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AJ Buono
Dr. Miller
Corporate Risk Management
Project #1 – Risk Identification
24 March 2016

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To: Steve Miller, CEO, Caterpillar INC.
Executive Summary:
As the Chief Risk Officer of Caterpillar I have carefully taken the time to identify the
risks we face at Caterpillar INC. In Appendix A I have identified 18 risks our company faces in
which I have narrowed down to the three most important risks we should do further analysis on.
As a global leader in manufacturing construction and mining equipment it is the upmost
importance that we continue to product a high quality product that is safe for the consumer to
operate. Products Liability is a major risk we are subject to in our operations. At any time we can
be subject to a lawsuit or investigation due to the nature of our business (“Caterpillar 10K” 17).
Not only this but through constant inspections more penalties can be tacked on which can hurt
the financial and operational health of Caterpillar. In that it is hard to predict the outcomes of
these claims that can impact our company at any given moment.
Secondly, natural and unexpected events can leave a bearing on our operations and the
costs associated with running our business. These unexpected events are defined as tsunamis,
hurricanes, tornadoes, fires and floods that can lead to direct (physical damage) and indirect
losses (business interruption). Events such as these effect our company’s operations as they can
possibly shut down manufacturing facilities and / or distribution centers while delaying the
acquisition of key components (“Caterpillar 10K” 18). Although, some of our insurance
agreements may cover this risk there is no guarantee that all costs will be covered
Finally, disputes among our collective bargaining agreements with our employees and the
unions they belong to. Many of our production employees are covered by collective bargaining
agreements that are to expire in the next two years (“Caterpillar 10K” 7). If not handled properly
Caterpillar can be impacted both operationally and financially.

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The risks listed above can be found within Appendix A and B, these three important risks
I have discovered are those in which we must have a handle on. Additional risks identified can
be found in the back in the appendices.
Thank You,
AJ Buono
Chief Risk Officer, Caterpillar INC.
Risk Identification In-depth Analysis:
Risk #1 Products Liability
As a manufacturer of high quality construction and mining equipment it is at the upmost
importance that our products are safe for our consumer. If we do not follow the proper
procedures during our manufacturing process, our products can become defective in which we
would be subject to products liability. This risk should definitely be on our radar as legal costs in
defending against personal injuries due to products liability can pile up. Illustrated in Appendix
C, in 2013 the personal injury jury awards for products liability was approximately $6.4 million
(“Products Liability”). This is only the start as defense costs are not factored into these numbers
which can increase the loss more than $6.4 million. In addition, Caterpillar can be subjected to
other fines, penalties and/ or other enforceable actions as we are typically reviewed by regulators
on a periodic basis (“Caterpillar 10K”). If subjected to this risk the costs associated with this risk
can hurt us in many ways (financially, operationally, strategically, and hazardously).
The method in which I was able to identify this risk was through two risk identification
methods, on-site inspections and loss histories. When talking to our VP’s of the divisions of our
company (Marine & Petroleum, Construction Products, Electric Power, Material Handling,
Remanufacturing & Components) that during our typical on-site inspections when testing our

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products every so often a malfunctioning product was found. It’s important, when conducting
these on-site inspections that we bring in someone who is in expert in our field of manufacturing
who can also extend a discussion with our people on the frontlines (Corporate Risk Management
4.29). As we hired an outside expert we made sure he used a bottom up approach and talked with
employees in our manufacturing facilities. From which the expert stated that employees felt that
the reasoning behind some malfunctioning products is due to back orders and in some cases
trying to make our products fast to get out to our consumers as soon as possible. Furthermore, I
found looking at the loss history with our CFO Brad Halverson, which we’ve experienced
upwards of $100 million dollars in settlement and legal defense costs associated with products
liability. Comparatively, to some of our competitors, (such as Hitachi, Deere & Co, and Kubota)
our loss experience has been worse. It is for this reason that the risk was listed as a frequency 4
and severity as a 5 in the risk register. (Appendix A & B). Overall, the risk needs to be our top
priority as there are too many ramifications if not handled properly. Certainly, our reputation as a
global leader in manufacturing construction and mining equipment would be impacted if this risk
were to occur along the possibility of burdening us operationally and financially.
Risk #2 Natural Events
The second top priority risk that should receive further analysis is unexpected natural
events. If there were an occurrence of such events as hurricanes, tornadoes, tsunamis, flooding,
windstorm and other events could cause several different losses and disruptions to Caterpillar’s
operations. “Natural disasters, pandemic illness, equipment failures, power outages, or other
unexpected events could result in physical damage to and complete or partial closure of one or
more of our manufacturing facilities or distribution centers, temporary or long term disruption in
the supply of component products from some local and international suppliers, disruption in the

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transport of our products to dealers and end users and delay in the delivery of our products to our
distribution centers” (“Caterpillar 10K” 18). Similar to products liability if Caterpillar is
subjected this type of risk it can hurt the company in several ways (in this case as a hazardously,
financially and operationally).
The methods in which identified this risk were through a scenario analysis and an
external expert. Scenario analysis is great for identifying several outcomes that associated with a
certain risk. The best way to conduct a scenario analysis is with a cross functional team, so that
way various perspectives on the risk and its different outcomes (Corporate Risk Management
4.11). For my scenario analysis the team included: CFO Bradley Halverson, V.P. of Global
Supply Network Frank Crespo, V.P. of Middle East, Asia and Africa Distribution Raymond
Chan, V. P. of Americas & European Distribution Phil Kelliher, Qihua Chen V.P. of China
Operations and me. Through several meetings we put together a scenario tree which contains
several different outcomes if an unexpected natural event occurs (See Appendix D). From the
scenario tree there are many situations our operations and financials could be subjected to if we
were to be impacted by a natural event. Some of the outcomes we as a team came up with were;
a manufacturing facility suffers damage, delays in delivering our products/services, and business
interruption in that Caterpillar would lose profits. In addition, to finding the several different
outcomes we were to visualize linkages between several of the different outcomes, like if one of
our distribution centers is damaged, then it can lead to the facility to be shut down and we can
incur further delays in delivery of our products and key components (Appendix D). Beyond the
scenario analysis I also brought in an external expert to help better understand when the next
natural event that could affect Caterpillar and how severe it could be. Our outside expert shared
with my team that the next major natural event would occur within the next three years that

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could have a serious impact on our company’s operations. Between the forecasts from the
external expert and the scenario analysis that I conducted with my multifunctional team I overall
decided this risk had a low frequency at a 1; however has a strong impact on our company at a 5
(See Appendix A & B). Although this risk might not occur as often as other risks we may face,
the impact is still alarming as it can severely impact Caterpillar.
Risk #3 Expiring/ Renegotiating Collective Bargaining Agreements:
The third and final risk that I have identified as a top priority is our continuous cycle of
expiring collective bargaining agreements with our employees and the process of renegotiating
those agreements. Without employees a business is unable to operate and continue to grow
profits so it is important to make sure we are good standing with our employees. Currently, many
of our employees worldwide covered under a collective bargaining agreement, “There can be no
assurance that any current or future issues with our employees will be resolved… We may not be
able to renegotiate collective bargaining agreements in the United States and other countries
when they expire” (“Caterpillar 10K” 17). Without properly resolving our employee issue or
renegotiating the collective bargaining agreements can immediately impact our operations and
financials.
By going through a compliance review with our chief legal officer as well as surveying
and interviewing our employees I was able to identify this risk. While sitting down and going
through a compliance review with our Chief Legal Officer Jim Buda we looked through our
annual 10K report as well as our several collective bargaining agreement documents we found a
little over 8,000 production employees are covered under these agreements which are set to
expire in March of 2017 and December 2018 (See Appendix E). Found this slightly alarming as
these contracts are soon because if they are not renewed we could have work stoppages by

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upwards of 8,000 frontline employees within the next two fiscal years. Secondly, through our
employee surveys and interviews many had said that the employee relations are fair at this
current moment, but said that on a scale of 1-5 of how important the terms of the CBA if they are
covered by it was ranked at an average on the high end at about a 4. During my identification
process I took both these tools into consideration as I listed it as a risk with medium impact (See
Appendix A & B). This final risk should be taken as seriously as the first two as I stated earlier
without employees our company will be unable to operate efficiently as well as grow profits.
Conclusion:
As I have identified our top three risks the next step is to further analyze each risk
individually. These three risks have many ramifications for our company if Caterpillar were to be
subjected to them without proper risk management. Henceforth, I suggest you should consider
my recommendations for products liability, natural events and expiring collective bargaining
agreements for further analysis so they can be properly mitigated.

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Risk Description Risk Type Method Identified Likeihood (1 to 5 Severity 1 to 5) Risk Impact (combining both likelihood and severity)
Union Disputes / Collective Bargaininig
Agreements - Some of our employees
are represented by a Union in which
their collective bargaining with varying
experation dates. Failure to renegotiate
existing collective bargaining
agreements could lead to interruption
in business operation and other issues
with labor unions
Operational
Employee Survey's /
Interviews /
Compliance Review
3 4 Medium
Natural Disasters- Large unexpected
events such as natural disasters, war,
terrorism and pandemics could lead into
manufacturing and distribution centers,
as well as disruptions in operations,
supply of key compnent products
Hazard
External Expert/
Scenairo Analysis
1 5 Medium
Lawsuits / Investigations regarding
Products Liability
Hazard
Onsite Inspections /
Loss Histories
4 5 High
Failure to Realize all benefits associated
or benefits materialize later than
expected with joint ventures,
acqusitions, and other strategies
Strategic
Scenairo Analysis /
Document Analysis-
Financial Statements
1 3 Low
Cyber Liability Hazard /
Strategic /
Operational
Cyber Assesment /
Scenairo Analysis
3 5 High
Oil Prices (add / drop in Oil prices lead
to effectsdemand in oil drilling/ mining
equipment) Financial
Escalation & Threshold
Triggers/ External
Audit
3 3-4 Medium
Interest Rate Fluctuations / Cost of
Acessing Capital
Financial
Escalation & Threshold
Triggers / External
Audit/ Document
Analysis - Financial
Statements
2 3-4 Medium
Employee Injured on the job / Worker's
Comp.
Hazard
Employee Survey /
Hazop/ Insurance
Policies/ Loss
Histories
3 4-5 High
High Steel Prices
Financial
External Audit /
Document Analysis -
Financial Statements /
Escalation & Threshold
Triggers
3-4 4-5 High
Manufacturing's high dependance of the
demand of the cyclical Construction
Industry
Operational
Flowchart / Process
Flow Analysis
3-4 5 High
High dependance on Consumer Spending
Financial
Escalation & Threshold
Triggers/ External
Audit
2-3 4 Medium
Appendices
Appedix A: Risk Register

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Key: 3 Key Risks Identified
Exposure to political risks in the
countries we operate in Operational Compliance Review 2 3 Medium
Failure to maintain postive credit
ratings Financial
Document Analysis-
Financial Statements
3-4 4 Medium
Currency Exchange Rate Fluctuations
Financial
Document Analysis-
Financial Statements
2 2 Low
Changes is US GAAP Accounting
Principles Financial
Compliance Review /
Doucement Analysis -
Financial Statements
1 1 Low
Failure to comply with Environmental
Regulations Operational Compliance Review 1-2 3 Low to Medium
Must follow inventory and sourcing
decisions of our dealers and original
equipment manufacturer customers-
can impact CAT positively or negatively
Operational
Flowchart Analysis /
Document Analysis -
Contact Analysis
3 3 Medium
Operating within a highly competive
industry. There's no gurantee our
products will be competitive and can
also lead us to possibly not competively
pricing our products as well as
Strategic
SWOT Analysis /
Scenario Analysis
4 4 Medium
Severity /
Frequency
1 (Low) to 5 (High)
Appendix A (Cont.)
Appendix A contains all the risks identified through Caterpillar’s 10 K Report as well as reports
from Hoover’s on challenges within the manufacturing and construction manufacturing industry.
Additionally it shares where the risk should be categorized (strategic, hazard, operational,
financial) and severity and frequency rankings (1 low to 5 high) as well as an overall risk impact
which factors the rankings of both frequency and severity. From the 18 risks listed the 3 risks
highlighted in yellow are the three risks which will be discussed in detail as they were chosen as
the 3 key risks Caterpillar should focus analysis on (“Caterpillar 10K”).

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5 Natural Disasters * Cyber Liability
Manufacturing's high
dependance of the
demand of the cyclical
Construction Industry
Lawsuits regarding
Products Liability *
4-5
Employee Injured on
the job / Worker's
Comp.
High Steel Prices
4
High dependance on
Consumer Spending
Union Disputes /
Colletive Bargaining
Agreements *
Failure to maintain
postive credit ratings
3-4
Interest Rate
Fluctuations / Cost of
Acessing Capital
Oil Prices
3
Failure to Realize all
benefits associated or
benefits materialize later
than expected with joint
ventures, acqusitions, and
other strategies
Failure to comply with
Environmental
Regulations
Exposure to political
risks in the countries we
operate in
Must follow inventory
and sourcing decisions
of our dealers and
original equipment
manufacturer
customers- can impact
CAT positively or
negatively
Operating within a
highly competive
industry
2-3
2
Currency Exchange Rate
Fluctuations
1-2
1
Changes is US GAAP
Accounting Principles
1 1-2 2 2-3 3 3-4 4 4-5 5
Frequency
Severity
Key
High Severity /
Frequency
Medium Severity /
Frequency
Low Severity /
Frequency
* after risk is identified
as a Top 3 Risk
Appendix B Heat Map
Appendix B contains the Heat Map has all 18 risks listed in the risk register in Appendix A
illustrates where each risk stands in regards to one another, factoring both the frequency and
severity of the risk. From the map and key the risks in red are considered highly impactful, risks
in orange have a medium impact and risks in green have low impact. The top 3 identified risks
have an asterisk next to them.

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Appendix C
Appendix C contains the median and average personal injury jury awards for 2013 by any type
of liability. In 2013, products liability was the liability with the largest personal injury jury
awards (approx. $6.4 million Mean and $3.12 million Median) (“Products Liability).

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Appendix D
Here in Appendix D is a scenario tree for Natural Disasters which was constructed together by a
cross functional team that includes myself, our CFO Bradley Halverson, V.P. of our Global
Supply Network Frank Crespo, V.P. of Middle East, Asia and Africa Distribution Raymond
Chan, V. P. of Americas & European Distribution Phil Kelliher, and Qihua Chen V.P. of China
Operations. While taking in consideration several different unexpected natural events we put
together several different outcomes based on if the event were to occur or not. As illustrated
above there is at least 9 different situations that Caterpillar could face in the case of if a natural
event occurred near their operations.

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Appendix E
Appendix E is a snapshot of all the employees Caterpillar has, the footnotes below share how
many production employees are covered under a collective bargaining agreements as well as
when some of the agreements expire. (“Caterpillar 10K” 7).

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References
"Caterpillar 10K." Caterpillar. Caterpillar INC, 16 Feb. 2016. Web. <http://phx.corporate-
ir.net/phoenix.zhtml?c=92466&p=irol-
SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2l
wYWdlPTEwNzQ0NzA5JkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FT
lRJUkUmc3Vic2lkPTU3>.
Corporate Risk Management. 1st ed. Malvern, PA: The Institutes, 2013. Print.
"Products Liability." Insurance Information Institute. Insurance Information Institute, n.d. Web.
<http://www.iii.org/fact-statistic/product-liability>.