Tyco's Spend Management Results: Is the Glass Half Full or Half Empty?

Over on Global CPO Doug Smock notes some insightful figures from the procurement and supply chain turnover effort at Tyco. Impressively, Tyco has reached its $3 billion, three-year savings goals from "operational excellence" programs due to programs targeting working capital, strategic sourcing, and Six Sigma. But as is the case of many direct materials strategic sourcing programs, only a fraction of the original identified savings have been implementable. To be exact, "gross savings of $1.5 billion in sourcing were cut to $700 million in net savings due to strong pricing headwinds in critical direct materials such as plastics, resins, copper and steel."

When reading this, the first question that pops into my head is whether or not Tyco achieved cost avoidance from their efforts on the 50+% of identified savings that they failed to implement -- and if so, is the procurement organization being rewarded or at least measured by their ability to not just reduce cost, but avoid additional expense, in highly volatile commodity markets. Certainly, Tyco appears to be following textbook strategic sourcing and risk reduction operational strategies when they were able to reduce their supply base for one category from "two hundred [suppliers] to one" as Smock points out (however, I'd say that three is preferable to one, from a risk standpoint). But whether or not they’re applying advanced supply risk management strategies to reduce and lock-in downside risk is unclear.

Still, we should give credit to Tyco's operational excellence and sourcing champion, Shelley Stewart, who was starting from scratch when he joined. According to Doug's commentary, it was a "two-year project just to identify that Tyco, a very decentralized company, had a $25 billion global spend". And that's not even counting Park Avenue apartments or million dollar birthday parties.

In all seriousness, this decentralized spend came from over 400 acquisitions in the past two decades. Throughout that time, the company would follow a slash and burn strategy to reduce headcount, but would ignore procurement and supply chain synergies, before the Spend Management turnaround team came on board. The fact that Stewart and his team could implement such a turnaround from so many far flung global pieces in a matter of a few years is impressive indeed. But perhaps their next step will be to achieve additional, implementable direct materials savings in rising and volatile commodity markets from applying new types of risk management and advanced sourcing strategies.

Jason Busch

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