This month is likely to see the completion of Terex’s acquisition of Demag Mobile Cranes GmbH. The last crane manufacturer to become part of the Terex empire was truck loader and excavator manufacturer Atlas Weyhausen GmbH, which under a two stage takeover process came under Terex management in August 2001 and formally under Terex ownership in January 2002.
Included with the acquisition of the German group was its UK subsidiary, Atlas Hydraulic Loaders Ltd (AHL), manufacturer and distributor of Atlas truck loader cranes.
Despite being a market leader in several countries, including the UK, Atlas had already realised that it needed to increase its competitiveness even before Terex stepped in. It had started to reorganise its production in Germany and had increased component outsourcing. Investments and changes were also being made in the UK at AHL. Atlas excavators had been transferred to an independent dealer network so that Atlas could concentrate on its core business of loader cranes. Money had been put into service centres in Yorkshire and Oxfordshire and the number of home-based service engineers had increased 30%.
Terex’s initial involvement with Atlas was as consultant to venture capital group GKM Value Partners that acquired Atlas Weyhausen from Eder Handel und Beteiligungen GmbH, part of the Walter Eder Group. Steve Filipov, now president of Terex’s Europe and international group, was seconded to Atlas as one of three managing directors. It was announced, soon after, that Terex would be taking control of Atlas.
Fil Filipov, Steve’s father, and at the time Terex Corp executive VP, led the turnaround of several ailing companies acquired by Terex. He has formulated a 100 day restructuring plan which, in the case of AHL, was implemented to provide quickly available and cost effective loader crane products and services to UK and Irish customers. The stated aim was to build a quality product at the lowest cost that gave buyers the best return on investment.
The man that Fil Filipov chose to lead the turnaround of AHL was Bob Halls, previously of Terex’s Matbro operation in the UK. In July 2001, a year after he had supposedly retired, Halls was appointed managing director of Atlas Hydraulic Loaders Ltd. AHL included the manufacturing plant in Hamilton, Scotland and the distribution network of fitting and service centres in Bradford, Yorkshire and Bicester, Oxfordshire. Halls’ job was to implement the 100 day restructuring plan at what is now Atlas Terex UK Ltd.
Atlas Terex is aiming for between 20% and 30% of the European loader crane market, Halls says. The USA is also to be targeted. Halls’ responsibility is to show a top line turnover increase of 15% month-on-month and achieve a net operating profit of 10%. A growth target of between 25% and 33% from one quarter to the next might be unattainable, but the result will be much closer than if there was no target at all, Halls reasons.
By 12 November 2001, after 112 days of restructuring, £5.25m ($7.8m) had been saved at Atlas Terex UK, almost all of it from reducing inventory and operating costs.
Prior to acquisition production costs at AHL were between 15% and 20% higher than other loader manufacturers; the target was to reduce them to 20% below the nearest competitor. By June this year both the cost and the price – since all savings are passed straight through to the customer, Halls says – were between 15% and 28% lower than they had been a year before. Markup is between 8% and 15% and the current range of cranes built in Hamilton sell for between £7,000 and £14,000 ($10,000-$20,000) each.
Implementation
The initial phase of the 100 day plan was to reduce working capital, cut operating expenses and look at how to bring down the cost of the product. To start with Halls had AHL’s audited accounts for 2000 and the profit and loss balance sheet for the first six months of 2001. He introduced himself to all the employees and spent the first seven days looking at the accounts before starting on a total of between 100 and 120 measures to change things. ‘Running the business is nothing to do with personality, it is all about numbers,’ Halls says.
Meetings were held to tell bankers and employees what would be happening over the next 100 days. Regular update letters were sent out to inform relevant parties of progress made, the first of which, dated 9 August and sent to distributors and suppliers for Atlas crane products, confirmed the company’s commitment to continued growth and that the distributor and supplier partners would play a key role in achieving it.
By the time of the second letter, dated 21 August and also sent to employees, major steps towards restructuring had been taken. Restructuring had to be financed internally and Halls calculated that he needed £600,000 ($900,000) to do it. Within the first 10 days of the plan disposal of surplus land and buildings had contributed £500,000. Part of the Hamilton manufacturing site included a ‘lazy asset’ in the form of the original building where Atlas’s Scottish production had started. It had been empty for four years, incurring maintenance and security costs, and therefore it was sold.
Strict cash control is an important part of the plan so Halls has a daily statement of all cash in and out of the business so that any necessary action can be taken immediately instead of waiting until the end of the month and only finding out then that something has not happened.
Spending was tightly controlled. Items needed for crane production could be purchased without a signature from Halls but anything else needed his approval, right down to office stationery. On that basis Halls said £20,000 ($30,000) was saved in the first 40 days. Savings of £3.25m (annualised on a quarter) have been made on sales, technical and administrative costs, including company cars and computers, for example. A new mobile phone contract, on 73 handsets, is saving £30,000 a year. Also implemented were measures to eliminate consultants and to give top priority to repair, parts and service.
Suppliers were requested to give payment terms of 90 days and inventory was reduced by getting suppliers to hold the stock, delivering when requested. Larger suppliers are more willing to agree to 90 days, Halls says, and with the smaller ones a compromise can be reached, 45 days for example, which is acceptable because the customer pays in 30 days so it is still on the right side. After 60 days of the plan, when it was 48% complete, 30 of the top 50 suppliers, working on cost reductions and quality improvements, had agreed to the 90 day terms.
Inventory levels had been reduced by £2.7m ($4m) after 60 days by using up stocks of components and disposing of unnecessary items. A drive to standardise components is also helping to reduce costs and inventory and simplify production. Suppliers were asked for a 20% discount and the majority of current suppliers are the same as two years ago, Halls says. The aim is to reduce the number of suppliers to a core of around 50 or 60 from the 380-plus previously.
To reduce employee costs the UK workforce was reduced by 40%. Within the first 10 days of the plan 122 people had gone, 96 of those from the Hamilton factory, mostly from the fabrication shop as this was being closed down in a move to become more of an assembly operation. The machinery assets were sold and the place was cleaned up to be used as a sub-assembly shop. Fabrications are still machined at Hamilton, taking between 30 and 90 minutes for the main components including base, column and boom.
Outsourcing fabrications to get competitive pricing was underway because to produce in house they were costing between £1.20/lb and £1.90/lb whereas, to do it right, Halls was looking for a price of about 55p/lb. Fabrications are now being bought in for between 35p/lb and 50p/lb. Some are from mainland Europe and some are from a fabrication company that set up in the old building on the Hamilton site that was sold to help fund restructuring. It helps the fabricator to be next door as suppliers’ prices are for items delivered to the Hamilton factory. Insisting on delivery being included has contributed to an 80% reduction in inbound freight costs for Atlas Terex.
Hydraulics is another area where major savings and improvements have been made. The four suppliers of hydraulic components from AHL days were asked for a 20% cost reduction, for all components such as manifolds to be pre-assembled, and to supply complete kits of all hydraulic components needed for each crane. A basic crane was sent to Dunlop Hiflex which came up with a hydraulic package, using the more expensive ORFS fittings, that has 37% fewer leak paths and costs 28% less than before. The flexible hoses and the steel piping are also of a higher specification than before to better resist abrasion and corrosion respectively. A problem that had recurred for years on a particular model was solved and an arrangement was made where customers now contact Dunlop Hiflex direct to deal with any hydraulic problems or repairs.
A 24% cost reduction has been achieved on the electrical system. It used to take seven hours to build a crane’s electrical box in-house and then another six hours to fit it to the crane. These boxes now come ready built and tested, so can be fitted more quickly. One box will include all the necessary electrical connections for any crane specification. Many of these functions will be redundant on a basic specification crane but there is the benefit of standardisation and the fact that higher specification features can be retrofitted at a later date if required.
Another improvement is that paint for the cream and grey Atlas-Terex colour scheme is now specified as two pack polyurethane which is expensive but has good chip resistance and looks good for longer, Halls says.
Cost savings and improvements in hardware include suppliers being responsible for ensuring that all nuts, bolts, washers, etc. are available to hand in bins at the assembly point. This is just one way that the bill of materials for each crane is being reduced, towards the target of it forming just a single A4 sheet of paper with around 30 components listed on it to assemble a crane from.
From now on
Halls says that even at the end of his time as MD, a year into Terex management and six months into ownership, he still spent six hours a day on the shop floor of the factory, looking for ways to save money by seeing what had come in, and by asking questions.
Component supply cost reductions year on year are part of the plan so next year the purchasing department has to produce a 5% cost reduction over this year. This is to continue for the first three years of Terex ownership and then it becomes a case of cost containment rather than reduction.
The company’s largest accounts, its biggest customers spending, for example, £3m a year, are handled directly from Hamilton instead of by regional distributors. Even on existing contracts these customers are benefitting from Terex’s cost reduction measures: a 10% saving on a 200-plus unit order that is being delivered during the course of this year. Customers are also receiving higher specification machines at no extra cost.
Current production in Hamilton is around 25 cranes a week and the target for the end of the year is to have increased that to 40. Production prior to the Terex takeover was around 1,100 units a year and the aim is to increase this tenfold, perhaps in as little as three years, Halls suggests.
The range of models built in Hamilton has been reduced from 28 to just four basic platforms with two more being added this year. This fits with Fil Filipov’s view that six or seven models is the ideal. The new models are not ‘ground breakers’ as Atlas Terex does not do research and development work but instead looks to see what is available and adopts that if it improves safety or gives the customer better value. For example, the B3 class model 120.2E has radio remote control included as standard, at no extra cost to the customer.
Last month Halls finally moved back into his version of retirement and finance director Jim McManus took over as managing director of Atlas Terex UK Ltd.
The Terex turnaround strategy, as devised by Filipov, focuses in turn on ‘eight-Ms’: manpower, money, materials, machines, markets, motivations, morale and management. Halls said at the time of his departure that he was at the markets-motivations-morale stage, but was still keping an eye on the first four Ms.
