Getting a Handle on Complexity

In the pursuit of revenue growth all too many companies have embraced the adage "everything to everyone." For many companies, the end result is overwhelming complexity. This complexity impacts all aspects of the firm’s value chain: the sales force is burdened; marketing’s messages are diluted; production struggles with capacity constraints and high changeover rates; and supply chain is shackled by reduced economies of scale and buyer power, increased (and often slow-moving) inventories, and encumbered logistics. The supply chain team is in a strong position, within most companies, to drive the complexity reduction discussion and to serve as stewards of complexity management in the long term.

Meaningful, sustainable benefits require a strategic complexity-management program with input across the value chain. Our recent experiences assisting clients with strategic complexity management have shown that applying the following four-step approach increases the likelihood of meaningful, sustainable supply chain benefits:

• Drive complexity management from the C-level suite.
• Create SKU cost and complexity transparency.
• Engage stakeholders across the entire value chain.
• Install processes and governance to ensure sustainability.

Step 1. Drive Complexity Management from C-level Suite
All complexity is not bad. Value-adding complexity offers firms a way to meet customer demands and create a real competitive advantage. Top management must be able to effectively communicate the value proposition their firm offers and the appropriate level of value-add complexity required to deliver this proposition to the market. Elimination of value-destroying complexity is often an uncomfortable process that will falter without the unwavering support of the C-level suite. To be successful, sustainable complexity management requires hard work, considerable patience, and top management’s continuous attention.

In a recent client situation, the CEO sponsored the complexity-reduction initiative, ranking it in his top four initiatives for the year. Throughout the course of the program, he set the tone for the rest of the organization, which helped remove barriers (both perceived and real), and empowered the organization to move swiftly and decisively.

Step 2. Create SKU Cost and Complexity Transparency
Analysis by A.T. Kearney has shown that many companies fail to fully understand the relationship between complexity and costs within their product portfolios. A.T. Kearney has developed a "multi-cube" data model that systematically organizes the level of complexity and associated cost at the SKU level, thereby making previously complex data easy to comprehend. The multi-cube model enables this comprehension by assessing revenue, cost and profitability for each SKU sold over a select time period, coupled with estimated raw material pricing and SKU-level manufacturing costs. A crucial element in this analysis is shifting from a traditional approach to allocating fixed costs to an activity/complexity-driven allocation.

Another tool that has proved useful is the development of Complexity Trees. Complexity Trees look a lot like a traditional family tree. A tree starts at the top with a common grouping (usually a product/family brand or packaging type) and then branches out based on increasingly specific product/packaging attributes until you reach each unique SKU. For each SKU, it is helpful to include a table of key metrics, such as total volume, gross margin, and inventory turns. By evaluating the complexity at the branch or group level – not the individual SKU level – the team can move beyond simply "cutting the tail" to truly pruning the tree for better value growth and improved supply chain performance.

In most client engagements of this nature, Complexity Trees serve as the backbone of a multi-day idea-generating "summit," with broad cross-functional participation. The goal: to drive complexity out of the value chain.

Step 3. Engage Stakeholders across the Entire Value Chain
For maximum, sustainable benefits, it’s critical to engage stakeholders across the entire value chain in the development of ideas to reduce complexity and create efficiency. Bringing sales, marketing, R&D, production, and supply chain into one room to discuss a sensitive topic such as complexity management can be uncomfortable. But it is only through such cross-pollination of ideas that a firm can move beyond merely scratching the surface and instead extract meaningful and sustainable benefits.

In our experience, an "ideation summit" process has proven especially effective here.

In such a process the team systematically and critically questions all elements of the value chain in a focused workshop session. The objective is to develop an idealized state of the company’s product offering and value chain.

Next, a bottom-up approach is taken. Specifically, teams comprised of stakeholders across various elements of the value chain analyze SKUs to determine their profitability/strategic values vs. their associated complexity. Complexity trees provide a tangible focal point for conversation among the team members. It is our experience that the teams will quickly move beyond simply eliminating the SKU tail and will start identifying levers that will help the organization manage its complexity.

In addition to eliminating the SKU tail, the "ideation summit" at one client identified nearly 200 potential opportunities, the vast majority of which were supply-chain focused. These initial ideas were vetted and evaluated, creating a focused list of priority items that will deliver $35-40 million in value for one region across four areas: top line growth, packaging, raw materials, manufacturing, and logistics.

Step 4. Install the Right Processes and Governance to Ensure Sustainability
As the trumpets fade and the initiatives selected during the ideation sessions are put into action, management needs to put in place a process and governance to manage complexity in the long run. One suggestion is to incorporate ongoing multi-cube analysis to ensure that the entire value chain is continually surveyed to control complexity. While this is a useful surveillance mechanism, in order to maximize sustainable benefits, a firm should address those processes that create complexity in the first place—such as product portfolio management, R&D processes, and the product lifecycle management process. Moreover, just as senior executives were critical in initiating the complexity management initiative, their continued vigilance is essential to ensuring sustainable benefits.

In a recent engagement, we embedded the multi-cube tool into a client’s IT and decision support tool set. The multi-cube was created in such a manner that it could be easily "refreshed." In addition, training was provided to ensure that the supply chain users could leverage the tool independently to enable sustainable results.

Challenging Process, Profound Gains

Harvesting the low-hanging fruit, in and of itself, will not yield meaningful change. To deliver long-term, sustainable results, a strategic approach touching multiple aspects of the value chain is required. Achieving such results will likely significantly impact a firm’s supply chain in the form of the production lines closures, the elimination of product lines, the standardization of packaging and formulation, alteration of processes, and adoption of best practices. The complexity-management approach we have outlined here provides a means for the supply chain organization to mobilize the firm to address complexity and to ensure that the benefits of complexity reduction are indeed sustained.

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