April 5, 2010
Business summaries.com About the Authors
Waging War on Complexity Costs Reshape Your Cost Structure, Free Up Cash Flows, And Boost Productivity By Attacking Process, Product, and Organization Complexity By Stephen A. Wilson and Andrei Perumal, McGraw-Hill, 2010
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Stephen A. Wilson is Managing Director of WilsonPerumal, the strategy and operations management consultancy. He is co-author of Conquering Complexity in your Business and a contributing author of Fast Innovation, both published by McGraw Hill.
Andrei Perumal is Managing Director of WilsonPerumal, the strategy and operations management consultancy. He works with CEOs, executive teams, and government leaders to help them solve challenging problems with a focus on integrating strategy, operations and organization.
omplexity costs are the single biggest determinant of your company’s cost competitiveness. For the past two decades the pursuit of growth has created massive complexity in processes, product portfolios, and organizations, adding costs that companies can ill afford. The only good news is that your competitors may be carrying as much complexity as you are. Learn how to eliminate this complexity, and you can create a tremendous cost advantage over your competition.
What’s Inside:
WHY YOU NEED THIS BOOK
AN ISLAND OF PROFIT IN THE SEA OF COSTS THE ART OF COMPLEXITY WARFARE
Waging War on Complexity Costs | Stephen A. Wilson and Andrei Perumal
It is not enough to attack bloated product portfolios. Substantive cost improvements require addressing the complexity in the underlying processes and organizational structures. Tomorrow’s consumers are emerging as wellinformed customers who know what they want and the price they’re willing to pay for it. Complexity not only drives costs; it creates a barrier between you and the customer. Declare a war on complexity costs and prepare for profitable growth.
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The Nutshell WHY YOU NEED THIS BOOK This book delivers a powerful and practical approach for reclaiming your cost advantage. This executive-level resource presents a wealth of insight and new research to definitively answer how to take on the intractable problem of business complexity and as a result, help companies to reduce costs by 15% to 30% in significant portions of their business. AN ISLAND OF PROFIT IN THE SEA OF COSTS
the need is greater. It is our assertion that the best path to restructuring your costs is by attacking product, process, and organizational complexity. But although the issue of complexity costs is increasingly transparent, many shy away from attacking the issue as a more strategic and effective path to cost reduction. THE ART OF COMPLEXITY WARFARE To meet the task before us, we need a different approach. We need to think differently about how we approach the challenge.
It is difficult for many to accept the impact of complexity on the overall health of the organization, particularly given the fact that complexity does not announce itself with fanfare. Rather, it creeps in decision by decision, each choice adding costs that are hidden from traditional accounting methods. Worse still, its effects are geometric: a small expansion in a product or service line affects not just the offering of the delivery process but also everything that goes into creating and supporting that process – inventory, instructions, overhead and more. But all that said, our takeaway is the following: Cost-reduction approaches that didn’t work before won’t work any better now just because Waging War on Complexity Costs | Stephen A. Wilson and Andrei Perumal
About the Book
Authors: Stephen A. Wilson and Andrei Perumal Publisher: McGraw-Hill, 2010 ISBN: 978 0 07 163913 2 341 pages
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There are six key principles that inform the art of complexity warfare: • Principle 1: There is good complexity and bad complexity (reduce the bad and make the good less expensive to deliver) The fact that some complexity is good means you can’t just focus on eliminating SKUs, parts, vendors, dealers, and so on. Reducing complexity costs is not just about reducing the amount of complexity in your business. It is also about reducing the cost of delivering good complexity—making complexity less expensive. • Principle 2: Complexity is a multidimensional issue (and must be viewed as such to be understood in its fullness) Complexity is the result of the interactions of many different parties. Typically many companies think first of SKU or product complexity but that’s just a part of the issue. We look at the issue in terms of product, process, and organizational complexity. Each of these is a critical dimension but even more significantly is how they interact. This is where the costs reside. • Principle 3: Piecemeal approaches will not move the needle on cost reduction (don’t nibble at the edges of the issue) In order for a company to find and sustain significant improvements in their cost structure,
a company needs to make some big changes in the way things are done. A cost-reduction strategy that focuses on doing the same things, the same way, but cheaper, is likely to lead to disappointing results. • Principle 4: Unlocking the benefits requires “concurrent actions” Given the systemic nature of complexity, unlocking the benefits requires a coordinated combination of actions. To achieve big savings, you need to understand how the three dimensions of complexity (process, product, and organization) work to trap costs in the business, and then you need to attack complexity with an integrated campaign. For example, consider the pharmaceutical company that was looking to reduce its factory footprint and distribution network. As it examined the various factors involved, such as geography, channels, portfolio, and volumes, the focus soon became how to best rationalize the footprint assuming the same or near-same portfolio of products. This is a decision-trap— assuming an element is fixed and designing around it—but all-too-common.
Work to trap costs in the business, and then you need to attack complexity with an integrated campaign.
Waging War on Complexity Costs | Stephen A. Wilson and Andrei Perumal
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“A broader view with less detail is more important than diving deep into any one area. ” • Principle 5: Complexity costs “creep in” incrementally, but you need to remove them in chunks Consider a typical product portfolio: over a number of years, a portfolio has grown bloated with line extensions, new products, and new brands. The answer is not to trim the bottom 5% of SKUs. That will do little to free up capacity, cost, and focus; but when you can cut deep enough to cut a brand, close a warehouse, cease a productivity-draining process, then you will see substantive cost savings. The takeaway is that when addressing complexity costs, recognize that there are pivot-points at which fixed or semifixed costs are released. These points represent the staircase of cost targets that can release substantive benefits.
• Principle 6: This need not be a long, academic exercise. Throughout your efforts, we urge you to focus on leveraging 80/20 thinking. Taking out complexity costs does not and should not be a long academic exercise. Ensure that you are not embarking on a months-long program that is long on analysis but short on insights. It is important to get a more grounded view of the
drivers of complexity cost, but a broader view with less detail is more important than diving deep into any one area. Do enough to develop a battle strategy, and constantly ask yourself, What do I need to know to move forward on this? In our experience, it is possible to quickly develop hypotheses as to the drivers of complexity cost, which can then be validated, and this is a much faster approach than an exhaustive, bottoms-up approach. THE THREE TYPES OF COMPLEXITY 1. Product (and Service) Complexity Product complexity describes the variety of and within the products or services you offer your customers, be it banking services or frozen pizzas, hydraulic pumps or CAT scans. 2. Process Complexity Process complexity is the number of processes, process steps, handoffs, etc. involved in executing and delivering its products. Bad process complexity looks like duplication, rework and complexity-related work-arounds. 3. Organizational Complexity Organizational complexity is the number of facilities, assets, functional entities,
Waging War on Complexity Costs | Stephen A. Wilson and Andrei Perumal
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organizational units, systems, etc., involved in executing the processes of a company. A MORE COMPLETE VIEW OF COMPLEXITY In reality, each type of complexity impacts the others. From a practical standpoint, therefore, it makes more sense to think of product, process, and organizational complexity as dimensions of the Complexity Cube. Complexity may reside on the axis of the cube, but its costs reside on the faces of and within the cube. Such cube illustrates the geometric nature of complexity costs: how your products interact with your processes or your organization, for example is what drives complexity costs. Conversely, trying to attack product complexity without understanding how it interacts with the organization and processes is ineffective. Typical efforts to attack complexity usually focus on an individual dimension. But because complexity costs are multiplicative between the dimensions, looking at only a single dimension of complexity underestimates complexity costs. Those multi-dimensional impacts explain why you can’t just attack any single dimension of complexity of you want to have big (and
lasting) impact. For example, an equipment manufacturer that made a move to eliminate a lot of offering complexity (slashing variety in the products) could not reap the full benefits. Why? Because everything put in place to support that product complexity – the additional warehouse space, the extra processes, the workarounds, the staff – was left in place. The effort was centered on reducing product complexity, but because they had failed to see how some of the costs were rooted in interactions with the company’s processes and organizational structure, the costs remained. COMMON SYMPTOMS OF PRODUCT/ PROCESS COMPLEXITY It is critical to understand where the biggest opportunity exists. The book presents a diagnostic approach for assessing this, and defining the optimal battle strategies. What does complexity on the Product/Process face look like? The answers are myriad, but here are some of the most common symptoms we see: • A large portion of products are unprofitable, weighing down the profits of the company.
“ Complexity may reside on the axis of the cube, but its costs reside on the faces of and within the cube. ”
Waging War on Complexity Costs | Stephen A. Wilson and Andrei Perumal
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“ No one has a complete picture of what each group does. ” • Excessively high inventory levels are consuming working capital and adding costs. • There are product shortages due to strained capacity resulting in lost sales. • Product surpluses are leading to markdowns, waste and additional inventory costs. • Long lead times are frustrating customers. • Long and frequent changeovers are eroding production capacity. • Service delivery, customer service, and quality levels are not meeting customers’ expectation, and the situation is getting worse, not better. • Every action seems to have a negative reaction in another part of your operations.
create an absence of coherence. There is a lack of alignment between functions, goals, initiatives, resources, and so on. Even if there is a common goal, there remains a large disconnect between that goal and the specific actions taken by specific functions at specific points in the process, which is often described as an inability to execute. But what does a lack of coherence look like? Common symptoms include the following: • The organization seems overly complex and bloated; no one has a complete picture of what each group does. • Decisions that should take days take weeks, and information flows slowly through multiple layers and silos in the organization. • Seeing or managing trade-offs that cross functional boundaries is difficult.
COMMON SYMPTOMS OF PROCESS/ ORGANIZATION COMPLEXITY
• There is lots of activity but not much outcome (e.g., time to market is excessive, it takes more and more resources to get the same things done, accountability is blurry, and decision rights are unclear).
How do the interactions on the Process/ Organization face manifest? At its worst, they
• There are poor customer service levels (the organization is not aligned around satisfying
Waging War on Complexity Costs | Stephen A. Wilson and Andrei Perumal
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the customer, or processes are so cumbersome that the organization cannot execute them). • Poor product availability arises as a result of poor supply chain coordination. • Poorly implemented or complex use of IT systems weighs down processes and impedes decision making. COMMON SYMPTOMS OF ORGANIZATION/PRODUCT COMPLEXITY How will you know if the Organization/ Product interactions represent a sizeable opportunity for your business? Consider if any of the following common symptoms sound familiar: • Your physical footprint (factories, distribution centers, warehouses, and so on) is sprawling, with low or declining utilization. At the same time, operations struggles to keep up with the “cats and dogs” of your product line.
• Your supply base is fragmented; there are gaps and overlaps; it is not unusual for different parts of the organizations to be sourcing the same product with different vendors. • Your sales organization or third-party distributors resist efforts to focus on your product line, citing a specific customer need. • IT systems have grown “organically” in response to new emerging needs to the point that they represent a tangled web. • Management has discussed the need for network consolidation, but efforts are stymied by current production needs. GROWING REVENUE While the focus of this book is cost reduction, the longer-term objective of portfolio optimization should be revenue (and margin) growth. Moreover, we recognize that the fear of revenue loss has a dramatic shaping effect on a company’s efforts at SKU reductions.
• The efforts of marketing, sales, and other functions are diffused over an unmanageable number of products and geographies.
Waging War on Complexity Costs | Stephen A. Wilson and Andrei Perumal
“ Poor product availability arises as a result of poor supply chain coordination. ”
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Portfolio optimization, led with intelligent SKU rationalization, positions the portfolio for growth in the following ways:
bad complexity at bay? The answer in brief is manage complexity as a complete system and drive accountability through governance:
• By focusing the portfolio on what customers value.
• With governance comes the accountability for looking cross-functionally and for considering the systemic nature of complexity
• By concentrating scarce resources. • By increasing process performance.
• With accountability comes the demand for the information, metrics, and capabilities that help sustain a strong portfolio
• By driving more revenue per product.
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• By exposing gaps in the portfolio. CURBING PRODUCT AND SERVICE COMPLEXITY While the mantra of “more is better” used to summarize most companies’ approach to product and service variety, that is changing. With shifts in consumer behavior and the economic contraction, many retailers are realizing that “less is more.” To that end, keeping product and service complexity in check is a top priority for organizations. Companies of all stripes are now asking: Once you have taken out the big costs and adjusted your portfolio, how do you keep
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Waging War on Complexity Costs | Stephen A. Wilson and Andrei Perumal