A seat at every table: Tyco wins the 2009 Medal of Professional Excellence
Tyco International has given purchasing a seat at the table of every business unit, blending decentralized and center-led purchasing practices that actually boost earnings per share. For its achievements, the company wins the 2009 Purchasing Medal of Professional Excellence.
By Paul Teague -- Purchasing, 9/17/2009 2:00:00 AM
On July 30, Tyco International released its third-quarter earnings report for fiscal 2009. The company reported $4.2 billion in revenue for the quarter, and 58¢ in earnings per share (EPS). Both numbers were less than the figures reported in the third quarter a year ago—no surprise given the economy—but they were high enough to cheer Chief Executive Officer Ed Breen and at least some of the analysts on Wall Street. The company's results beat the Street's expectations. MarketIntelligenceCenter.com said technical indicators for the company's stock were bullish.
There are several reasons for the company's better-than-expected results, including some downsizing. But, Breen says a little more than 10% of that 58¢ EPS is directly attributable to incremental savings the company has logged in the last 12 months through its Operational Excellence programs, including purchasing and supply chain management. The success of those programs and the importance they play in the company's many achievements are among the reasons Tyco International has won this year's Purchasing Medal of Professional Excellence.
The savings have come from, among other things, a total redesign of purchasing that pairs procurement professionals with leaders of the individual businesses through a multi-council structure. That structure gives purchasing a seat at the C-level conference table in each of the highly diversified $20 billion company's five business units. "By partnering with the business-unit leaders, we focus on learning customer expectations so we can design the supply chain to meet the ultimate 'buy' expectations," says Jaime Bohnke, vice president of global supply chain at Tyco. The process and systems have produced close to $2 billion dollars in savings since 2003—and that in a company where only the $3.5 billion indirect portion of the $13 billion total spend is centrally managed within purchasing. While purchasing does not control the direct spend, it influences that spending through the guidance it provides and the processes it has established.
To amass those savings in any organization would be a challenge. Doing it in a matrix organization, where persuasive powers have to make up for a lack of mandates and direct reporting relationships, requires purchasing professionals at Tyco to take the concept of collaboration—with internal stakeholders as well as suppliers—to an entirely new level. The key is to develop an "emotional bank account" with stakeholders, says Russ Davis, director of global sourcing for Flow Control, one of the Tyco International businesses, and leader of the company's international procurement offices. "You do it by showing results," he says.
All "results," like all politics, are local, and the different business leaders look for the results that favorably affect their own units. There are plenty of those local results, which we'll describe later in this coverage. On a broader scale, though, there are several achievements that show the impact purchasing is having on the organization as a whole. Among them:
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Visibility into 96% of the global spend on direct and indirect materials. With such visibility, commodity managers can more efficiently and effectively develop sourcing strategy.
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Cost savings resulting from use of e-sourcing of 8% to 11% annually. Tyco uses Ariba for e-RFX (electronic request for information, proposal, quotation) and reverse auctions in the initial steps of the strategic sourcing process for indirect (T&E, facilities, transportation, MRO items, temporary labor, office supplies) and direct materials (chemicals, electronics, packaging). Procurement recently started using the tool to source professional services such as legal. To date, procurement has sourced $600 million through Ariba. Cost savings measured consist of price reductions, cost avoidance and results of demand-management activities.
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A template for contracts that consists of a set of standard terms and conditions across the company. Now, procurement is able to search and view contracts and has set up "alerts" that inform stakeholders when the agreements are up for renewal. The company's legal department has access as well.
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Ability to monitor supplier performance in a number of key areas, such as cost, delivery, quality, account management and technology and compare capability of suppliers across the company's supply base.
Underlying those achievements—and, in fact, critical to purchasing operations—is the structure that Bohnke put in place around what she calls Communities of Practice (CoPs). They are formal groups of domain experts who address process, gaps and ensure a "one-Tyco" approach to supply chain operations. There are CoPs for supply chain organization and development, supplier risk management, enterprise material and sourcing and global logistics and distribution. Bohnke leads each group, which consist of representatives from across the company.
The groups discuss business objectives, share best practices and ensure that knowledge management is institutionalized so there is a blended, or systems, approach to supply chain management. "They force knowledge across company boundaries and challenge everyone in the organization to pursue excellence," she says.
Now, in addition to the range of strategic sourcing and supplier-management activities it pursues, the Operational Excellence teams headed by Senior Vice President of Operational Excellence and Chief Procurement Officer Shelley Stewart, Jr. are helping to improve pricing of Tyco products by using best-practice pricing tools and Six Sigma processes. "If you analyze any sales team in any company, you will see a Bell curve where those sales people on the lower end of the curve are pricing products too low," says CEO Breen. "Fixing that will bring us much more profit."
A new start and new look
What a different company Tyco International is from the Tyco in the news earlier this decade, when the former chief executive and his top lieutenant were convicted of larceny and misleading financial statements. That Tyco could probably never have boasted of such savings from purchasing and supply chain operations. There was, in fact, no central purchasing organization at all.
There were about 30 core companies that managed their purchasing separately, organizing ad hoc core teams around each purchasing area that formed as needed and then disbanded. A slew of consultants augmented team members. Every factory did its own buying. There was no real strategy. "They weren't looking at things like sourcing in emerging markets," says CEO Breen. "They didn't know what they didn't know."
When Breen joined the company in 2002, he made operational excellence, including sourcing, Lean, Six Sigma and real estate areas for sustained focus. He continues to emphasize with leaders the importance of efforts to manage costs, improve pricing strategies and simplify business processes, all of which play a big role in the company's success.
In August 2003, Stewart, then at Invensys, joined the company and began the process of putting some structure into its decentralized purchasing effort, finding opportunities for savings and using purchasing and supply chain management to drive value. Stewart built his team, which began the process of pulling together individual spend data from divisions throughout the company and then analyzing it for areas ripe for savings. The structure that Stewart and his team built included several different councils teaming business leaders with purchasing professionals, and it became the foundation on which a more formalized council structure emerged when Tyco reorganized in 2007.
That year, the company spun off its health care and electronics divisions, and formed the present Tyco International. It consists of five business segments: ADT Worldwide, Fire Protection Services, Safety Products, Flow Control and Electrical & Metal Products.
Supply Chain Vice President Bohnke joined Stewart and his team and strengthened the council structure by documenting roles and adding accountability.
In essence, the purchasing and supply chain structure for indirect purchasing today looks like this:
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At the top is the Enterprise Supply Chain Council, which Bohnke chairs. It includes vice presidents of all the businesses, and discusses common sourcing and supply chain issues as well as sets general guidelines for purchasing and supply chain operations at the businesses.
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Each business has its own sourcing council, chaired by a sourcing professional within the business who reports to the business leader and indirectly to Bohnke. These councils discuss supply and sourcing issues related to the respective businesses.
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There are also separate councils for each commodity, each chaired by a member of Bohnke's staff. These councils have responsibility, authority and accountability to make sourcing decisions related to the commodities on behalf of the entire company.
The structure forces collaboration. Beyond that, Bohnke insists that her purchasing staff act like CEOs for the commodities they cover. And to help them do that, she has organized audit teams to help find areas for savings. The audit team for the energy commodity, for example, helped some facilities save upwards of 20% in electrical-energy costs by analyzing savings opportunities at those facilities, describing actions to garner the savings and then tracking progress.
One other aspect of the multi-council structure is the involvement of key executives as champions for certain activities. Bohnke says they are yet "another voice of leadership" that helps break down barriers. The executives and the activities they champion are: John Davidson, senior vice president, controller and chief accounting officer (professional services); Chris Coughlin, executive vice president and chief financial officer (travel and expense management); George Oliver, president, safety products business (energy, IT and telecom,); Nelda Connors, president, electrical and metals products business (MRO); and Jim Spicer, president, SimplexGrinnell (Fleet).
On the direct side, collaboration is even more important since purchasing decisions reside with the businesses. But purchasing hardly acts as a wall flower. "We always act like we have the authority," says Flow Control's Davis.
The burden of proof
There often can be resistance, though. For example, several of the European operations are very loyal to their regional suppliers and were originally reluctant to change. "We listened to their concerns, then showed them the capabilities of our low-cost-country suppliers," Davis says. His team escorted European managers and purchasing staff to India, China and Eastern Europe so they could see the capabilities of the suppliers there themselves, and convinced them to source some materials there.
Low-cost-country sourcing helped one of the company's French facilities meet delivery and save costs. The French operation had to produce a 24-inch ball valve that required a 20-ton carbon-steel casing. The incumbent French supplier didn't have the capacity to handle the job, so the business sourced the work in India. Result: 25% savings on the casting cost and they met the delivery schedule. "Collaboration requires proof in evidence, and we work hard to provide that proof," Davis says.
Having proven the value that purchasing brings to the organization, Bohnke and her team are pursuing another initiative that promises to extend their influence further. It's a program to expand their Six Sigma efforts to the supply base. Bohnke did that at her previous jobs, at Westinghouse and Raytheon Defense. "The process will enable us to drive low-cost solutions, reduce cycle times, reduce redundancies, increase quality, share knowledge and be more efficient overall," she says.
Bohnke says they'll be working hard over the next year to capture the full value of opportunity with suppliers. "The size of the prize is dependent on the type of engagement and our ability to perform at world class," she says. Bohnke says for the program to succeed her team will need to do several things very well, including:
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Increase deployment utilization
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Provide a consistent approach
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Provide tacit knowledge sharing
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Eliminate redundant efforts (internal and external)
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Break business-unit "group think"
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Ensure that qualified people are performing projects
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Increase SME networking
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Provide process overview
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Provide "One-Tyco" face to suppliers
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Communicate with customers
Additionally, different programs will need different development plans, based on their program needs. Any supply development strategy needs to accommodate this variety.
Based on its performance so far, Tyco's operational excellence and supply chain team is the go-to group for that kind of effort.
Congratulations to Tyco International
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