Joe: I don’t think a lot of people realize the trouble that Caterpillar was in the early 1980s. I would think that time period is correct. They were losing a million dollars a day or something?
Craig Bouchard: A million dollars a day for three years and in that third year which was 1984 where they lost a $150 million. That was the year that Schaefer said, “We’re turning the place around. We’re turning to start, in fact, to compete with the Japanese, Komatsu, etc.” They entered the first of the six big decisions which was the plant for the future. Schaefer committed $1.8 billion dollars to upgrade 37 of their main plants and make them the most modern plants in the world. They did that after losing a million dollars a day. Imagine that decision at that time, which is staggering – nobody could believe it – Wall St, the New York Times, everybody called it their last stab at avoiding bankruptcy to make such a big change. It was a survival decision by the estimate of most people at that time. As it turned out, it set the stage for successful Six Sigma, Lean set of programs for the company over the coming years.
Joe: I think there’s a lot to be said about that. There’s a whole chapter on Lean and Six Sigma in the book and, of course, my listeners are familiar with this. So is that an important part of the Caterpillar story?
Craig: It’s a huge part. It’s one of the six major decisions, and it’s probably the biggest one in its definite scope. So in the year 2000, Glen Barton had taken over as Chief Executive Officer and him on the board, and he called and described in the book – fascinating interviews backing all these material and some consulting with – so he called all the senior executives around the world into the auditorium in Peoria. They did some planning all day long; they had all kinds of things going on. Barton was scheduled to appear at the end of the day, late in the day. Everybody’s going, “Where the heck is Barton?” At that time, everybody at Caterpillar wore suits – they were sitting there in ties and the suits whole day – imagine that being said. Towards the end of the afternoon, everybody started to check their cellphones for text and messages – back in 2000 that was a new innovation basically – and a gong sounds in the auditorium and they all jumped up.
Here comes Barton in a black-belt karate uniform with four people behind him and people were astounded. Barton basically said, “Look, we’re here today for a very important reason. We’re going to change the company, and you’re all going to help with it.” He then explained that something that was true, there is$20 billion dollar revenue sphering that exists out there, so it’s like a legendary elephant graveyard of a library. A lot of companies have hit that level of revenue, people that have successfully reached $20 billion; it’s very hard to scale and grow beyond that because you’re doing big that you start to screw up a lot of things. Barton had realized that there’s one key cost that’s rising dramatically in the equipment out in the field, and that was a big red flag for him and he was smart enough to get it. He said, “We’ve have a quality problem and secondly, we stagnated. Our revenue has been consistent about $20 billion dollars for three-year, we’ve hit the ceiling and we got to fix that. I’m here today to give you your objectives as a company.” He got a lot of attention because of this, of course. He said, “We’re going to grow $20 billion of revenue to $30 billion of revenue in the next five years.” That caught everybody’s attention. And then he said, “While you’re doing it, we’re going take a billion dollars of expense out of our cost phase. So we are going to grow at that amount, and we’re going to take a 10% of a billion dollars out of our operating expense. And finally, you’re going to be accretive – the cost of this program that you’re going to enter into, which is Six Sigma, we’re going to pay in revenue-enhancement in cost reduction” and everybody is wondering “What the hell is accretive”. He said, “Here’s what it means; we’re going to revenue increase this year and cost reduction this year; we’re going to pay for this program. We’re paying for it ourselves in the first year.”
Barton set out that very aggressive schedule, he’s walking around the room with hundreds of people in the auditorium going up to the ceiling, and he could see faces going “Ngggnh, I have heard about this Six Sigma, I heard about this; G.E. and 3M did it recently. Sounds good, those other guys can do it.” You could see it in their faces. And so Barton said, “I can see it. The train is leaving the station; you’re all going to be on this train, or you’re going elsewhere. And right now we’re going to start and have every person in this room walk down the stage, look him in the eye, shake my hand and promise him to fully support the Six Sigma program. Every single person and that’s how they started. They took 750 of the top employees of the company out of their jobs in the next 30 days and put them in black-belt training and if that wasn’t enough, think about that investment – 750 of your best people out of their jobs, in their black-belt training full-time. Then they took 3,500 people and put them into green-belt training to support these 750 guys. In the next two years, then they did what they called ‘The Tsunami Change’ inside CAT. G.E and 3M are two great examples of big companies who’re successful in Six Sigma. They rolled it out division by division across the globe – it took them years investing in Six Sigma. And he said, “We’re all going to do this year.” Nobody believed that. And he had his 750 people right away, and he had 3,500 to support them. By the time, the program was two years in, he had 30,000 employees involved in Six Sigma program. Never before and never again has anyone committed that many resources in that period of time.
They made their $10 billion in revenue one year early, four years later. They got their billion dollar cost reduction and they shattered the $20 billion dollar ivory elephant graveyard ceiling, went on to $40 billion, went on to $50 billion, and they went on to $60 billion in recent years, and in the next couple of years it’ll go over $70 billion. Glen Barton gets a lot of credit, and that’s the commitment it took the tsunami of change that made it all happened otherwise people may have lost interest and that all happened in that first year.
Craig Bouchard, author of the book, The Caterpillar Way: Lessons in Leadership, Growth, and Shareholder Value, discussed how CAT got it right in a Business901 podcast
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