complexity crisis

The Complexity Crisis Why too Many Products, Markets and

Customers are Crippling Your Company

John L. Mariotti

Former President of Rubbermaid Office Products and Huffy Bicycles

2Clarkston Consulting Confidential & Proprietary. Reproduction by any method or unauthorized circulation is prohibited without prior approval. Copyright © 2008. All rights reserved. Complexity Crisis.pptx

Table of Contents

The Complexity Problem Truths About Complexity Calculating the Complexity Factor – A New Measure to Correlate

Complexity With Profitability Recognizing Excess Complexity – Motorola Case Study Reducing Complexity – One Step at a Time Sources of Complexity – What to Measure - Where to Assign costs Controlling Complexity – Know Your Competition Topics You Must Understand in Order to Compete The Shape of Value – Creating the Shared Vision Memorable Quotes


The Complexity Problem

Quest for top-line growth in low/no growth markets What gets measured gets done – but none of today’s accounting or

measurement systems identify the costs of excess complexity until it is too late

People feel the need to create new products, processes, facilities and systems, but no one is designated to kill of the old and unproductive ones

This results in proliferation in products, customers, markets, suppliers, facilities, locations

The rate and scope of complexity in the world around us is exceeding our ability to deal with it

Just because you can make/sell a product or service doesn’t mean you should

Complexity fragments management focus, wastes time and money and ultimately reduces shareholder value


Truths About Complexity

1. PP X 2 ≠ FF – Protecting/Preserving the Past and Perfecting the Present does not equal Finding the Future

2. There are only three solutions for wrong forecasts:

a) Carry inventory as a hedge – but it will at least partly the wrong inventory, and it cost money to carry it, and more money to dispose of the wrong stuff

b) Get more lead-time from customers – but sometimes customers can not or will not provide more lead-time, or competitors will provide shorter lead-times

c) Have more, flexible production capacity available – which is clearly the best option of the three if you can afford it and if it isn’t so far away that it takes too long to get the goods where you need them, when you need them

3. There are only two steps to solve any problem:

a) Define the problem

b) Solve the problem

4. The Two-Mile Drive

a) A man must drive two miles and average 60 MPH for the trip. He decides to drive the first mile at 30 MPH. How fast must he drive the second mile to reach his two mile destination and average 60 MPH? If you said this task is impossible, you are correct. When he decided to drive 30 MPH for the first mile, he used two minutes. Since 60 MPH is a mile per minute, the only way to complete the two mile trip at an average of 60 MPH is to complete the trip in two minutes, but he already used two minutes driving the first mile because he decided to go too slowly on the first half of the trip. This is a common error in business. Per Peter Drucker: “Time is the scarcest resource and unless it is managed, nothing else can be managed.” If your business is suffering from complexity, time is precious. Don’t waste it now, because you may not be able to get where you need to go in time, later on.

5. There are only five ways to grow faster than the market is growing:

a) Take share from existing competitors

b) Expand the market with innovative new offerings

c) Change the mix to sell higher-price-value products

d) Enter new markets or an entirely new market (go back to numbers 1-3 above)

e) Create an entirely new product and market (e.g., Fed Ex packaged delivery, or packaged lettuce or eBay on-line auctions)


Truths About Complexity (Continued)

6. Complexity is the enemy – Drive down CF, drive up the profitability of the company

7. Framework for thought

a) Purpose

b) Structure

c) Processes

d) Relationships

e) Culture

8. Four formulas for success:

a) Data + Organization = Information

b) Information + Insight = Knowledge

c) Knowledge + Experience = Wisdom

d) Wisdom + Imagination = Genius


Calculating the Complexity Factor – A Different Way to Measure Your Business

Complexity Factor (CF) = Number of Finished Products (SKUs) X

Number of Different Markets Served X

Number of Company Legal Entities X

Number of Significant Facilities X

(Number of Employees + Number of Suppliers + Number of Customers) ÷

Sales Revenues

Observations – Preliminary Research :• Companies with a CF less than 1.0 have managed to avoid the most common complexity

problems

• Companies with a CF greater than 50 are unnecessarily complex – great opportunities for improvement

• Companies with a CF between 1 and 50 require a more thorough root-cause analysis to determine if the complexity is warranted


Recognizing Excessive Complexity – Motorola Case Study

At a portfolio level

• Too many products

• Too many high-complexity products

• Too many low-volume models

At a detail level

• Not enough component reuse

• Too many non-standard parts

• Too little use of postponement

• Too many models

• Too many parts

• Too complex subassemblies

Used a “Complexity index” comprised of the following to combat

• Average part count

• Test time

• Assembly time

• Mechanical postponement

• Software postponement

• Use of industry standard parts

• Component reuse


Reducing Complexity – One Step at a Time

Use the 80-20 Rule• Customers:

– Rank customers in descending sequence by annual sales

– Rank the same customers in descending sequence by profitability

– Rank the same customers in descending order of gross margin %

– Compare all three lists (side by side)

– Draw a line at the 20% and 80% cumulative points on each of the above – you’ve now identified the most valuable and least valuable customers from a sales and profit contribution standpoint

– Now, analyze the list of margin % and compare it to the list of margin $’s – a high margin % with little sales and/or $ profits usually indicates unnecessary complexity

• Suppliers- Conduct the same exercise on total annual purchases

• Products – Conduct the same exercise (Sales and margin by SKU)

• Review all of the above at least quarterly, monthly to begin the process

• Sales per Employee – look at a trailing twelve months trend line to assess if you’re getting better or worse since complexity tends to add staff without corresponding sales


Complexity Sources – What to Measure – Where to Assign Costs

Transactions – orders, invoices, payments, voucher entries, adjustments

Customers – sales calls, unique products, programs, promotions, record keeping/reporting

Suppliers – Sales calls, unique components, materials, deals, record keeping/reporting, variability and six sigma

Competition – market segments, products, regions, countries and distribution types

Obsolescence - raw material, components, finished products, marketing/merchandising materials, closeouts, markdowns, scrap, administration (Which customers, products, dist channels)

Forecasting – Variety, similarity/shifting, seasonality, geography, Bill of Materials, planning changes, schedule changes

Shipments - destinations, routings, shipping instructions, manifests/paperwork, confusing, similar numbers/models/packages, DC locations

Staffing costs, learning curve and training costs

Information systems – EDI protocols, size of database, number of programs, memory, processing, documentation, network management, security

Currency risks – number of countries buying, selling, doing business, employees

Tax returns – number of different states and countries, different tax codes, regulations

Incorporation and officer designations – Number of states and countries, governing law

Regulations – number of states and countries, local codes, industry related

Intellectual property – number of states and countries, patents, trademarks, copyrights


Solutions to the Complexity Problem

Common platforms – around which product variation can be produced Standard component lists Approved supplier lists Long term agreements Postponement Mass customization Plan global, make local Study how industry leaders have managed complexity Other tools at emcien.com


Controlling Complexity – Know Your Competition


Topics You Must Understand in Order to Compete

The Current Environment

• Latent over-capacity

• Global parity

The Curse of Complexity

• Capacity is elastic, demand only exists where there is wealth, needs and wants

• There is no measurement system

Strategic Outsourcing – Boon or Bane?

• You (and your competitors) can get it in China, subcontract it to India, import it from South America

• Be careful what you give away – Your supplier could become your biggest competitor

The Value Network

• Supply Chain is a misnomer – it’s about what network creates the most value

Partnerships in an Era of Growing Complexity

• People and partners are key competitive differentiators

• The best partners, working collaboratively enable winners

Leadership – Creating a Path to the Future

• Creates a clear understanding of and a healthy dissatisfaction with the current reality

• Builds a shared vision of a new, better reality

• Creates an environment in which people are motivated to move from the former to the later


The Shape of Value – Creating the Shared Vision

Attributes of Value• Quality

• Service

• Speed

• Cost

• Innovation

The Shape of Value Plot – Shows Why People Buy• Illustrative Example

– Rolex = Quality and Service

– Timex = Speed and Cost


Memorable Quotes

“Talent hits a target no one else can hit, genius hits a target no one else can see.” – Arthur Schopenhauer – 19th century German philosopher

“Fools ignore complexity. Pragmatists suffer it. Some can avoid it. Geniuses remove it.” Alan Perlis, computer scientist and Yale University professor

“A man who carries a cat by the tail, learns something he can learn no other way.” Mark Twain

“Most of what we call management consists of making it difficult for people to get their work done.” Peter F. Drucker

“Opportunity is missed by most folks because it is dressed in overalls and looks like work.” Thomas A. Edison

“Willingness to change is a strength, even if it means plunging part of the company into total confusion for awhile.” Jack Welch

“All generalizations are false, including this one.” Mark Twain

“Simplicity does not precede complexity, but follows it.” Alan J. Perlis

“Everything should be made as simple as possible, but not simpler.” Albert Einstein

“Even if you’re on the right track, you’ll get run over if you just sit there.” Will Rogers

“Success is a lousy teacher. It seduces smart people into thinking they can’t lose.” Bill Gates

“The first step to getting the things you want out of life is this: Decide what you want.” Ben Stein

“In theory, there is very little difference between theory and practice; in practice, they are very different.” John Mariotti

“Doing business abroad is about 80% = to business in the United States, but you better know what/where the 20% differences are, or they’ll kill you.” John Anderson, International Consultant

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Appendix


Illustrative P&L of an Overly Complex Business – Top Line is Up – Bottom Line is Gone


A Five-Step Framework for Thought

Purpose• Why do you deserve to be in business?

• What do you do better than competing alternatives?

• Who do you serve? Why? and How?

Structure• How are you set-up, organized, configured?

• Where, how many, how big?

• What’s done, by whom, why?

Processes• How does your company do things?

Relationships and Culture• How do you work together and with others?

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Thank You

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