A&A HK Production Logistics Site Visit

HK Systems Targets Additional Growth with HK Production Logistics

Mossville, Illinois USA

January 21, 2009

Evan Armstrong

Key Personnel:

John Splude - Executive Chairman, HK Systems

John Hines - President, HK Production Logistics

Mike Judis - Vice President, HK Production Logistics

Company Background

HK Systems has roots extending back to the 1960s as the warehousing and distribution automation division of Fortune 300 manufacturer Harnischfeger Industries. In 1993, HK Systems current Executive Chairman John Splude led a management buyout of the division and created a separate private company. HK Systems then began a successful sequence of strategic acquisitions in the material handling industry to develop a portfolio of material handling systems, supply chain management software, and components. Today, HK Systems is a major provider focused on designing, building, and deploying complex, turnkey warehouse management and distribution solutions. Its key markets include Food/Beverage, Consumer Packaged Goods (CPG), Industrial, and Publishing/Printing with customers such as: Anheuser-Busch, FedEx, Ford Motor, Nestle Foods, Procter & Gamble, and The New York Times. HK Systems revenues are an estimated $250 million.

Given its expertise in designing complex warehousing and distribution operations, it may not be such a surprise that in 2007 HK Systems founded a third-party logistics provider (3PL). HK Production Logistics (HKPL) began through its acquisition of a small 3PL--Inventory Technology, Inc. (ITI). ITI was performing inbound manufacturing support services to Caterpillar, Inc. from a warehouse one mile from Caterpillar's Mossville, IL manufacturing campus. During the due diligence process, HK Systems realized that it could streamline the current operation and improve Caterpillar's service levels by developing its own technologies and processes. As part of improving operational efficiencies, HK purchased a 570,000 square foot warehouse on Caterpillar's Mossville campus. HKPL also inked a 10-year contract with Caterpillar and began to automate operations and install new systems.

At the start of 2008, HKPL began full operations for Caterpillar and has since developed core 3PL service capabilities in value-added warehousing and distribution including: manufacturing support, vendor managed inventory (VMI), kitting, light assembly, packaging, labeling, sequencing, and just-in-time distribution. HKPL is ISO certified, has revenues in excess of $30 million, and employs approximately 400 people. Going forward, its strategy is focused on developing new 3PL business from industrial manufacturing and high-tech companies.

HKPL Caterpillar Mossville Engine Center (MEC) Operations Overview

Caterpillar is the world's largest manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The Mossville Engine Center (MEC) produces engines for boats, ships, trucks, power generators, and construction and mining machines.

To support the manufacturing operation and its just-in-time inventory management requirements, there is succinct operations coordination and communication between HKPL and Caterpillar. HKPL receives engine parts and components from Caterpillar's global suppliers at its warehouse each day. It provides storage for over 35,000 stock keeping units (SKUs) of parts and components, performs multiple value-added services including assembly and advance kitting, and sequences kits, parts, and components to Caterpillar's assembly lines in a separate campus building. The HKPL operations run 24 hours, five days per week.

Caterpillar sends HKPL a production schedule three days before its start-on-line (SOL) date. From receipt of the production schedule, it must build the required assemblies, kits, and sequence parts so they are available to Caterpillar five hours before going into the manufacturing assembly line. HKPL is building approximately 185,000 assemblies and kits each month.

The operation is highly automated. HKPL deployed Oracle's E-Business Suite for its enterprise resource planning (ERP) and warehouse management system (WMS). The warehouse management system is linked to over 200 radio frequency scanners to drive tasks and provide production and inventory visibility at every step in the process. Oracle interfaces with HK Systems own equipment management system (EMS) which drives automated picking and receiving via automated storage and retrieval systems (AS/RS).

HKPL Caterpillar Mossville Engine Center (MEC) Operations Tour

The main "floor" operations part of the HKPL MEC 570,000 square foot facility is split into inbound receiving, one major kitting area, seven assembly work cell areas, one major and two minor outbound shipping docks, and a completely enclosed AS/RS storage area. The layout is shown in the figure below.

HKPL Mossville Operations Layout

Daily, HKPL receives approximately 60-70 inbound truckloads of engine parts and components in "lifts" which resemble open top crates. Approximately 2,065 lifts are received each day by three shifts of workers. HKPL barcodes all of the inbound product and scans it into Oracle. Each lift contains a single SKU of product and is putaway after receipt, brought to a "hot" area for expediting parts to the assembly line, or if directed by the system, it is moved to a quality inspection area. Some of the inbound product is from Caterpillar suppliers that HKPL provides VMI to. The VMI parts and components are stored by HKPL and owned by the supplier until Caterpillar needs them for assembly.

From receiving, 90% of the parts and components are taken to two inbound induction stations for putaway by the AS/RS. There are also two outbound AS/RS stations for picking. The fully automated AS/RS cranes store and pick lifts to and from 43,000 rack locations without human intervention. The other 10% of the parts and components are stored in racks or staged for kitting, assembly, or cross-docked to Caterpillar for manufacturing.

Assemblies are built from a bill of material (BOM) maintained in Oracle. HKPL has approximately 135 assemblers producing fan drives, fly wheel assemblies, turbo assemblies, oil pans, air intake manifolds, water pumps, and other engine components. Most of the assemblies are then packaged with other parts in kits and staged to go into the manufacturing line.

In addition to the operations detailed above, HKPL is also providing repacking and returns processing services to Caterpillar.

Summary

The tightly run HKPL MEC operation exceeds its contractual key performance indicator (KPI) service levels for Caterpillar and has improved operations, inventory management, and assembly quality significantly. Using this operation as a growth platform, we anticipate that HKPL will continue to gain business with 3PL customers requiring high-quality operations with a high level of required value-added services.

Inbound Receiving

AS/RS Cranes

Area "K" Main Kitting Line

Area "2" and "3" Work Cells

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