Dividends and Caterpillar leans on cost cutting strategy to cope with effects of Trump tariffs

It is always amazing to see the disconnect between politicians and reality and a recent article by Rajesh Kumar Singh of Reuters highlights this disconnect. President Trump loves to impose tariffs and believe manufacturing jobs will come flocking back to the US; on the other side are existing manufacturing companies – who see the world a little differently. The article highlighted Caterpillar – you will know their yellow machines.

The article discusses Caterpillar’s North Carolina manufacturing plant in Clayton and hopefully the flooding did not have a large affect on it. The company makes small front end loaders, in 2010 it laid off employees due to slow sales and consolidated two shifts into one under a program its calls Operation & Execution Model.

Since 2010, sales have picked  up, however Caterpillar still only runs one shift and all the employees are on flexible contracts. It turns of employment, CAT is producing more loaders with 30% fewer people. How? The company redesigned all its machines it makes to have 20% less parts. Fewer parts means less steel ( a savings); it improves safety; it improves quality and it improves the cost.

On the national political level, President Trump’s policies have driven up costs which CAT passed along to consumers.

On the production level, internal calculations provided to Reuters shows that half of the improvements in the profit margins since 2015 are due to the cost reduction strategies. As part of its cost-cutting effort, CAT business heads have been mandated to reduce the overall manufacturing cost of every product by at least 5%.

One example is the Clayton factory, the whole small front end loader is not made at the plant, a plant outside the US sends in semi-finished machines where they are assembled and met the standard made in the USA.

Linking to dividend paying stocks, the supply chain is complex and what you think is happening is not likely to be doing so. Controlling costs is a time tested strategy that everyone needs to do on a personal and professional basis. If you can control the costs, then the organization will make more on the profit side. In the manufacturing business sometimes the additions over the years are wonderful, sometimes they are just more expensive. At regular intervals who looks at them?

There are more questions than answers, till the next time – to raising questions.

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