The current trend for mass customisation means fewer markets now accept “a one size fits all” product offering. However, as a quick method for appreciating the hidden costs incurred through increased product complexity, Henry Ford’s model of “any color …. so long as it is black” is still a good comparative starting model for manufacturing and selling organisations.
Managers of an imaginary single product range manufacturing facility, which were considering the development and introduction of a second, related product range on the same facility would certainly consider the ROI of one-off R&D and sales incentive costs. They might also consider the potential of the new product to cannibalise existing sales. But they are less likely to identify the comparatively small increases in the Selling, General & Administration (SG&A) costs, which are hidden as reductions in unit operational efficiencies within functions or between departments. Although individually small, these complexity costs are multiplied across functions such as in production planning and inventory management workloads. They therefore rise logarithmically as the numbers of products increase.
How much more difficult must it be for a multi-site manufacturer with hundreds of products to measure the complexity cost of individual products. A recent Accenture study (2013) of blue chip companies showed that on average an equivalent of 52% of revenues are tied-up in direct material costs. Complexity costs exist between departments as increases in workload costs, such as errors and portfolio management control systems.
When it comes to considering complexity reduction between dependent functions Brown et al., (2010), recommended using a ‘complexity index’. The authors described how easily measured cross-departmental key performance indicators (KPI’s), including numbers of product, production units and suppliers were multiplied together to provide a ‘complexity index’, which was successfully used by an industrial goods company to target improvement measures that resulted in 10% cost saving in the first year.
As also reported by Brown et al., (2010), the most intransigent complexity costs are hidden between departments and it is only by taking a holistic approach to complexity reduction that sustainable profitability improvements can be achieved. Application of the 80:20 rule, whereby 20% of products typically provide 80% of revenue and marginal contribution is commonplace. This is because it is easy to understand and delivers quick results. However, unquestioning use of the 80:20 rule can be severely damaging to a company’s competitive position in the marketplace. For instance, a product range with a recognised competitive advantage but contributing a relatively small percentage of the overall turnover should not be immediately pruned from a business’ product portfolio. This range may be the differentiator in the marketplace and the impact of its loss may be far greater than its sales. Rather, a programme to streamline complexity costs associated with the maintenance of such product ranges. For instance, looking at simplified product design, shared parts, toll manufacture or outsourcing sales to distribution partner would be the preferred course.
Pennog has many years of experience in managing and streamlining industrial product portfolios. If you would like to speak to someone in more detail about Product Management training and best practice in portfolio management, please contact us by calling +44 1484 443001 by selecting “Product Management” in the easy contacts form.