Caterpillar: Big trucks, big sales, big attitude (p. 2)

The system began to roll out in January 2006. Cat has set typically audacious goals. By 2010 it wants to cut repair frequency in half, speed up inventory turns more than 40 percent, and boost productivity more than 20 percent. The effort to date has been slower than expected. Stopping assembly lines to fix problems has been expensive, and the introduction of additional quality procedures has boosted costs. Both were factors in the pummeling of second-quarter profits.

CEO Owens, a Ph.D. in economics who rose from staff economist to the top job, is very much aware that, should Caterpillar falter when customers are clamoring for product, the company's prospects and reputation would suffer lasting damage.

He is comfortable in his role as the burr under Caterpillar's saddle. Despite the falloff in North American business this year, he hasn't cut his forecast of a compound annual growth rate of 15 to 20 percent for the rest of the decade, with $60 billion in sales possible by 2010. "We aspire to be a great company," he says. "We're not there yet."

Going forward, Cat faces two essential tests. One is making the CPS work. "This is a big challenge," says University of Michigan professor Jeff Liker, who has written two books about Toyota and is helping Caterpillar with the transition. "Very few companies have gotten very far with Toyota's production system. They manage to put it to work in a few pockets but can't generate a global lean-management philosophy."

Relying on the strength of its brand and a powerful network of independent dealers to fend off competitors, Caterpillar has been able to profit from some products that haven't fundamentally changed for 25 years. But the pace of change is accelerating. Now customers want frequent equipment upgrades, and government regulations mean Caterpillar has to revamp its entire line of diesel engines to meet emissions requirements for 2011.

And Caterpillar has to do all this while turning its factories inside out. Erkut Uludag, a consultant with Roland Berger in Detroit, notes that the company will have a particularly difficult time incorporating the best Toyota practices because Cat's "volumes are substantially smaller, and there is more complexity to the product line."

With its history of rancorous union relations, Caterpillar is climbing a wall of skepticism with its workers. They are still miffed about a two-tier wage system that Caterpillar pushed through in 2004 that stipulates sharply lower wages for new hires: $10 to $15 an hour, vs. $20 to $22 for veterans.

In Decatur, where Caterpillar builds those big mining trucks, UAW local 751 president Dave Stanley, a 30-year Cat veteran, regards CPS with the jaundiced eye of a man who has seen it all before. "It's nothing more than a new acronym. Black belts, Six Sigmas; it is nothing new to us."

In East Peoria, UAW Local 974 president Dave Chapman says that factory changes so far have been "a mess and created a lot of headaches." He adds, "The bottom fell out of production. We couldn't get anything built because suppliers weren't delivering material. Our guys said it was the best thing that happened to them. Instead of busting their asses to build 20 tractors, now they only have to build eight."

Big question: With a grumpy workforce, can Caterpillar mimic a Toyota system? Says Waters: "We believe we will fully engage every worker through the rollout of CPS."

Dealers are skeptical too. For large trucks, some customers place their orders three years in advance - and Caterpillar insists on a letter of intent before an order is even accepted. Inventory issues mean that a big mining company like BHP Billiton must wait at least four months between presenting a purchase order and putting an actual machine to work at Antamina.

At Ferreyros S.A.A., a Caterpillar dealer in Peru, CFO Mariela Garcia de Fabbri used to hold about $50 million of machinery in inventory, enough for three months of sales. But customers complained about slow deliveries, so in 2006 she has bumped it up to four to six months. "We still have a lot of work to do to improve velocity," Owens admitted to analysts earlier this year.

The second challenge is longer term: Cat's place in the global market. Despite its problems on the factory floor, Caterpillar makes good products; its equipment is widely considered the gold standard, a reputation that allows it to charge 10 to 20 percent more than its competitors.

But a reenergized Komatsu is giving it a battle. Komatsu's operating margins are a third higher than Caterpillar's. The Japanese firm also got started early in China and now boasts 32 dealers there. Though Cat has almost pulled even with Komatsu in China sales and plans to triple its product offerings in the next three years, the battle for what is likely to become the world's biggest market for heavy equipment is still very much up in the air. In July, Caterpillar raised its stake in a 40-year-plus Japanese joint venture with Mitsubishi Heavy Industries - an overdue move that analysts attributed to frustration over its slow progress in the region.

Unlike Detroit, which focused too narrowly for too long on the U.S. market, Caterpillar has thought globally for decades. Almost three-quarters of the 37,600 jobs it has added in the past decade, for example, are overseas. In a sense, then, Caterpillar is a high-visibility test of how and whether U.S. manufacturers can make it in a world of opportunity - and relentless competition.

American manufacturers can succeed overseas - GM in China, Boeing in the Middle East and Asia, General Electric everywhere. To stay on that list, Caterpillar needs to shake off some of the complacency and insularity that comes from being No. 1 for so long. And it will have to win over its disaffected workforce.

Owens isn't letting up. He's pushing Caterpillar to reach $100 billion in sales by 2020. But Caterpillar has to hit its short-term targets first, and that's going to be dicey. "We're in year one, and on a scale of zero to 75, we're a 12," says Waters - and the finish line is only 30 months off. That should help raise the fear factor around Peoria.  

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