Q: How have the last two years of economic slowdown impacted your industry, which is so dependent on capital investment from your customers?
A: The business climate has been a mixed bag. Globally, construction equipment has not picked up, as we had expected. However, in regards to agricultural equipment, North America has been steady through the first half of this year, with a slight increase in the third quarter. In Western Europe, sales are up. Latin America has been very strong.

Q: How has this slowdown affected your supply-chain strategies?
A: Our industry is also very competitive, so we continue to walk the fine line between reducing costs and maintaining high levels of service. Cost control has become a key driver for our supply chain. We are on track to implement our manufacturing footprint strategy laid out in 2000, which will consolidate our plants around the world.

Q: What is CNH's footprint strategy?
A: We are consolidating our manufacturing plants to gain better plant utilization. We are transitioning the footprint of where each product is produced to one or two locations in the world. Before we started this plan, most plants were running at about 50 percent capacity. The end result over the next two years of our consolidation will be that all plants will be at 70 to 75 percent capacity utilization. The overall strategy is to rationalize the number of industrial plants globally from 60 to a target of 39. We are currently at 43. A key element of this strategy is to reduce our fixed costs by building a lean manufacturing system, and increase flexibility by relying more on outside component suppliers.

Q: This sounds like more than just a reaction to an economic downturn. What is driving this strategy?
A: The real impetus behind this strategy is the need to reduce costs on an ongoing basis. This is probably a similar mantra for everyone in the industry. Our procurement function has an aggressive global sourcing strategy that essentially will allow us to outsource a significant percentage of our component parts to suppliers in China and India over the next three years.

Q: What role will logistics play in this strategy?
A: We are constantly trying to improve our logistics infrastructure to better support our plants, which are our internal customers. We must provide them with the information that they need and with a comfort level about their component supply. They need to know that the inbound supply chain is going to be managed. Our job is to fulfill their requirements, including improving how exceptions are managed.

Q: What systems are you putting in place that will allow you to provide this information, and this level of confidence?
A: We have developed, and are launching, an in-house system that provides our suppliers and plants with a web-based visibility tool. All suppliers are now getting their requirements off of this CNH extranet. It's a browser-based portal where suppliers all over the world can access the site with a secure link.

Q: How does the system work?
A: Suppliers can see their delivery schedules on the portal, so they know what is expected from them. They can then input confirmations of what items will be included in the shipment. All parties know what is scheduled and planned, and what will be shipped - down to the part number. This information is shared with the third-party logistics provider in that region. The 3PL gathers shipment information from all suppliers in the area, so it can build an optimized load. The 3PL then gives each supplier the carrier information and pick-up time.

Q: How about information when the goods are in transit?
A: We are going to use this supplier-visibility system in conjunction with another tool that we are working on with an outside vendor that will give us part-level visibility throughout the logistics cycle, from the supplier's dock, or an FOB point, through to our manufacturing plant. At some point, we will be integrating this visibility system with an advanced shipping notice function.

Q: What makes this system so important to CNH?
A: Working with our suppliers requires better integration, data visibility and re-engineering of processes. We must link the suppliers with our plants and our logistics operations. One of our major challenges going forward is integrating all the information between our plants, our suppliers and logistics providers. We have done a good job of documenting our business requirements and process requirements associated with running an efficient supply chain. We now need to cascade those processes across the organization and put the discipline and technology into them to the degree that we can be successful.

Q: Is this purely a portal-based system, or will there be system-to-system integration?
A: We have 4,700 suppliers globally, so we are not going to try to integrate every one of those. The browser-based function is working just fine for them. For high-volume activity, there will be need for tighter integration. We are starting with our consolidation points, which are close to major ports. We have three consolidation points in Europe for shipments coming to the U.S. We have two for outbound flows from the U.S. At some point, we will integrate our major suppliers from whom we get full containerloads. Our focus is to get the biggest bang for the buck.

Q: With so much emphasis on outsourcing to suppliers around the world, how does CNH maintain logistics control?
A: We have had a lot of success stories with outsourcing to suppliers, but there have been problems. From a process standpoint, we are focusing more on compliance within our supply chain, so we can measure how effectively we are managing our suppliers.

Q: Could you provide us with an example?
A: A simple example is getting suppliers around the world to use the correct carrier. We put in compliance programs to educate our suppliers about how they can help us better control this routing problem. This inbound compliance is important to us and to our overall success. We need to manage that flow to our plants, based on the plans that we have set forth.

Q: Is this a matter of better supply-chain management through better measurement?
A: Yes. Through our new system, and the processes that underlie it, we are able to tell the supplier which parts to have ready by a certain date, and then measure how well they perform. If there is a failure, we are able to see what it is, both in terms of timing and quantity down to the part level. We also are able to capture carrier information as the goods are shipped and received.

Q: What other aspects of logistics will your new system help you control?
A: By having the supplier work through our system, we get better controls over freight payment. For example, suppliers are supposed to go through our designated 3PL to route shipments. If they route it themselves, the shipment is likely to go through the wrong carrier at the wrong rate. That also causes issues with our freight payment at the back end, which has to be handled as an exception. We see our new process as an advantage in getting control over the accuracy and control of freight payment.

Q: We've talked about supplier performance management. How are you dealing with compliance within your own organization?
A: With our new process and tools, we will know whether or not the supplier will be able to ship on time. If not, we will know if the supplier was the cause for any expedited transportation costs that were incurred. But also, we will be able to see if the supplier did not receive the requirement information from the plant in a timely manner.

Q: How does all of this improved visibility translate into better supply-chain performance?
A: As we roll out this new visibility tool, we need to start building rules to deal with exceptions we uncover. If a supplier was supposed to have an order ready for a consolidation to a plant, but missed it by three or four days, a flag goes up. Someone at the plant has to make a decision as to whether there is still enough time to ship it via the normal ocean transport, or if that part is critical to production schedule changes that we are going to need that part sooner. Someone has to make a decision to airfreight some or all of that shipment to support production. This rule building is part of our process that we are working on now. That is the event management part. We monitor the supply-chain process and put the proper rules in place to notify the right people that need to make right decisions.

Q: Could you give us an example?
A: Airfreight is a good example. We have not had visibility tools in place to control decisions to use airfreight. Without such tools, there has been a lot of reaction at the plant level to meet perceived needs. Each plant sees that it has so many units to produce, so the managers focus on this number. It is easy to lose sight of the fact that when they airfreight, that is extremely expensive. With our new tools, they will now be able to see that impact of their decisions. They will be able to see when it makes sense to expedite because they can see where parts are today.

So for example, if a plant needs a particular part that is due next week from an international source their first reaction now is airfreight. In reality, the container carrying that part may be two days away. Our new tools will give them better information without having to go through the manual process of calling and faxing around the world every time a part is needed. But this is far more than a convenience. Our new manufacturing environment is based on sourcing more parts from China, India and other distant places. We need better tools to make this extended supply chain work efficiently.

Q: Have 9/11, the West Coast port lockout, and other recent disruptive events caused you to rethink your approach to contingency planning?
A: We are very concerned about disruptions, especially since our supply chain is becoming so extended. We are looking at dealing with this potential risk with additional inventory. Where it makes sense strategically, we are increasing buffer safety stock in order to negate any possible disruptions.

Q: Let's talk about people. With this new emphasis on global sourcing, what kind of expertise and training must your supply-chain managers possess?
A: We're focused very much on international logistics. In the last few months, we have been holding meetings and training sessions, both for staff and for third parties that support us. We need to bring up the skills of people who have not had international experience. Global sourcing in China, India and Eastern Europe - that number is going to continue to grow. One of our plants already sources 70 percent of its direct materials from offshore. Another plant two years ago, had only one offshore supplier. Next year, they will have over 50 percent of their content coming from offshore. That is our new environment, and we need logistics people with the skills to manage a global supply chain.

Q: You mentioned meeting with logistics providers to emphasize your needs. What does this entail?
A: We have stipulated to our 3PLs that they also must bring up the international logistics skills of their people as well. This is not about replacing people, it is about improving skills and competencies. That is the direction we are heading, and we want to work with 3PLs that can support us.