Why Cummins Has "a Real Climb Ahead"


After 82 years, Cummins Engine Co. changed its name in 2001 to Cummins Inc. to signify that it had become more than just a manufacturer of diesel engines. Indeed, it has. In addition to its original business, Cummins (CUM) now boasts three other full-fledged operating units: power generation, automotive filtration, and international sales and service. Together, the three accounted for nearly half of Cummins' gross sales last year and have out-earned its engines unit for two years running.

As Cummins stakeholders have painfully learned, however, the rechristened company is no less dependent on the tides of the industrial economy than it was under its old name. Cummins lost $102 million last year -- its worst showing since 1992 -- as sales fell 14%, to $5.68 billion.

And the hard times aren't over yet: The Columbus (Ind.) company estimates that it lost $33 million in the first quarter, with year-over-year sales down 9.5%, putting revenues back to 1995 levels. "We believe the business environment in 2002 will not be significantly better," Chairman and CEO Theodore "Tim" Solso warned at the Apr. 2 annual meeting.

The chief culprit: the engine business, which in 2001 posted an operating loss of $209 million on a 23% drop in sales, to $3.12 billion. Still, the 54-year-old Solso vows that Cummins will be solidly back in the black this year, even if sales do not rebound, thanks mostly to unrelenting cost-cutting. Cummins has undertaken three downsizings in the last four years, lowering its worldwide payroll by 3,600, or 12.5%, to 24,900. Since Solso moved up from president and chief operating officer in 2000, the company also has become a convert to Six Sigma, a statistical tool designed to ferret out waste.

Shareholders are wagering that Solso will come through for them. Over the last year, Cummins stock has leaped 30% in price, to $46.50 a share. But even so, it's worth no more than it was in 1993. Solso, who started at Cummins' personnel department in 1971 after earning an MBA from Harvard, recently sat down with BusinessWeek Correspondent Michael Arndt for a chat after the company's annual meeting. An edited transcript follows:

Q: At the annual meeting just now, you were suggesting that economists were being overly optimistic to expect a robust recovery. Why are they seeing a robust recovery and you aren't?

A: I want to be clear that I said they are overly optimistic when it comes to our businesses. I [hear people say] things like they aren't sure this was actually a recession. And there's a lot of statistics showing growth. But what we in our business see are drops in sales around the world. We can see order boards for anywhere from 90 to 180 days out, and we don't see the kind of recovery you hear being talked about in the media.

Q: What are those order boards telling you?

A: For the first time in several quarters, we're seeing some slight uptick. We're seeing some better orders for our heavy-duty truck engines because inventories are getting a little tighter, and the truck tonnage hauled is starting to slightly go up. Those are trends we hadn't seen for more than two years.

There's a new Dodge Ram pickup [which comes with the option of a Cummins engine], so it's natural that we're starting to see some increase in those engines. In our RV [recreational vehicle] business, we're also starting to see some kind of recovery. Again, it's not huge, but we haven't seen the RV business strong for seven or eight quarters.

If you look at construction and mining, oil and gas equipment, and commercial marine engines, those are still soft. This quarter is lower than what we thought it would have been four or five months ago. But I think we are at the bottom in the majority of our markets, and we're starting to see some things coming back.

Q: But this uptick is from a very low base.

A: You're right. To put this in context, from the middle of 1999 to the first part of this year, heavy-duty truck-engine sales are down 72% from peak to trough. So if you see a 5% uptick, you've got to keep it relative. We've got a real climb ahead.

Q: One of the tools you're using to cut costs is Six Sigma. How did you get into that?

A: I was on one of my visits to one of our OEM [original equipment manufacturer] customers, Paccar, and they were talking about the improvements they were achieving. I was so impressed that I then went and met with one of our suppliers who also had started the program. Then I was convinced.

We started the program in January, 2000. We've just had this forced march since then. And now I think after two years and one quarter, I'm comfortable that if something happened to this management team, Six Sigma would continue because people see the true value of it. Since inception through the end of last year, the saving is $172 million, and if you added cost avoidance, it would be over $200 million. Our internal target is annualized savings of $140 million this year.

The other thing that happens -- and this is just wonderful -- is that you've taken this middle-management person who may be bored with his job. You've given him four weeks of training, lots of visibility, and all of a sudden, what that person does make a difference. And they can measure it, and they can touch it. The unleashing of their ideas and energy is just incredible. I know from personal experience.

Q: Does that mean you did your own Six Sigma project? What did you do?

A: I looked at the correlation between bonus systems and variable pay at Cummins to the profitability of the business unit. We found that there was very, very little correlation between our variable pay or bonus pay to results. We had one plant -- and I won't name the plant -- that had a negative correlation.

So we developed a system to design bonus pay. We didn't take the right away for a plant to have its own variable pay, but we said it had to have some trigger points on profitability. What we're saying is that we're measuring people on doing what they said they were going to do, rather than on how hard they worked or how nice they are or whatever. This is reflected in their pay, it's reflected in their bonus, it's reflected in their performance ratings.

Q: Do you see the awarding of options as a good tool in encouraging performance?

A: I really do. All of a sudden, because of the extraordinary cashing in of options at some companies, options as a form of compensation have been tainted. [But] you really want to align at least your senior management with shareholders' interests. And if you give options, and they understand how their performance affects the business performance, which affects stock price, there's a direct link.

Q: One last question: What do you do in your spare time?

A: This is my spare time. I love my work. I really do.


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