No-Brainer Tech Investments from a CFO
Leah Archibald: Nobody wants to be left behind the pace of technological innovation today. But nobody wants to cut a check for the wrong technology either. How can manufacturers hold on to their aversion to risk and still make the right gambles on technological investment?
My guest, Peter Riley, was the CFO of Global IT for Caterpillar, the world’s leading manufacturer of earth moving equipment. He’s here today to tell us when and how to make a case for technological investment.
Peter Riley, welcome to the podcast.
Peter Riley: Thanks Leah. Glad to be here.
Leah Archibald: You were with Caterpillar for 25 years, and in your role as CFO you oversaw a number of fairly significant and costly technological investments. How do you think executives should go about making decisions on whether or not to invest in particular technologies?
Peter Riley: I think executives, when it comes to investments are pretty agnostic as to what they invest in. They get focused more on how does this investment deliver a return and help execute our strategy.
When it comes to making an investment decision, investing in software was no different than investing in a machine tool. The emphasis is on: what is this investment going to return? Is that high enough for me to throw money at it? And then the next question really is: what’s going to be needed to be successful? Change management was probably the biggest downfall with technological investments.
Leah Archibald: Say more about what you mean by the term “change management.”
Peter Riley: Well, the easiest thing to do when you are making a technological investment is write the check. You just send the vendor the check, and they send you the hardware or software. But that hardware or software is of no value whatsoever unless you can get your organization to adopt it and leverage it to its fullest capabilities. That’s what I mean by change management.
In my experience at CAT, we were probably one of the very first customers for PTC. We saw the advantage of 2D modeling. Now it’s necessary to do 3D modeling. But at the time, it was very easy to understand the productivity games you were going to get in the design space by leveraging technology versus engineers with tenfoot by four-foot drawing board.
Leah Archibald: When we’re talking about something like better modeling, that sounds like a relatively easy change to push through, because everyone from executives all the way down to the designers can see the potential gains in productivity. Can you talk about a change that was maybe more difficult to manage?
Peter Riley: GPS, when it came out, the real question was: How do you leverage that technology in a way that makes sense in the marketplace? The primary opportunity we saw for GPS was in the rental fleet market. The reason we had rental fleets is because that’s where the market was going. Customers didn’t want to buy equipment when they only needed it for a specific project. You’ve got this piece of equipment, you needed it for four, or six months for one project, and now you have no use for it but now you’ve got a lot of money sitting out there in your yard. And to be frank, we were slow to get to that market, but Hertz rentals and others came in and we were kind of caught flatfooted.
Where we found GPS to be useful was you could put GPS trackers on those rental fleets and that was a big positive for the dealers. The dealers said, if they had to have all these assets, at least they could know where they are at all times and track them.
Leah Archibald: It sounds like GPS technology was a technological innovation that made the business change to equipment leasing a little bit easier to swallow.
Peter Riley: It definitely was. To be honest with you, we didn’t like the leasing model because it ties up capital. If a dealer has $10 million in rental equipment, that’s $10 million they can’t invest someplace else. But at the end of the day, we both came to the conclusion that this was a strategy we were going to have to adopt because we were being forced to adopt it.
Leah Archibald: If you didn’t do it, somebody else was going to do it.
Peter Riley: Well, somebody else was already doing it – Hertz Rentals and United Rentals. Caterpillar is very driven by market share. We were watching our market share go down because these rental fleets were grabbing it up. We had to adapt. So that’s how we got into that business – adapting to the market needs.
I think inevitably that’s got to be the lens, not just for technology investments, but for all investments. All investments are going to be viewed at the executive level through the lens of market needs.
Leah Archibald: Is there a baseline level of technology that you think manufactures need to invest in today in order to compete? The same way that Caterpillar needed to invest in the rental market whether you wanted to or not?
Peter Riley: I mean, if you’re a manufacturing company, and you design, CAD system is pretty much table stakes.
That’s one of the things I see about aPriori now. I see aPriori as becoming table stakes for a manufacturing company. Before I had aPriori, I got a lot of scars from new product introduction – projects at Caterpillar that were consistently over target costs and consistently late. Being a CFO for some of those divisions, I know what that did to my financial projections, to commitments we made to the executive office based on the investments we made in that product.
All executives can deal with good news. They always like good news better. But they also can deal with bad news. Where you run off the rails is when you give them surprises. How did this become a surprise? I didn’t see this coming! That’s what I always used to tell my team: if we get surprises, that just tells me we’re not on top of the business. We’re not running the business, the business is running us. That’s not a good space to be in. Because now you’re reactionary all the time. You feel like you’re on your back foot. That’s not a good feeling?
Leah Archibald: We often think of technological innovation as being surprising or exciting. But for the manufacturer, you’re saying the best technological investments are the ones that actually help make your job less surprising.
Peter Riley: I used to have a saying when I worked at the manufacturing plants: the best factory is a boring factory. Meaning: there are no surprises. I was supposed to make 28 tractors today, and I made 28 tractors today. I know I have orders for all those 28 tractors. They’re going to ship when I told my customer they were going to ship. Etcetera, etcetera.
Leah Archibald: You don’t want surprises in the tractor factory!
Peter Riley: Exactly. What if I was supposed to make 28 tractors today, but I only made 20? Because of a specific component that I only got 20 of. Now that has knock on effects. Now I’m eight behind. Can I catch up tomorrow or over the next three or four days? Usually the answer to that is no. So now I either disappoint customers, which I’ve probably already done anyway because of the supply chain disruptions, or I’ve got to work on Saturday to try to catch up production. And now by the way I’m paying overtime. And it wasn’t in the plan to work Saturday. So, this is all variance from my plan.
If technology can help you get to no surprises, you got to adopt it. That’s typically why companies invest in supply chain systems, and have them integrated with their PLM systems and MRP. It all has to work together. Then it’s an easy sell. If you sit back and say: I could have people trying to manually do all this – sending mails back and forth – or I could invest in a system that does this, and by the way everybody’s looking at the same data and we all have one vision of the truth, this is what everybody wants. Very few companies actually achieve that. And none of them will achieve it without some technology.
Even with technology there’s no guarantee they’re going to achieve it. The technology itself is of no value unless it drives the right behavior. So if that material planner got the notice and did nothing about it, well, technology didn’t help you, did it? You are still going to have this surprise three weeks from now. I was supposed to make 28 tractors today and I only made 20 because Joe in material planning didn’t act upon what the system was telling him to do. That’s where you need to drive the change management to make this successful. How hard is that going to be? In CAT speak, how many cats are we going to have to try to herd meaning different groups, business units, etcetera?
Leah Archibald: How can a technological investment help executives answer the questions: How to Make It and Where to Make it?
Peter Riley: In one word, I’d say simulation.
I spent a lot of time doing business planning and strategic planning at Caterpillar. At the time, I had a sign on my office wall. It said: the first rule of corporate planning is everything that can be changed will be changed until there’s no time left to change it.
When you think about what we call budget iterations, they’re all different. It’s a simulation. You’re simulating what you think the financials are going to look like. You make assumptions about what the market is going to do. It’s the same way in manufacturing.
Let’s say I have a particular piece part. Let’s call it a connecting drive. I could decide I can make these myself, and I understand that it’s probably going to take a 20 or 30 million dollar investment in machine tools to make these, because I’m going to have to have an automated transfer line, meaning the part gets put into the operation by an operator and it doesn’t get touched again until it comes off the end of the line. It’s got to be that way because you couldn’t get the volumes you’re going to need otherwise, because for every single six-cylinder engine you need six connecting rods. Take that times 200 engines a day, and you quickly start getting the volumes that match the manufacturing investment you’re going to have to make.
So that’s one of my options. Another one of my options is I can find a supplier who has these capabilities. There’s OEM suppliers all around Detroit that make connecting rods. I don’t know exactly what GMs and Chrysler’s sourcing model is, but I’m assuming they probably have a supplier that makes connecting rods for all of them. Then you’ve got to evaluate: do they have the capacity to serve me? What would it cost?
Leah Archibald: That’s where the simulation comes in.
Peter Riley: Exactly. And then you say: I also know this upstart group in China. Or I know this group in Eastern Europe who has these capabilities. What if I did it in Hungary or China or Metro Detroit? You’ve got to simulate where you’re going to assemble. Because no matter where I make that connecting rod, it’s got to figure its way to my assembly line.
In Caterpillar’s case, they make most engines in Texas. So you say: okay, I could make it at a machine shop of my own in Texas and I control the whole thing, but that’s a big upfront investment. Or I could buy it from China. But you’ve got to simulate those ramifications because now you’ve got a very long supply chain.
The only way to do that is simulation. And if you can have an automated simulation, fabulous. Because I’m going to get to the right answer quicker with automation than if I’ve got to have 40 people exercising 50,000 spreadsheets to make these calculations. To me, that power is one of the beautiful things about aPriori.
Simulation basically helps you understand how to innovate. It’s not a new concept. Every decision has alternatives that you have to weigh against each other. But if you have a tool that allows you to do that in nanoseconds, versus three weeks, I’d take nanoseconds all day long.
Think of going back to that 3D CAD model. If you think you’re going to start designing and manufacturing things, and you’re going to do it on a drawing board and not utilize the capabilities of 3D modeling in the design space, good luck. Because, I’m not investing in that, FYI.
Leah Archibald: Well, if you’re not investing, then I’m not investing either. Peter Riley, thank you for being here on the podcast today.
Peter Riley: Thank you. I appreciate it.