors, excavators, off-highway trucks and engines. The company has 30 plants and more than 1,000 dealers worldwide.

Caterpillar's commitment to plant modernization was belated. In the early 1980s, the company fell behind its international competition because it was slow to adopt new manufacturing technologies.

With its competitive posture further crippled by the high value of the

dollar, Caterpillar made a fateful decision: It cut prices to retain market share while revamping its factories.

"They had to play catch-up for what they didn't do earlier," said Eli Lustgarden, an analyst with PaineWebber Group Inc. "They realized they had to make a major push in technology, or they eventually would be forced to give up market share."

Caterpillar feared that if it didn't cut prices, it would lose customers - perhaps permanently. The company also feared that if it didn't overhaul its manufacturing, it eventually would lose the price-cutting war with its competitors.

Still, Caterpillar refused to accept any vision of itself that meant relinquishing its role as world market leader in all of its major product lines. Clinging to that vision, Caterpillar sacrificed the short term for the long term.

Now, after an arduous climb back, Caterpillar is beginning to reap the rewards of its decision. Its margins have improved substantially, and its non- U.S. sales are back to about 50 percent of total sales, after falling to slightly below that level in the mid-1980s. More important, it has caught up with, and perhaps surpassed, its foreign competitors in manufacturing capability.

"In terms of integrating technology into the factory, they're ahead," said Richard Sweetnam, an analyst at Kidder, Peabody & Co. "They can match their manufacturing capability with anybody in the world."

Now that it has re-established its manufacturing prowess, however, Caterpillar faces a new challenge: The plunge in the yen is making its archrival, Komatsu Ltd. of Japan, more competitive internationally.

The yen has fallen almost 10 percent against the dollar so far in 1990 and has dropped more than 30 percent since January 1988. The weak yen doesn't hurt Caterpillar directly, since it exports little to Japan, but it enables Komatsu to cut prices outside Japan without hurting its profit margin.

The falling yen concerns Kidder Peabody's Mr. Sweetnam, who fears it will force Caterpillar to cut prices to remain competitive with Komatsu. "It's making me more cautious about their earnings, but I'm holding to my estimates," he said.

Analysts remain optimistic that Caterpillar's improved manufacturing capability will enable it to compete internationally over the long haul.

Although its competitors, Fiat SpA and Cummins Engine Co., as well as Komatsu and hundreds of smaller companies have the same manufacturing technology, Caterpillar has done a better job of putting the technology together, analysts said.

"Our strong suit is systems integration," Mr. Gates said. "A lot of our competitors have islands of automation. You don't see that in our plants."

Rather than simply add a few robots to the factory floor, Caterpillar revamped its entire manufacturing process, incorporating Just-in-Time inventory controls, computerized material handling and design and extensive worker involvement.

Previously, Mr. Gates noted, the Aurora plant kept enough steel on hand for several months of production. Now, the inventory is only what's needed for a few weeks, or in some cases, a few days. This cuts the company's costs of carrying inventory.

Similarly, Caterpillar keeps much lower inventories of finished products at its plants. When a customer orders a product, it may very well be produced

from scratch rather than shipped from inventory.

The changes have worked, Mr. Gates maintains. Quality has improved, products are assembled up to three times faster and workers are more productive and more committed to their jobs.

Caterpillar's tougher competitive posture should begin to bolster the company's bottom line in the next two years, analysts suggest.

Mark Leach, an analyst at Value Line Inc., said that Caterpillar's earnings could jump from a projected $4.75 a share in 1990 to more than $10 a share in 1992 to 1994, largely because of its newly gained manufacturing efficiencies.

The prospect of economic revitalization in Eastern Europe could further spur international sales.

"For all capital goods makers, Eastern Europe holds great promise," said Mr. Sweetnam. "Two years would be the timetable to keep in mind."

Meanwhile, Caterpillar is focusing on boosting sales in its established markets, Mr. Gates said, although he sees potential in the Soviet Union and China. "If those markets develop," he said, "I could see our percentage of international sales rising over 50 percent."

CATERPILLAR INC.

Headquarters:

Peoria, Ill.

Products:

Tractors, excavators, graders, compactors, loaders, off-highway trucks, pipelayers and engines.

Customers:

Road-building, mining, logging, agriculture, petroleum and general construction industries.

Operations:

30 plants and more than 1,000 dealers worldwide.

Top Officers:

George A. Schaefer, Chairman

Donald Fites, President

Main Export Items:

Tractors and excavators

Total Sales:

$11.12 billion (1989)

Overseas Sales:

About half of total sales

Transport:

Truck and rail to tidewater ports; via ship to country of destination. Frequently, overseas plants supply foreign markets, eliminating need for ocean transport.