This is the first of two articles based on a conversation with Donald Allan, CFO of Fortune 500 toolmaker Stanley Black & Decker since 2008.

At the end of 2016, the year former finance chief James Loree was promoted to the CEO seat at Stanley Black & Decker, he gathered his team to talk about his vision for the company in 2022.

That’s when Loree will be 65 and, perhaps, transitioning out of the post.

Well, he suggested, how about doubling the size of the company by then, from $11 billion in revenue to $22 billion?

So that became the plan. Although, says current CFO Don Allan, who’s been running finance for SWK (the company’s New York Stock Exchange ticker symbol) since December 2008, it’s not a hard-and-fast one.

Don Allan

“We’re not obsessed, when we talk about our vision, to getting to $22 billion by 2022,” he tells CFO. “If we get to, say, $20 billion, and we were a top-quartile performer in total-shareholder-return performance versus our industrial peers, and we had significantly enhanced our corporate social responsibility focus, we would view that as a success.”

Still, the company has a decent head start. Allan says he expects revenue to be about $14 billion for 2018.

Whatever level of growth is achieved, about 60% of it will come from acquisitions, Allan notes. The company is well-versed in the M&A arena. Most notably, the formerly named Stanley Works paid $4.5 billion in 2010 for competitor Black & Decker.

Since then SWK has acquired no fewer than 14 additional companies, the largest being Newell Brands in a $2 billion deal in March 2017. Last year also included the acquisition of Craftsman for $775 million.

One thing accomplished by the shopping spree is entering new product markets. While a large majority of the company’s business is still tools, it also has commercial electronic security and engineering fastening divisions.

What about the 40% growth earmarked to be created organically?

Like other industrial manufacturers, Stanley Black & Decker is emerging into a new era, with factory floors increasingly relying on robotics, data analytics, artificial intelligence, and machine learning. Expanding its use of such technologies will inevitably be a key to driving organic growth.

During a visit to CFO‘s offices on Monday, Allan spoke at length about the high-tech trends, how they will influence growth, and other company matters. An edited transcript of the first half of the discussion follows.

You’ve got a pretty ambitious growth plan for a mature industrial company.

I’ve been at the company for 20 years. It was about a $2 billion business back then, so we’ve already doubled our revenue a few times. We’ve also returned a significant amount of value to our shareholders. Over the last 15 or 16 years our TSR performance has been about a 500% return.

What are your current priorities in terms of driving that growth?

When I think about my role as the CFO, I really have to be the one forcing a lot of transformation.

There are three areas of transformation that I think will facilitate us doing what we need to do. One is a very basic functional transformation of the back office and a consolidation of our ERP systems. We have about 70 to 80 of them today.

You have 70 or 80 ERPs?

Instances of ERPs. Most are different versions of SAP. That’s what happens when you do a lot of acquisitions. Five years from now we’ll probably be close to having fewer than 10 ERPs.

We’ve been working on this for two-and-a-half years. We were at 115 when we started and will have 50-ish by the end of this year. We’ve dedicated a combination of IT resources and other functional resources to it. You wouldn’t be able to do it without putting a full-time team on it, because there would always be distractions.

It’s a priority for everybody on the management team — myself, the CEO, the three business presidents, and the CIO.

Simplifying the back office and making it more efficient will create a platform for us to continue to build upon with acquisitions and organic growth.

What other transformations are you influencing?

Another non-traditional finance area is what we call industry 4.0. It’s the evolution that’s occurring in manufacturing and will continue to occur over the next 5 to 10 years as we become more digital in our manufacturing plants and robotics becomes a bigger part of what happens there.

The digital piece is more significant. For most manufacturers it’s still a very manual process. Machines are doing things, but there’s also people assembling parts and putting them together to create tools.

What they don’t do very much is use data and information to become more efficient and effective. Industry 4.0 is about digitizing the plants, making them smart factories.

Finance needs to lead that effort, in my view. The CEO has given me executive sponsorship over that initiative. It’s where we can add dramatic value, facilitating not only a more efficient supply chain but one that can be leveraged as we grow.

Traditionally in manufacturing, as you grow you build another plant. You build another distribution center. You just keep building more buildings. And we’ll probably have to do some of that.

But if we can leverage the plants we have today with digital information, analytics, artificial intelligence, etc., we’ll be much more efficient and effective.

We’re already starting to do that. We’ve been working on it for almost two years, and we have created three pilot facilities as kind of examples of a smart factory.

What can a smart factory can do?

A good example would be putting sensors on various pieces of equipment in the plant to tell you what’s happening with them. Is this one creating excess vibration? Is it producing x number of pieces or parts per hour? Is anything changing?

Based on history, the sensors can tell you that the machine is going to fail in the next two or three days, for example, or that it’s going to require being shut down for an hour of maintenance.

Large manufacturers in general are moving in that direction, right?

Absolutely. It’s happening across many different industries. But in our industries — power tools, engineering fastening, and security systems — most of our competitors are not really doing any of it yet.

So we see it as an area where we can differentiate ourselves from our competitors. And then there’s robotics on top of that.

Also, it allows the gaps between manufacturing costs in China, Mexico, the United States, and Europe to shrink dramatically. That fits very well with our strategy, because many consumers are looking for locally made products and local brands.

What does this mean for the existing work force?

It’s going to change the skillsets needed in the plants. We’re not looking at it as a dramatic head-count reduction, because we’re going to continue to grow. But hopefully we won’t need to grow the head count at the same pace.

How do you find people with those skill sets? Every manufacturer has that problem today.

Yes, there’s a scarcity. We’re doing two things. One, we’ve hired some experts in these skills to train people internally. In many cases it’s not rocket science.

Now, you need a small group of people to look at using artificial intelligence and machine learning, to build the algorithms that [capture] the data that tells you a machine is going to break down in five days.

But the vast majority of the people are just learning how to use information that comes off an iPad, telling them what response to take. It’s retraining them, because they’re more used to saying, “hey, that machine sounds like it’s not functioning very well. We should probably shut it down.”

What proportion of the work force will be able to make that transition?

It’s really the managers of the different functions and sub-functions in the plants that you need to train. They are good leaders that understand these concepts.

But there are still going to be people in the plants doing manual assembly work. They won’t all be replaced by robots. They might just be doing things a little differently. It won’t be as hard to train them as it might appear on the surface.

What’s the nature of finance’s involvement in this evolution?

Finance has normal involvement in those types of things in terms of financial analysis and looking at cash-flow return on investments. What benefit are you going to get?

But I view this as another transformational activity. Finance has to drive the organization forward.

A finance team or leader can be very restrictive as to what can happen, or they can be very partner-oriented. Old-school finance people tend to think, “If it doesn’t fit in this little box, we’re not going to do it.”

With industry 4.0, the team not only needs to do the kind of traditional analysis I described. They also have to [estimate how long it will take us] to get that value. What if it’s four years? Is it the right or wrong thing to do?

It will be the right thing to do if it facilitates not having to grow the supply chain as fast as we’re growing as a company.

Next: Allan talks about analytics, why data scientists might replace some finance professionals, and whether Six Sigma is becoming passé in the evolving, hyper-technological world of manufacturing.

, , , , , , , , , , , , , , , , , , , , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *