Performance Of Operational Systems Of Caterpillar Inc Accounting Essay

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In this assignment we will look in to what big and complex organizations under current global business environment go through, and the need to evaluate and observe the requirements they have to measure their performance in the operational systems , we will also investigate the use of quality management tools and techniques to improve organizational productivity.


The operational systems of big and old organisations such as Caterpillar Inc are more reformed and complex as compared to new and relatively small size companies, we will base our material on one of biggest construction and mining equipment manufacturers and providers, its providing truly integrated logistics solutions, the operational systems with in the organization are in practice as per the requirement and size of business activities. These systems require continuous changes in some areas where as long term changes in others, the management is expected to have a strategic planning for the future for the development of operational system which enhances the performance at all levels and in every area of the globe where the branches are conducting services for its customers, the nature of the business stays same only new operations add up with the passage of time, could be due to expansion in the size of company i.e. more branches in different countries or at occasions with new customer requirements, hence according to size and frequency of the operations and/or nature of customer requirements operational systems are supposed to be looked into every now and then to achieve best result. This is all this assignment will be looking into that how this particular organisation has developed its strategies and what management tools and techniques have made it possible for them to have cutting edge in the market which has benefited each and every stakeholder associated to the company.


Caterpillar Inc, which is one of the biggest provider of construction and mining equipment, its been incorporated for last 80 years and has got several products and service offered all around the world served and produced at hundreds of locations around the world, mainly deals in with construction and mining equipment an addition to that it also provides Financial Services to its customers as well as produce Diesel and Gas Engines, Industrial Gas Turbines, Cat Logistic Services is one of the things the parent company does. The products of CAT are well known and reliable with the wide range to facilitate the needs of consumers in almost every part of the world at competent prices.

CAT has contributed on a vast scale towards transforming the world into a developed planet in relation not only to the construction but also in providing means of energy which can be used to enhance companies operation with the help of generators and engines to rail services, with the collaboration of NASA now CAT is working on developing a technology to make the living possible on Moon.

In service sector CAT also offers financial services since 1981 to the customers all over the world to help the customers fulfil their needs when and where they arise (Cat Official Website)


To remain competitive, companies need to institute a balanced set of financial and nonfinancial performance measures that relate directly to the organization's mission, objectives, strategies, and critical success factors such as customer delivery, quality, flexibility, productivity, and financial performance. Without them, companies won't have an accurate picture of how they are performing, in which areas they are achieving success, and in which areas they need to make changes.

At Caterpillar's Wheel Loaders and Excavators Division (WLED) in Aurora, Ill., significant revisions have been made in both organizational structure and performance measures. The revisions came about largely because Caterpillar changed its overall corporate structure from a "functional bureaucratic" organization to a "profit centre" organization and instituted performance measures appropriate to the new structure. Since then, the division has achieved outstanding success and continuous improvement. During the process, participants discovered some performance measurement principles that other companies can apply, regardless of size.


Until 1990, Caterpillar's organizational structure focused on functional areas such as engineering, manufacturing, and accounting. The idea was that if each functional area achieved its goals and objectives, the customer would be happy and the corporation prosperous.

Then in mid-1990, Caterpillar initiated the restructuring of its functional organization into one composed of 13 "profit centre" divisions and four "service centre" divisions. Product groups within the "profit centre" divisions focus on serving the needs of the customers associated with a product line. Product group managers have direct control over engineering, manufacturing, and marketing. Accounting is a separate organizational unit that provides financial services to the product groups. (See Figure 2 for the organization of the Hydraulic Excavators Product Group at the WLED.)

One goal of the reorganization and new performance measurement system was to increase responsiveness, flexibility, and customer focus, so Caterpillar created mini-businesses within the company that concentrate on each customer's product needs. This decentralized approach allows each division to focus on product design, manufacturing, pricing, and parts and service for each customer.

For example, under the previous structure, a customer who wanted to buy a hydraulic excavator would contact a dealer who would work with the massive Caterpillar organization. Today the same customer still would contact a Caterpillar dealer-whose role is unchanged-but the customer's needs would be addressed by the Hydraulic Excavator Product Group within the WLED.

Another goal of the reorganization and new performance measurement system was to drive authority, responsibility, and decision making downward in the organization-empowering employees and holding them accountable for results. By so doing, Caterpillar believed it would develop more broadly based businesspeople throughout the organization and allow them to make better use of their experience and innovativeness within their areas of expertise.



Before 1990, the Wheel Loaders and Excavators Division was considered a cost centre whose purpose was to reduce the cost of designing and manufacturing products. It monitored departmental costs and the costs of all parts and products closely. But revenue, profit, financial ratios, and nonfinancial performance measures were not implemented at the division level. Instead, they were monitored at the corporate level. The ratio of direct labour hours/machine hours was used to measure efficiency in the factory. Because the WLED had no direct linkage to the customer or to the "bottom line" of the company's income statement, the coordination of business decisions was not as effective as it could have been.

Developing New Performance Measures. In January 1990, Caterpillar Chairman of the Board Don Fites and Vice Chairman Jim Wogsland selected a team composed of high-level corporate managers and divisional financial personnel to oversee the development of new performance measures for all divisions. This ad hoc team solicited input from Caterpillar worldwide and visited companies such as AT&T, Texas Instruments, and IBM. They used this simplified approach to benchmarking because they wanted to pursue an aggressive schedule for developing the performance measures. Based on development time available, your company's approach to benchmarking may differ.

The ad hoc team decided that the new performance measures must relate to the corporate mission, the new organizational structure, the desire to push authority and responsibility downward in the organization, and critical success factors. They also were to be an integrated set of financial and nonfinancial measures that emphasized both long-term and short-term results.

After the ad hoc team developed the measurement concepts for the overall performance measurement system, a business measurements team was formed in Corporate Accounting to recommend specific performance measures and facilitate implementation. This team coordinated the efforts of numerous cross-functional teams in the division and worked closely with the accounting firm of Price Waterhouse & Co., which was engaged to help pull the data together to make the system operational. The business measurements team strived to ensure that all users understood and supported the behavioural implications of the new performance measures before they were implemented. In fact, each user attended a two-day training session for that purpose.

In the fall of 1990, the business measurements team developed and implemented financial performance measures used to assess divisional performance. This time frame would allow budgeting in the "new mode" for 1991. All Caterpillar divisions were directed to use these performance measures.

Next, a team composed of WLED Controller Jim Cromer, product managers, and accountants (including co-author David De Freitas ) developed financial performance measures for each product group and major component group as well as all nonfinancial performance measures to be used at the WLED. These measures were developed and implemented by the end of 1992. Refining of the performance measurement system continued through the end of 1994.

The business measurements team has since been disbanded, but the ad hoc team still meets quarterly or as often as needed to discuss various measurement issues. Revisions of top-tier measurements must be approved by the ad hoc team, but the individual divisions continue to monitor and refine performance measures to meet their needs.

Financial Measures. In the WLED's current organization, the division and each of four product groups are profit centres. Profit also is determined for major component groups such as machine structures, machine attachments, and parts, even though they aren't designated as formal profit centres. Obviously, to determine profit, revenues and costs must be identified for each segment.

The revenue for individual products and components is based on the price stated in the price list to the dealers. Market-based transfer prices are used to determine income for internal transfers because they provide an objective, arm's-length measure of revenue and cost. These market-based transfer prices are a key element in the development of the other financial measures currently in use.

To determine costs as accurately as possible for each product and major component, Caterpillar allocates indirect costs to each of the segments using the "cause and effect" criterion to the greatest extent possible. It avoids arbitrary allocations of indirect costs to these segments because they can distort profit.

The benefit of determining profit by major component group as well as by product groups within divisions is to push accountability to lower levels in the company and to create constructive conflict among intra organizational units. This approach aligns well with the strategy in place for "cost ownership" at the WLED, which is a team concept where representatives from all functional areas (such as purchasing, engineering, accounting, manufacturing, marketing) work together to minimize costs for each component and product. This level of profit analysis helps to identify areas of the business that are having difficulty and that require special efforts to improve profitability.

The profit for the division, product groups, and major component groups is used in the financial ratios of return on assets and return on sales. Other financial measures used include cash flow, inventory and fixed asset levels, and warranty expense.

Nonfinancial measures. Because a successful performance measurement system should include a balanced set of measures, the WLED employs several nonfinancial measures in addition to the financial measures for each profit segment. Measures of customer and employee satisfaction, delivery performance, process improvement, and conformance to plan are used for the division and for each product and major component group. 

The predominant factory performance measure is the efficiency ratio of direct labour hours/machine hours, which was in use before the reorganization. Although efficiency ratios are computed for each profit segment at the WLED, the division is de-emphasizing this performance measure because it may reward behaviour that builds unnecessarily high levels of inventory just to meet a manufacturing plan, regardless of whether the plan still reflects customer demand.

Factory personnel have said that new nonfinancial factory performance measures congruent with current strategies, critical success factors, and processes are needed. Examples include measures of material and parts delivery time, throughput time, due-date performance, quality, machine flexibility, and inventory levels. A team now is in place to make these performance measures operational. The division also is attempting to relate these nonfinancial factory performance measures to specific product groups and major component groups.

A major benefit of nonfinancial measures is that they usually can be reported on a more timely basis than financial measures. As a consequence, if a nonfinancial measure indicates poor performance, action often can be taken before adverse financial consequences occur.

In general, improved performance related to nonfinancial measures ultimately should translate into improved financial performance. Yet the linkage between improvement in operating nonfinancial performance measures and financial performance is tenuous. For example, what effect does improvement of on-time delivery performance or higher levels of employee satisfaction have on income?

Service Department Measures. In addition to the division, product groups, and major component groups, the WLED has three service departments that are not profit centres. The service departments are Business Resources (Accounting and Information Services), Human Resources, and Technology Resources. They exist to serve all product groups and major component teams.

The primary evaluation of service department performance is the comparison of actual spending vs. budgeted spending, and user satisfaction is the most important nonfinancial performance measure employed in the evaluation.