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Equipment Leasing Case Study - Cummins

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Cummins explains how they transformed their global equipment leasing program to yield significant savings. Cummins explains how they reduced sourcing costs by introducing competitive bidding on lease terms; lowered evergreen payments with better end of term management; and standardized lease vs buy across a global community of stakeholders.

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Equipment Leasing Case Study - Cummins

  1. 1. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 1 Cummins Inc. Implementing a Global Equipment Lease Management Program
  2. 2. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 2 Today’s  Speakers Jay  McGlynn Chief  Revenue  Officer LeaseAccelerator Neil  Banwart Director  -­ Corporate  Treasury Cummins
  3. 3. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 3 Equipment  Lease  Management Equipment  Leasing  – A  Big  Challenge  &  Opportunity
  4. 4. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 4 Lease  Accounting  – A  Hot  Topic “Biggest-­Ever   Accounting  Change” “$3.3  Trillion  Will  Transfer  On   To  Balance  Sheets” IFRS PWC
  5. 5. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 5 Potential  New  Lease  Challenges   Accounting  and  Sarbanes-­ Oxley  Compliance Equipment  Lease   Management The  pending  rule  change  may  require  and  or   expose  the  fact  that  many  Fortune  500   companies  have  significant  financial  waste  of   dollars  on  due  to  the  mismanagement  of  their   equipment  leasing  programs. Lease  Accounting  moves  from  the  dark   corner  of  the  financial  footnotes  to  the   bright  lights  of  the  balance  sheet.
  6. 6. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 6 Equipment  Lease  Management Overview  of Cummins’  Business
  7. 7. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 7 About  Cummins 46
  8. 8. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 8 Cummins  Revenue  by  Segment   2015  Results Sales: $19.1  billion EBIT1: $2.4  billion EBIT%: 12.5% ▪ Strong  product  portfolio  and  global   partners ▪ Macro  growth  trends  play  to  Cummins'   strengths ▪ Disciplined  investment  for  growth ▪ Demonstrated  technology  leadership 2015  Revenue  by  Segment 1 Q4'15  EBIT  excludes  $211  million  of  impairment  of  light-­duty  diesel  assets  and  $90  million  of  restructuring  actions  and  other  charges.
  9. 9. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 9 Geographic  Diversification ▪ Capitalizing  on  global  emissions   regulations ▪ Strong  geographic  diversification  and   leadership  across  multiple  end-­ markets ▪ Global  distribution  network  with   presence  in  more  than  190  countries   and  territories 2015  Revenue  by  Marketing  Territory
  10. 10. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 10 Partnerships  and  Customers
  11. 11. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 11 Technology  Leadership Fuel Systems Turbo Technologies Filtration 78% 42% 35% 34% 25% 17% NA  Truck HD Global Construction China  Truck MD+HD Global Mining Emission Solutions *  2015 Estimates Engine  market  share* Controls and     Systems NA  Truck MD India  Truck MD+HD
  12. 12. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 12 Global  Distribution Cummins  owned  and  Cummins  joint venture Independent
  13. 13. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 13 Equipment  Lease  Management Cummins  Equipment Leasing  Program
  14. 14. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 14 Equipment  Leasing  at  Cummins Trucks AutomobilesForklifts Networking Equipment Industrial Equipment Manufacturing Equipment Lab  & Testing Equipment Building Systems Office Equipment Corporate Aircraft Computers
  15. 15. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 15 Why  Does  Cummins  Lease? Corporate Treasury does not advocate purchasing or leasing. Local budget owners make decisions. Treasury provides policy, process, advice, supports and tools. Liquidity • Budget management • Align costs with incremental usage • Avoid tying up cash in depreciating assets Economics • Less expensive than buying • Greater flexibility than buying • Outsourcing management of residuals to best local lessor • Improve ROA and ROE Why budget owners choose leasing:
  16. 16. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 16 No  Standardized  Lease  vs  Buy Corporate Treasury Local  Business  Units Empowered  to  make  leasing  decisions Lease  versus  Buy  Tool Inconsistently  used  by   various  business  units CHALLENGE#1
  17. 17. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 17 No  Clear  Owner  for  Leasing Accounting Finance Treasury Corporate  IT Procurement Shared  Services CHALLENGE#2
  18. 18. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 18 Insufficient  Competition Insufficient  competitive   bidding  to  reduce  the   lease  price 12 24 36 48 60 Example  -­‐ 48   Month  Lease Relationships  with   captive  lessors  was   too  tight CHALLENGE#3
  19. 19. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 19 Considerable  Evergreen  Payments 12 24 36 48 60 Example  -­‐ 48   Month  Lease No  end  of  term   process  resulted  in   evergreen  leases Forced  buyouts   because  could  not   return  on  time CHALLENGE#4
  20. 20. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 20 Equipment  Lease  Management Cummins  Equipment Lease  Management  Strategy
  21. 21. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 21 Equipment  Lease Management  Strategy Global  Leasing  Process Centralized  Controls Single  Lease  Database Global  Leasing Database
  22. 22. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 22 Executive  Sponsorship CFO (Executive Sponsor) Treasury Procurement Accounting Shared Services Corporate IT BEST PRACTICE #1 Treasury  Took  a  Leadership  Role   Across  the  Various  Stakeholders
  23. 23. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 23 We  Needed  More  than  Software Equipment   Lease   Management Incentives Training Procedures Controls Software BEST PRACTICE #2
  24. 24. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 24 Two  Very  Different  Types  of  Leases Real  Estate Leases Equipment Leases Stakeholders Counter  Parties Processes  &  Controls Reporting  &  Metrics Stakeholders Counter  Parties Processes  &  Controls Reporting  &  Metrics BEST PRACTICE #3
  25. 25. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 25 Our  Lease  Collection  Process CFO Shared Services English Translation Lease Database Business Unit Business Unit Business Unit Business Unit Business Unit Business Unit Request  for  Leases Leases
  26. 26. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 26 We  Underestimated  Our  Leases 2500 Leases 7400 Leases
  27. 27. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 27 New  Information  Flows Procurement Applications Asset Management ERP Applications Lessor Accounting Systems Purchase Request Purchase Order Cost Center Governance Upgrades Moves Adds Changes End of Term Returns Buyouts Renewals Journal Entries Amounts Due Allocations Corporate Hierarchy General Ledger Codes Cash Disbursement Info Moves, Adds, Changes End of Term Origination Data & Documents
  28. 28. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 28 Reducing  Evergreen  Costs Oldest Leases Largest Leases Lease Database Lessors Lessors Lessors Renew,  Return,  Buyout Evergreen  Leases Identify  Most   Expensive  Leases BEST PRACTICE #4
  29. 29. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 29 New  Lease  versus  Buy  Process Business  Unit Business  Unit Business  Unit Business  Unit Business  Unit Business  Unit ARF ARF ARF ARF ARF ARF FAS  13 Test Lease  vs Buy  Analysis FX  Rates Interest  Rates WACC IBR Asset  Request Forms Lease  versus Buy  PDF BEST PRACTICE #5
  30. 30. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 30 Competitive  Sourcing  Process Lease  vs Buy Generate RFP Match Lessors Competitive Bidding Compare Offers Award Business BEST PRACTICE #6 Savings  of  6%  Achieved  Through  Introduction  of  Competition
  31. 31. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 31 Global  Lessor  Network Captive   Vendor Finance Independent Lessors Banks Business Unit Business Unit 500  Lessors Competitive  Bids  for Material  Handling Manufacturing  Equipment Industrial  Equipment Office  Equipment Aircraft Trucks Automobiles Computers
  32. 32. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 32 Tracking  Throughout  the  Lifecycle Location Change Cost  Center Change Ownership Change Buyout Renewal Return Always  Up-­to-­Date   Equipment  Lease   Database Tracked  at   Portfolio,  Schedule   and  Asset  Level
  33. 33. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 33 Since  the  Start  of  the  Project New  Leases Sourced Lease  vs Buy  Analyses Fewer  Leases (Evergreen) Assets  Being Managed Leases Processed 73 8000 4900 56,000 9,000
  34. 34. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 34 The  Return  on  Investment Competitive   Sourcing 8% Savings   On  Average 73  Events  across 26  Countries Evergreen Payments Dropped  from   18%  to  8.5% Unintended/Unplanned   Fees  Dropped 50%
  35. 35. Cummins  Case  Study  -­ Implementing  a  Global   Equipment  Lease  Management  Program Slide 35 Get  an  Executive  Briefing • Equipment  versus   Real  Estate? • Accounting  Issue  or   Data  Issue? • ERP,  Spreadsheet  or   Leasing  Application? • Comply  or  Transform? Five  Steps  to   Understand  the   Impact  of  the  New   Lease  Accounting   Standards

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