Back On Diamond Road

Dec. 21, 2004
Faced with dwindling revenues and mounting losses, Navistar has used a back-to-basics approach to return to profitability.

By noon Ed Anesi, plant manager at Navistar International Corp.'s engine facility in Melrose Park, Ill., knew that the day's output would fall several engines short of the 250 needed to meet customer requirements. Earlier in the day, a downed assembly line held up production for a couple of minutes. In order for the plant to meet its goal and keep the customer happy, Anesi needed work to continue for several minutes after quitting time. He began making the rounds and asking employees if they could put in a bit of overtime. As it turned out, the overtime wasn't necessary. The employees volunteered to work through their wash-up time -- which they are allowed under union rules -- to get the engines out. "A couple of minutes doesn't sound like much, but several years ago, that never would have happened," Anesi says. The incident -- which occurred Apr. 7, 1998 -- is a small, but telling, sign of just how much things have changed at the Chicago-based manufacturer of trucks, buses, and engines. Like many truck manufacturers, International Harvester -- Navistar's predecessor company -- was hit hard by deregulation of the trucking industry in 1980. To make matters worse, the country slid into a recession at about the same time. Through much of the 1980s and the early 1990s, Navistar just hung on. Revenues fell every year from 1988 to 1991, and the company failed to post a profit from 1990 to 1993. In 1992 Navistar ceded first place in market share for heavy trucks to Daimler-Benz' AG's Freightliner. "We forgot how to be competitive, and then the rest of the world rebuilt and came zinging after us, and they cleaned our clocks," says John Horne, president and CEO. Today, it's Navistar that's doing the cleaning. From a low of $8.50 in 1996, Navistar's stock almost quadrupled to about $30 before the bear market hit. (As of mid-October, stock was trading at about $22 per share.) Revenue was at $6.4 billion for fiscal 1997, up 11% from 1996. Net income more than doubled from $65 million in 1996 to $150 million. "The company really has done a marvelous job of turning itself around. It's positioned to reestablish itself as one of the premier companies," says Eli Lustgarten, an analyst with Schroder & Co. Inc. The struggles of the previous decade were a new experience for Navistar, whose trucks and buses can be identified by the "diamond road" icon on their front grills. A back-to-basics approach is helping the company become competitive again. Management and employees have mended their contentious relationships; the most notable result was the labor agreement with the UAW International Union reached in 1997 after talks had broken off a year earlier. With less time spent at the bargaining table, Navistar can give customers and quality more attention. New programs make ordering a truck easier for customers and simplify manufacturing for the company. Problems on the plant floor that had been an annoyance for decades are being addressed. A renewed focus on the bottom line means that projects get a thumbs-up only when they show they can generate a 17.5% aftertax return on equity and 15% return on assets. In order for these changes to work, Navistar first had to tackle the more elusive job of changing its culture. During the 1980s, as the company took hits to its market share and sold off divisions, employees survived largely by keeping a low profile. (At one point, International Harvester had 110,000 employees; Navistar today has about 15,000.) "We had forgotten how to be winners," Horne says. Horne seems well suited to the job of helping people remember. For 32 years he has put his heart and soul into the company. For the last few years he has been positively dogged in his quest to lead Navistar back to profitability. At the annual shareholders' meeting in March, he choked up as he recalled the strides the company and its employees had made. In an interview, Horne jumps up regularly to grab reports, manuals, and even his day planner to make his points. In his day planner, highlighted in yellow, is Horne's schedule for the year's "Face to Face" meetings with workers at the company's eight plants and headquarters. He thrives on the encounters, which bring management and employees together for company updates. No subject, from pending contracts to executive pay, is off-limits. For the executives, the days start at dawn and continue until midnight so no shift is left out. Getting a dialogue going has been key to the company's efforts to reinvent itself. At the beginning things were so bad, says Maril McDonald, vice president of communications, that no facility wanted to be the first to host a Face to Face. Managers at the plants were afraid that employees would hiss and boo or throw tomatoes or worse at the executives. Finally, Horne simply called and said, "I'm coming." That was in November 1996. Horne and Don DeFosset, president of Navistar's truck group, headed to the plant in Springfield, Ohio. The reception was pretty chilly. Just three months earlier, negotiations between management and the UAW had broken down. Navistar needed changes in work rules if the company's proposed Next Generation Vehicle (NGV) program was going to hit the 15% return mandated by the board of directors. Without the changes, making the return would be impossible, says Horne, and the board would refuse to fund the program. However, "There was a willingness among all the parties to try to make it work, in spite of everything," DeFosset says. Focusing on quality emerged as one way to bridge the gulf between management and employees. Even through the fighting, workers' loyalty and desire to build world-class products wasn't a question. Many employees are the second or third generation in their families to work at Navistar; average tenure at the company tops a quarter-century. On the plant floor, Navistar employees exude a sense of pride in the products they make. By working with employees to solve problems that had been papered over for decades, management gave a clear signal of its confidence in its workforce. Today a number of programs geared to boosting quality are in the works, all under the rubric of operational excellence. One of the most significant is the company's effort to simplify its manufacturing processes. When Navistar went into survival mode in the 1980s, management consolidated production at a handful of plants. The inevitable result: The Springfield facility, for example, churned out some 19 different truck models. The complexities that were created led to "almost diseconomies of scale," says DeFosset. Today the situation is steadily being corrected, so that most of the factories focus on a single product line. The Chatham, Ont., plant will produce most of Navistar's heavy-duty trucks, and Springfield will handle the medium-duty trucks. School buses will come from Conway, Ark., severe-service trucks from Garland, Tex. Although it is too early to pinpoint productivity gains, DeFosset is aiming for a 5% rise per year. Navistar also is rolling out an initiative that develops internal quality experts, or Black Belts. The candidates come armed with a quality or engineering background and then add four months of classroom and on-the-job training in quality theory. Today more than 100 Black Belts are busy tackling the myriad issues on the factory floor that impact product quality. An example: An imperfect door-to-cab fit in one of Navistar's trucks had been worked around for years. "We had put in a belts-and-suspenders, bubble-gum-and-baling-wire kind of manufacturing process" that affected the work of dozens of people, DeFosset says. Not until the issue became the focus of a Black Belt project were the root causes identified: a combination of flaws in the door design and tooling. All together, Black Belt projects are expected to save Navistar $17 million in fiscal 1998. Quality also has become a rallying cry within Navistar's engine division, which produces midrange diesel engines both for Navistar and other OEMs. The company has invested about $50 million to increase capacity and automation in its engine plants in Melrose Park and Indianapolis, a 1998 IW America's Best Plants winner. Just as significant as the dollars, the over-the-wall syndrome is on its way out, says Dan Ustian, vice president for the engine and foundry divisions. In the past projects would move from engineering to production with little communication between the two departments -- a system bound to lead to mistakes and inefficiencies. The changes are yielding improvements in almost every measure. Labor-hours per unit have dropped by one-fourth during the last three years, and first-time quality is closing in on 100%. Last year Navistar shipped 184,000 engines, up 13% from the year before. Even more significant, last year Navistar beat competitors from around the globe to sign a 10-year deal to supply diesel engines for Ford Motor Co.'s heavy-duty pickups and vans. This year Navistar announced that it had signed a letter of intent to work with Ford to develop a diesel engine for the light-duty pickup and sport-utility-vehicle market. Navistar also has been paying more attention to the amenities the truckers who drive their rigs want. In the past the company concentrated on fleet sales. Although its International trucks were durable enough, they also were frugally outfitted. A bare-bones approach doesn't work as well today. Growth in the owner-operator segment of the market means more truckers literally live in their rigs and demand the comforts of home. In addition, it can be difficult today to attract drivers at all. Style and safety, bells and whistles -- all are necessary to entice customers. Navistar is responding. The company says its new Sky-Rise sleeper cab truck offers the tallest sleeping space in its class. To appeal to "the cowboy image a trucker has of himself," says DeFosset, Navistar introduced its International Eagle 9900 truck series in March. With their big, square hoods, the trucks are a throwback to the beefy rigs of the 1950s. In order to reduce the complexity of ordering a new truck -- a process that can consume a couple of days for a customer -- Navistar rolled out its Diamond Spec program in 1996. Rather than picking from among thousands of components, a truck buyer chooses from 16 packages. As a result, the time it takes to order a truck drops to several hours, and Navistar's factories gain some predictability in orders. DeFosset says about 80% of sales in the heavy-duty market are spec orders, and the program was just recently expanded to the medium-duty line. Of course the company's most ambitious project is its $650 million NGV program. Under NGV, all of Navistar's product lines will get a bottom-to-top, front-to-back redesign -- the most extensive in more than 20 years. At the same time, the program should slash the cost of making a truck by about 20% because of a less complicated manufacturing process, says DeFosset. In order for the NGV program to get the go-ahead, employees had to agree to work-rule changes that increased efficiency and allowed for some downsizing of the plant. Before that could to happen, both employees and managers needed a better understanding of such basic business concepts as return on investment and shareholder value. They also had to learn how Navistar's cost structure stacked up against the competition's. To accomplish that, the company has been aggressively rolling out business training for all levels of employees during the last few years. The top 450 managers completed a course on shareowner value in 1996; in addition, their compensation now is linked to increasing shareowner value. A less-extensive version of the training is being introduced throughout the company. The results so far? Some very astute businesspeople and a complete turnabout in the tenor of Face to Face meetings. At first, the sessions often were little more than a chance to gripe. Today, however, employees might want to know about changes in the stock price or what they need to do to make sure their facility gets to manufacture the products for a new contract. The union wasn't the only stakeholder that had reservations about changing. As Horne pointed out in his address to shareholders in March, the new contract with the UAW "meant management had to step up to the responsibility of leading, not [used] unions as an excuse for not being successful." Top managers also had to put their money on the line. In 1997 Navistar's board adopted a plan that requires top execs to purchase Navistar stock in amounts ranging from three-quarters to three times their salaries. Given the stock's poor performance, this wasn't a move to be made lightly, and Horne says he wouldn't have been surprised if some of the managers who were nearing retirement decided to leave. None did, an accomplishment of which Horne says he is most proud. Customers have noticed the changes. Navistar strengthened its lead in the medium-truck market last year, moving from a 36.8% to a 38.1% share. Ford, its nearest competitor, has 23% of the market. In heavy-duty trucks, Navistar has just under 20% of the market, up from 17% in 1996, although it still trails Paccar Inc. and Freightliner. And the company continues to dominate the U.S. school-bus market with a 60% share. A handful of competitors split the remaining business pretty evenly. Navistar's turnaround efforts have been helped by an asset whose strength actually came as a surprise to management -- the recognition the name International Harvester holds. Truck drivers can be passionate about their rigs, but in the past the company failed to take advantage of this. Instead, management often confused people by switching back and forth between the names Navistar and International Harvester. According to the company, the brand equity of the name International Harvester is worth about $100 million; in other words, that's the amount it would take to establish a similar level of recognition with a new name. Not surprisingly, Navistar is vigorously promoting the International label for its product lines. (Wall Street types still can refer to the organization as Navistar, which will continue as the legal name of the organization.) Even as management focuses on the company's legacy in the U.S., Horne and his crew are seeking to create a bit of history outside the U.S. borders. A newly opened plant in Nuevo Leon, Mexico, will make it easier to export to the rest of Latin America. The huge $167 million facility -- 17 acres, all under one roof -- opened in April, a scant 18 months after the site first was selected. To help get the building up and operational that quickly, about 70 employees from Navistar's Springfield plant volunteered to move with their families to Mexico for a year. Joining them were about 30 Navistar retirees. Once there, the group provided expertise and direction in just about every facet of construction and operation: manufacturing-system design, equipment purchasing, and supervisor training, to name a few. Neven farther south. They have invested in a contract assembly plant in Caxias, Brazil, that is scheduled to begin production in June. Navistar executives say they expect to grab a 10% share of the Brazilian market in five years. Even as he insists on sharing the credit for the strides the company has made recently, Horne's skills as a leader are drawing accolades from both within and outside Navistar. "He made me believe in the company and let me see that there's a light at the end of the tunnel, so that I know why I'm doing this job day after day," says one worker at the company's engine plant in Melrose Park. "There's no doubt in my mind that Horne deserves the lion's share of the credit for the turnaround," says Schroder's Lustgarten. "His predecessor did an incredible job of stabilizing the company and working through the restructuring. Then Horne came in and set financial goals, performance goals, and focused the company on growth versus survivability." In December Horne landed the No. 2 spot (behind computer magnate Michael Dell) on a ranking of high-impact CEOs produced by executive search firm Heidrick & Struggles International Inc. For his part, Horne appears determined not to let himself or his company assume that the success Navistar currently is enjoying will last forever. His caution is warranted, as the company faces significant challenges. Part of Navistar's recent favorable results are due to the currently prosperous state of the trucking business. Given the industry's volatility, no one is counting on this to last forever. Steve Sturgess, senior editor of Heavy Duty Trucking magazine, questions whether Navistar's redesign of its product lines will come quickly enough, and he notes that many competitors currently have newer models out. Given that Navistar's heavy-duty trucks are not due for replacement until after the turn of the century, Sturgess asks if the company will have held onto a large enough market share to make the new models a viable proposition. However, Navistar appears prepared to meet the challenges. Sales, productivity, and quality are up. The company's balance sheet has been restructured and strengthened during the last few years. Relationships between employees and management are good. But most important, notes Horne, attitudes -- from those who occupy the executive suites to the men and women on the plant floor -- have changed. "You can have plans and strategies and goals and visions and all that stuff," says Horne. "But until people believe they're winners and believe they can make a difference every day, all that other stuff is not going to get done."

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