I referenced this article in class last week when speaking about how companies have to plan for different scenarios in our discussion of “sensitivity analysis. ” It isn’t enough anymore to arrive at one long-term plan and ride it out to the end.  To be competitive today (or, in fact, to survive sometimes) companies need to engage in several “what if” plans so that they are being proactive when the inevitable surprises arise rather than scrambling to keep up.  Caterpillar is not only planning for their “most likely” scenario, but they are also planning in case other scenarios occur.

Caterpillar says that even if demand for its equipment is flat this year—an unlikely projection it calls its “Great Recession scenario”—it would still need to boost production in its factories by 10% to 15%, just to restock dealer inventories and meet ongoing customer demand.

Meanwhile, output at Caterpillar’s suppliers would have to rise 30% to 40% in this scenario, because Caterpillar would also be refilling its shelves.

Caterpillar is also expanding their planning process to be inclusive of their suppliers and their customers (including dealers) so that everyone is on the same page.  We no longer cover the “value chain” concept in as much depth as we have, but working beyond the legal boundaries of Caterpillar to engage these other participants is growing in importance and moves like should work in the favor of companies that make them.

Going forward, a big question is how well suppliers are positioned to ramp up production. Bottlenecks and other headaches may occur as spot shortages cause unexpected price hikes and hamper companies’ ability to meet demand.

That’s why Caterpillar took the unusual step late last year of visiting with key suppliers to ensure they had the resources to quickly boost output. In extreme cases, the equipment maker is helping suppliers get financing.

‘Bullwhip’ Hits Firms As Growth Snaps Back. Timothy Aeppel. Wall Street Journal. (Eastern edition). New York, N.Y.: Jan 27, 2010. pg. A.1