Jerry Palmer outlines the company's Six Sigma strategy.

Yellow and blue is a distinct color combination that brings smiles to the eyes of executives at Caterpillar Inc. (Peoria, IL). Despite today's sour economy, they envision their distinctive yellow construction equipment glistening against a bright blue sky tomorrow.

In early September, the $20 billion company announced that it plans to achieve $30 billion in sales and revenues by the end of this decade. Shortly after the optimistic announcement, Jerry Palmer explained how lean manufacturing will play a key role in meeting that ambitious goal.

Palmer, vice president of Cat's wheel loaders and excavators division, outlined the company's Six Sigma strategy during a keynote speech at the Assembly Technology Expo in Rosemont, IL. According to Palmer, Six Sigma focuses on customer satisfaction and the bottom line. It is a relentless quest for perfection through the disciplined use of fact-based, data-driven decision making.

"Caterpillar is pursuing Six Sigma because it has the power to provide us with an energetic new direction and raise our business success to unprecedented levels, further solidifying our leadership position in the industries we serve and providing greater satisfaction to employees, customers and shareholders," says Palmer.

The company is using a set of strategies, statistics and methods to improve product design and manufacturing. "By applying the rigorous practices of Six Sigma we can achieve breakthroughs in financial and quality performance that would otherwise be unattainable," explains Palmer. "Since we adopted Six Sigma [in January 2001], it has transformed how people work, what they work on and how they perform their work. It has made people ask the right questions . . . rather than shooting from the hip."

Caterpillar has achieved numerous benefits, such as cost savings, manufacturing efficiencies and quality improvements. In a recent speech to financial analysts, Glen Barton, Cat's CEO, pointed to Six Sigma as the major contributor to the company's financial results. "We've seen a direct impact of Six Sigma on manufacturing costs, product quality and volume," he proclaimed.

During the third quarter of 2003, sales and revenues were up 9 percent compared to the same period in 2002. According to Barton, "[these] results show that Six Sigma is driving a continuous improvement culture in which employees look for efficiency gains in all aspects of our business."

Caterpillar boasts 40 product lines and more than 280 different models. During the last 10 years, the number of models has more than doubled. Engine sizes range from 5 hp to 8,000 hp. "We've expanded horizontally into a number of different product lines," notes Palmer. "For instance, 10 years ago, we didn't have products such as skid-steer loaders and compact construction equipment."

Palmer's 46-year-old plant in Aurora, IL, assembles eight product lines and more than 25 different models. The facility builds equipment for excavating, pushing and loading materials such as dirt, fertilizer, gravel, salt and sand. Wheel loaders are built in 17 basic configurations, based on bucket capacity, engine horsepower and operating weight. Tracked excavators are assembled in four basic configurations, based on horsepower and bucket capacity, reach and depth.

In addition, customers specify numerous options, such as unique axle and powertrain configurations, that make one vehicle moving down the assembly line different than the next. Buckets alone come in a variety of designs that are engineered for specific applications, such as excavating soil or stockpiling coal.

Palmer's plant also produces machines for forestry, soil compacting and waste handling applications. Each machine has unique features. For instance, landfill compactors are equipped with steel wheels and frame guards that prevent damage from trash and debris.

Caterpillar's executive team first addressed Six Sigma during its strategic planning meeting in August 2000. "We identified a clear need to implement Six Sigma and identified three major goals," says Palmer. "The primary goal was to grow the company; we knew it wouldn't happen unless we actively managed it.

A Clear Need

"Over the previous 5 years, the industry experienced overcapacity and reduced demand," adds Palmer. "In order to return to profitability, we knew that it had to come out of the cost cycle. As we looked at our costs, we concluded that a 10 percent cost reduction-$1.6 billion out of a cost base of $16 billion-had to come out of our cost structure somewhere in order for us to compete in the marketplace and provide a better return for our shareholders.

"We also decided that we needed to make a quantum leap in the quality and reliability of our products," recalls Palmer. "We always prided ourselves as having the highest quality products in the marketplace, but the competition had not stood still. Over the years, they've closed the gap. We decided that incremental improvements were no longer acceptable."

Caterpillar appointed a full-time team committed to Six Sigma and the first employee training session was held in December 2000. Today, more than 22,000 Caterpillar employees-one third of the company-are involved in Six Sigma. The company boasts more than 1,900 black belts who spend 100 percent of their time solving problems through the Six Sigma methodology.

Palmer's wheel loader and excavator division, which comprises 2,500 people, currently has 100 black belts. By the end of this year, that number will increase to 130.

Although Six Sigma is still a relatively new concept at Caterpillar, the company has achieved some impressive results. For instance, it recently experienced a $220 million quarterly improvement. According to Palmer, $138 million in profitability improvements can be directly attributed to Six Sigma.

"We normally are a very cyclical industry," says Palmer. "Coming through the [downturns] has often been very difficult. But, we're coming through this one in a way that we never have before. We attribute most of those results to Six Sigma and some of the things it has done for us."

For instance, Palmer points to a Cat plant in Sanford, NC, that assembles small skid-steer loaders. Because of Six Sigma, the facility has increased production by 26 percent and decreased assembly cost per unit by 25 percent.

Manufacturing Commitment

While other manufacturers are outsourcing huge chunks of product assembly to third parties, Caterpillar is not. "We're still very much a vertically integrated company," Palmer points out. "We manufacture our own engines, transmissions, final drives and much of the hydraulic systems used in our products. Like most companies, we've moved to some outsourcing, but we still keep all of our core technology strengths internally. Manufacturing will continue to play a major role. We're committed to it, because we have to control our own destiny.

"We're now going through something called PWAF2," adds Palmer. "It's an updated version of a major initiative we launched 17 years ago called Plant With a Future. The original PWAF was a $1.8 billion renovation of all of our plants around the world that wrapped up in 1993." The program transformed Caterpillar's factories. For instance, machines were reorganized into production cells linked by automated guided vehicles and other material handling equipment.

"Some of that equipment is now getting tired and worn," says Palmer. "And, in some cases, there is better technology available today. We're selectively replacing those assets."

Traditionally, Caterpillar has been a major user of arc welding technology. However, the company has been investing heavily in laser welding. "We're looking at new welding technology that allows us to improve the weld deposition process to increase strength," says Palmer. "We hope to decrease the weight of structures 20 to 30 percent with the same-strength weld."

In addition to investing in new assembly equipment, Caterpillar is consolidating the size of its manufacturing operations. "My plant has more than 4 million square feet of manufacturing space," notes Palmer, "which was absolutely necessary back in the days when we had to have a 7-day buffer of parts, in addition to transfer lines [and other production processes that are no longer necessary]. Today, we only need about 2.5 million square feet of space."

Flexible manufacturing allows Caterpillar to take advantage of other plants in times of peak needs, disruptions and currency fluctuations. "If my back is up against the wall because of unexpected demand, I can turn to one of our plants in Belgium, Brazil or Japan for components or entire machines," notes Palmer. "By having that flexibility, we can respond to demand much easier without having to put infinite capacity in place in four different [parts of] the world."

Sidebar: Cost-Savings Aren't the Only Benefit of Toyota Production System

During the first 3 months of 2003, Toyota Motor Corp. surpassed Ford Motor Co. as the world's No. 2 automaker, in terms of global unit sales. Ford had ranked second since 1931.

The secret behind that success? Yasuo Tanigawa, vice president of production engineering at Toyota Motor Manufacturing North America (Erlanger, KY), knows: It's the Toyota Production System. "The original reward [of the Toyota Production System] was cost-savings, but that was not the only benefit," said Tanigawa, in his keynote address to a standing-room only audience of more than 300 manufacturing engineers and managers at Assembly Technology Expo in Rosemont, IL, in September.

For example, the Toyota Production System has enabled the company to assemble vehicles that consistently rank among the world's best in initial quality. Indeed, one of the pillars of the Toyota Production System is the demand for continuous improvement. And, advised Tanigawa, the only way to ensure continuous improvement is for engineers to walk the assembly line and see for themselves what's going on, a directive summed up in the Japanese philosophy of genchi gembutsu, or "go and see."

"You can't solve problems behind a desk," Tanigawa asserted. "Genchi gembutsu means getting inside the process. Michelangelo believed his sculptures were already inside the marble. All he did was free them. In the same way, genchi gembutsu means to get the most out of everything-people and machines. There is always more [to a process] than is apparent."

Tanigawa warned engineers that new technology alone will not necessarily solve production problems. As an example, he pointed to the paint line at New United Motor Manufacturing Inc. (NUMMI), Toyota's joint-venture assembly plant with General Motors Corp. in Fremont, CA. NUMMI engineers had wanted to completely revamp the existing line, which had been operating for nearly 20 years. "The first-run acceptability ratio was only 70 percent," recalled Tanigawa. "It was time to improve."

However, before engineers could install new equipment, they had to improve the old line's ratio to 90 percent. The paint shop met that goal in just 6 months. "You can always buy new equipment, but before you do that, try to improve your process with the old equipment," said Tanigawa. "Today, the new paint shop has a first-run acceptability ratio of 95 percent."

Besides NUMMI, Toyota's North American operations consist of plants in Georgetown, KY; Princeton, IN; and Cambridge, ON, Canada. A fifth assembly plant will open this year in Tijuana, Mexico, and a sixth is scheduled to open in San Antonio in 2006. In addition, the carmaker will open a new casting plant in Tennessee in 2005.

Toyota's goal is to grab 15 percent of the world auto market by 2010, up from 10 percent in 2001 and 11.7 percent in the first quarter of 2003.

-John Sprovieri, senior editor