By Christoph Steitz and Tom Käckenhoff
Kerkhoff is preparing to replace the unit's head Peter Feldhaus and finance chief Stefan Gesing, the source told Reuters. The likely successor to lead the division is Marcel Fasswald, who would concentrate on turning the business around.
Shipbuilding should be split off from the unit and report directly to the managing board, the source said. The Handelsblatt newspaper was first to report the plan. Thyssenkrupp declined to comment.
Earlier on Wednesday, three people familiar with the matter told Reuters that how Kerkhoff handled the engineering business was likely to influence whether he keeps the top job.
Settling who will succeed Heinrich Hiesinger, who left in July over a strategy clash with leading shareholders, will help to determine whether Thyssenkrupp clings on to its conglomerate structure or seeks ways to simplify its business.
The 50-year-old Kerkhoff, who served as finance chief under Hiesinger and was given the top job pending the appointment of a permanent successor, is seen as part of an 'old guard' that some investors say failed to turn around the group quickly enough, the people said.
But a planned restructuring of the group's ailing industrials division, which makes everything from submarines to chemicals plants, could allow him to show what he can do, they said.
"The longer there is no permanent CEO the longer Kerkhoff has to prove himself," one of the people said.
Another person said Kerkhoff would likely be on the short list of CEO candidates that is currently being put together.
Thyssenkrupp is currently looking for both a new CEO and a new chairman.
Industrial Solutions, dubbed Thyssenkrupp's "problem child" by Kerkhoff, was responsible for a group-wide profit warning in July, suffering from higher than expected costs for a number of contracts in Turkey, Saudi Arabia and Australia.
The division accounted for 13 percent of sales last year.
Kerkhoff briefed the group's supervisory board on the problems at the division at a meeting on Tuesday, including options for how to fix them, the people said, adding they expected further cost cuts and restructuring measures.
Thyssenkrupp is already in the process of slashing a total of 2,000, or about one in ten, jobs at the unit, which it said would improve operating profit by up to 200 million euros (178.10 million pounds)a year.
Kerkhoff, who joined Thyssenkrupp from Deutsche Telekom in 2011, told analysts last month he was planning to "take out some layers in the organisation" at Industrial Solutions.
To make a difference he would have to launch a sales process for the unit's shipbuilding operations or other parts, one of the people said.
Germany's Rheinmetall and French shipping company Naval Group, have been considered potential buyers but Thyssenkrupp has declined to discuss any deal, people close to the matter have said in the past.
($1 = 0.8628 euros)
(Additional reporting by Edward Taylor; Editing by Keith Weir and Mark Potter)
By Christoph Steitz and Tom KÃ¤ckenhoff