2015 Year In Review

SFS 2.0 – BEST-IN-CLASS OPERATING SYSTEM GETTING BETTER

We are transforming our Stanley Fulfillment System (SFS) from the operating system that drove operational excellence, customer fulfillment and free cash flow generation, into a system that also bolsters our position for the future—as an engine of organic growth that powers excellence of all kinds across our global enterprise.

SFS 2.0 builds on the operational excellence and asset efficiency that Core SFS has always delivered, adding new dimensions of Digital Excellence, Breakthrough Innovation, Commercial Excellence and Functional Transformation—that enable us to exploit the digital revolution to our advantage and drive a culture of sustained organic growth and margin expansion. These aspects are mutually reinforcing and have a high degree of intersection between each initiative. We see them as synergistic and expect that their simultaneous launch will magnify the impact on growth and margin expansion, while also delivering enhanced customer and shareholder value.

SFS 2.0 launched in 2015 and we are already seeing its impact in our 2015 results—driving organic growth, margin improvement and new levels of innovation and digitization across our enterprise. The momentum continues to build.

SFS DIagram

Core SFS – Operational Excellence

Warehouse showing Stanley Fulfillment System in action

SFS is our operating system, and we believe it to be a competitive advantage for creating exceptional customer value. Our focus for Core SFS will remain firmly on leveraging Operational Lean and delivering best-in-class asset efficiency.

Through SFS 2.0, we are expanding this continuous improvement vehicle and mindset of innovating how work gets done into new areas of excellence—Digital, Commercial, Breakthrough Innovation and Functional Transformation. But Core SFS will continue doing what it always has done: raising all of our operations to the next level of effectiveness.

Our Engine for Operational Transformation 2003-2015 Through many significant surges in growth and even through periods of declining revenue, SFS has taken us within striking distance of our vision of ten plus working capital turns, a number that truly sets us apart from our peers. SFS is at the root of our proven ability to integrate new acquisitions quickly and bring acquired operations into alignment with our standards of performance.

Core SFS focuses us on improving key process drivers. In the early years of SFS, we focused on service excellence and provided step-function improvements in customer satisfaction. We then focused the organization on cash efficiency, nearly doubling working capital turns not once but twice. Today, as we build a culture of organic growth, Core SFS is a key enabler to service higher volumes while building on the working capital turn improvements from the past.

As we advance Core SFS into our next phase of growth, the opportunities are clear. We have made significant progress with embedding operational excellence across the company, and now have the potential to expand even further, while at the same time leveraging technology to drive additional improvements. Such improvements include digitizing our global supply chain to achieve a true “glass pipeline” with our suppliers, as well as combining our process expertise with our industry-leading technology to create the smart factories of the future.

$1+ Billion

of working capital freed up By SFS
since its inception

Delivering 10+ Working Capital Turns SFS is a winning formula. Sales and Operations Planning is the sinew that connects our commercial and supply chain teams. Operational Lean is how we connect the shop floor to our customer through demand pull systems. Complexity Management ensures that we allow only the business and product complexity that our customers value and are willing to pay for. Global Supply Chain Management keeps our costs, risks, responsiveness and reliability along the supply chain in control and moving toward best-in-class performance. Order-to-cash excellence helps us create a flawless customer experience. Delivering 10+ working capital turns will be the result of all these tools working in concert.

The STANLEY Standard We continue to extend Core SFS principles into our non-manufacturing businesses. STANLEY Security has created the STANLEY Standard to raise the effectiveness and efficiency of its field operations in North America. The STANLEY Standard is designed to spur organic growth by delivering an industry-leading, differentiated service and install experience for customers focused on standardization, empowerment and accountability. This field efficiency playbook requires a total team approach, embedding standard work and communication protocols and critical success metrics into every assignment with the goal of satisfying customers on their terms while providing the business with new streams of insight.

At Stanley Black & Decker we believe the best way to grow profitably is to deliver value to our customers at levels the competition can’t match. SFS makes that possible by continuing to drive operational excellence, and we will continue to evolve Core SFS to ensure that we win in the marketplace.”

Steve Stafstrom
Vice President, Operations,
Global Tools & Storage And Global Emerging Markets

Stanley Black & Decker’s Vice President, Operations, Tools & Storage, Steve Stafstrom

Digital Excellence

Analytics shown on iPad

We define Digital Excellence as leveraging the power of emerging technologies to drive new sources of growth and competitive advantage. Our intent is to exploit the power of digital including connected devices, the Internet of Things, big data and analytics as well as social and mobile technology.

Our efforts and resources are aligned with ensuring that all our business models maximize the value creation potential of these technologies while leveraging the power of digital across all relevant parts of our enterprise.

The Digital Accelerator Hits the Ground Running In mid-year 2015 our new Digital Accelerator brought on its first hire. By the end of the year, we had two dozen world-class technologists, software engineers and digital product managers helping to bring a breakthrough mobile app from concept to beta testing. At the same time, the team also helped businesses across Stanley Black & Decker get smarter at digital marketing, with enterprise-wide alignment on how to approach the web and social media. A center of excellence tasked with advancing digital across the enterprise, the Digital Accelerator is located in Atlanta, Georgia, home to the world-class engineering school of Georgia Tech, headquarters of twenty-seven Fortune 500 companies, countless startups and entrepreneurs, and a hotbed of activity where technology and consumer durables meet.

Exploring the Future of Work The Digital Accelerator is also transforming how work gets done across a variety of industries, connecting unconnected assets and developing solutions that drive productivity and efficiency for end users around the globe. The combination of critical real time data, integrated enterprise or manufacturing systems and powerful analytics enables a foundation on which to create the smart factory and workplace of the future.

At the same time we are making advancements to our internal technological infrastructure, both in terms of our systems and platforms, and in terms of our digital mindset and culture. These enhancements are helping our leadership team become more agile and responsive with real time information, helping our employees connect across geographic boundaries and business lines, and even improving the way we innovate with crowdsourced ideas gathered from our 52,000 employees.

We realize it will take time for these transformative ideas to bear fruit, but with the Digital Accelerator up-to-speed and focused, we look forward to the transformation ahead.

In a short time, we have made significant progress in building our Digital Accelerator team and in fostering the build-out of digital marketing capability across Stanley Black & Decker. We are very optimistic about the potential of these efforts, and look forward to seeing the initial wave of our digital excellence initiatives come to life in 2016.”

John H. Wyatt
President, STANLEY Engineered Fastening

Stanley Black & Decker’s President, Stanley Engineered Fastening, John Wyatt

Breakthrough Innovation

Special Innovation Forces, Innovation Is Doing

Stanley Black & Decker is a proven powerhouse in new product development, perennially at the top of the patent rankings. Innovation is in our DNA, and our processes and culture have supported a constant stream of incremental or linear innovation across our portfolio.

But we know that’s not enough to guarantee our future. “The Innovator's Dilemma” puts it clearly: “The very management practices that have allowed companies to become industry leaders also make it extremely difficult for them to develop the disruptive technologies that ultimately steal away their markets.” So, as a key pillar of SFS 2.0, we are building a parallel set of breakthrough innovation processes, practices and teams with a disruptive attacker mindset focused on game-changing, never-before-seen innovation.

Breakthrough Innovation is about step-function change—disrupting an entire industry, obliterating or creating whole categories, reshaping how people work and live. Our breakthrough model augments our tremendous core innovation capabilities, which continue to bring the most innovative products to market year after year.

Breakthrough Innovation Team We have built a series of Breakthrough Innovation teams that are entirely focused on generating breakthrough ideas and experimenting with them. This includes leveraging external innovation and finding new ways of applying it. These dedicated, elite teams of innovators are based off-site, with structure and operating rhythms that are distinct from our core business units. Today, the teams are working on a robust portfolio of opportunities in the breakthrough space, enabled by disciplined problem statement identification processes, rapid experimentation and accelerated prototyping.

Exemplifying speed and agility, these teams are modeled after the incubator approaches of standout innovators and startups we have observed in Silicon Valley, the Boston/Cambridge corridor and elsewhere. The extension of our breakthrough model across the enterprise will effectively create an incubator network that spans Tools & Storage, STANLEY Oil & Gas, STANLEY Hydraulics, STANLEY Engineered Fastening and STANLEY Security. You will see the first fruits of our breakthrough efforts in tools in 2016. Innovation is doing and seeing is believing.

This has all been accomplished while maintaining the momentum within our core businesses, whose market-leading linear innovation continues to generate results as we pivot to support new ways of innovating and improved ways of operating our business.

The pace of experimentation continues to accelerate. We have added a due diligence model, adapted from private equity firms, to rapidly assess breakthrough opportunities. The model applies five filters—market, customer needs, routes to market, intellectual property, and cost position—to quickly support go or no-go decisions.

“The Drawing Board” Opens for Business To spark and capture innovative ideas brewing across Stanley Black & Decker, we have launched an internal innovation portal, “The Drawing Board.” The purpose of this platform is to engage our global team in innovation crowd-sourcing for new and next-generation solutions. Piloted within Tools & Storage in 2015, the portal generated three times the expected participation rate, and is now being rolled out enterprise-wide.

What we learned from exploring hotbeds of innovation like Silicon Valley and the Boston/Cambridge corridor, is that breakthrough innovation stems from culture. You need the right high performing people, of course, but also the right environment and mindset. So we’ve created a Breakthrough Innovation group and incubators in our businesses, tasking teams with just this: go find us a breakthrough that changes everything. And then another and another and another.”

Stephen Subasic
Vice President, Human Resources, Global Tools & Storage

Stanley Black & Decker’s Vice President, Human Resources, Global Tools & Storage

Commercial Excellence

Stanley Black & Decker employee assisting DEWALT tools customer

At Stanley Black & Decker, we view Commercial Excellence as superior execution across seven areas: customer insights, innovation and product management, brand and marketing, pricing and promotion, sales force deployment and effectiveness, channel programs, and the customer experience. These pillars are interrelated and interdependent. We have always put focus and investment into each one, but with SFS 2.0, we are making these interrelationships more overt.

The first, customer insights, is about how we segment the market and get close to the end user. We serve a vast array of end users; understanding each one’s needs enables us to offer solutions they trust. The second, innovation, is about continually improving our solutions and bringing the right new solutions to market. The third is about leveraging the power of our brands—and we benefit from having, globally, among the most recognized brand portfolio in our industry. Intelligent pricing and dynamic promotions, the fourth pillar, boost growth. Sales force deployment, pillar five, is about optimizing our resources in the field. As can be seen from our recent Tools & Storage success in Europe, having an agile and flexible team allows us, in any market whether challenged or buoyant, to go to market for best effect. The sixth pillar, channel partnering, is a vital growth engine. Partnering with the best and strongest new partners and growing our existing relationships allow us to bring more of our products to market. Underlying it all is pillar seven, the customer experience.

In executing on each of these pillars and across these pillars, partnering with leading customers is key. Simply put, commercial excellence comes down to serving our customers the way that they want to be served and as only we can serve them.

We saw clear evidence of the benefits of our Commercial Excellence actions in 2015 in both the North American and European Tools & Storage businesses where we generated organic growth of 11% and 7%, respectively, far outpacing underlying market growth and making meaningful share gains.

Example: Made In The USA, Using Global Materials, Delivers

We have shipped over 62 million units of products that are made right here in the USA, using materials from around the world, since late 2014. This success is a result of many factors, but chief among them is the recognition that our customers and end users would embrace this effort. Making and assembling tools and accessories in the USA, using global materials, has shortened the supply chain for these products. And we have always manufactured certain key parts, such as powdered metal gears, on our home turf. We continue to develop end user engagement for this portfolio of products, which continues to expand. We are now producing brushless cordless products in our North Carolina plant, and corded power tools in Greenfield, Indiana.

OVER 62 MILLION

Units of products made in the USA
using global materials shipped since
late 2014... and growing

Simply put, commercial excellence means delivering capabilities, processes and structures that enable all of our businesses to grow profitably faster than the market. Our Tools & Storage business has grown at twice the market rate for five consecutive years, thanks in large part to a relentless focus on commercial excellence. We are now working to bring that focus to every business and every brand across Stanley Black & Decker.”

Jeff Ansell
Senior Vice President & Group Executive, Global Tools & Storage

Stanley Black & Decker’s Senior Vice President & Group Executive, Global Tools & Storage

Functional Transformation

Members of the Stanley Black & Decker team brainstorm Functional Transformation

Functional Transformation focuses on building more effective, efficient and scalable back office functions by redesigning our functional organizations from the ground up. Our support functions (IT, Finance, HR and Legal) are currently very effective. But we have completed nearly 100 acquisitions over the past 15 years and realize there is room for improvement that we can achieve by rethinking our processes and activities.

We have confirmed the opportunity by benchmarking against various companies that are similar to us in global reach or size, and in some cases are our peers. This resulted in a roadmap to potentially generate a reduction of one to three percentage points of our 2014 SG&A expenses as a percentage of revenue. Achieving this rate will allow us to not only fund the new SFS 2.0 machine of Digital Excellence, Commercial Excellence and Breakthrough Innovation but also support our organic growth and margin expansion plans.

Our approach is highly disciplined. First, we look to standardize all of the processes in our back-office functions — leveraging our own lean methodology from Core SFS — to improve how we serve our internal and external customers. Second, we will consolidate low return on investment activities into certain high efficiency locations. Third, we will optimize the organization by increasing spans and decreasing layers within the functions—eliminating bureaucracy while maintaining the right level of internal controls to effectively run and support the business. Fourth, we will leverage digital technology to enhance automation within our functions so many of the low value activities that are done today can either be automated or eliminated.

A successful outcome will be functions that are even more effective and scalable than they are today, and considerably more cost efficient.

We have the opportunity to impact the very core of Stanley Black & Decker, delivering a back office that is not only simple, but smart and scalable. Utilizing the proven methodology of zero-based redesign, we are building a current state fact base of each function—where people sit today, what they do, what they cost, what are some of the activities that may be low return and what are the activities that are very value-oriented. Benchmarking has helped us establish ideal states of where we want to go with each function, allowing us to build a roadmap on how to get there.”

Rhonda Gass
Vice President &
Chief Information Officer

Stanley Black & Decker’s Vice President & Chief Information Officer

Steven Brodrick
Vice President, Corporate
Financial Planning & Analysis

Stanley Black & Decker’s Vice President, Corporate Financial Planning & Analysis