Executive Briefings

It's a Mad, Mad World! The Causes and Effects of Business Complexity in Supply Chain Management

Business literature is increasingly permeated with explorations and ruminations about the impact of "complexity science" on business operations and performance.  In every area of business today, the world seems at times to be going mad.  The proliferation of choices available to the end consumer in almost every category of product is indicative of the underlying challenge.  The number of choices translates - for the manufacturer - into a broader and broader array of design variations, engineering change orders, part numbers to inventory, manufacturing processes and work instructions to manage, revision levels to monitor, and packaging solutions to enable.  It also often requires a swelling of the supplier base, with all of the attendant complications of integrating components into the final product, and managing larger and larger volumes of purchase orders, invoices, and so on.

In some of the more progressive Fortune 100 companies, multimillion-dollar initiatives are under way right now to identify, understand and deal with the burgeoning complexities of their business.  These initiatives span a wide number of business areas and include everything from the application of business intelligence (BI) tools to supplier base and customer base rationalization.

Complexity in modern businesses is described by current thought leaders such as John Mariotti (The Complexity Crisis) as the result of a proliferation among many elements of modern business, including: transactions, customers, suppliers, competitors, obsolescence, forecasts, shipments, and information systems as well as others.  In fact, a number of leaders in this field have developed their own formula for the calculation of business complexity, and some companies are using this as a measure of where it is most prudent to make investments in streamlining processes and pruning back the volume of business elements in order to maximize their return on capital invested.  One such calculation, offered by Mariotti, is:

Number of finished products (SKUs) x Number of markets served x Number of company legal entities x Number of facilities x (Number of employees + Number of suppliers + Number of customers) divided by Sales revenue.

Most companies involved in a Complexity Reduction initiative develop their own formula, but many have used this formula as a foundation from which to launch their own development work.   However, the companies that are most insightful about their approach have discovered that these elements are more symptomatic than they are reflective of root causes.  The underlying causes for business complexity as it is most commonly manifested today include:

• Unassimilated business acquisitions, where businesses continue to operate with different business processes, information systems, and organization structures.

• Overlapping technology platforms and applications, where businesses maintain redundant systems and technology platforms resulting in license fees, maintenance costs, and a loss of visibility across business units that would otherwise provide financial leverage to the company as a whole.

• An increasingly regulated operating environment, resulting in a substantial and growing staffing requirement to develop, produce, and maintain documentation that demonstrates compliance.

• Globalization and the resulting growth in customer bases, supplier bases, and competitors, requiring an unprecedented level of coordination among geographic operations that incorporates the various cultural nuances of those regions as well as dealing with multiple languages, currencies and regulatory (tax, import/export) structures.

• The burgeoning density of information content in our products and services, which requires an ever-growing information storage capacity and knowledge management capability.

Complexity also manifests itself differently in different types of businesses.  For example, in businesses focused primarily on cost leadership, where their primary market-facing business strategy is overall cost leadership, the environment is typified by a large base of competitors, a comparatively large transaction volume, and a broad customer base.  In these cases, complexity often manifests itself in the forms of large volumes of purchase orders, shipments, material moves and warranty claims as well as a wide array of competitive intelligence sources, data bases and records.  On the other hand, a business focused primarily on differentiation, where their primary focus is on commanding a high premium for their products as a result of exceptional quality, the environment is typified by a wide array of product options, more sophisticated customer requirements, and a broad supplier base.  In these cases, complexity often manifests itself in the forms of a large number of design variations, a high number of SKUs, a large number of variants in manufacturing process / work instructions/ process specifications, and high volumes of data related to customer requirements.  There are other types of businesses - each with their own unique characteristics, and each manifesting their own set of complexity factors.

However, business complexity is manifesting itself in supply chain management across all types of manufacturing companies as a growth in the complexity and sheer volume of supplier networks.  As OEMs attempt to "move up the value chain" to wider profit margins, eschewing themselves of fabrication and subassembly operations, their supply chains are developing more tiers, and becoming increasingly challenging to manage.  It is also showing up in voluminous import and export regulations, especially in this post-9/11 era.  This results in more work and more risk in packaging, transportation, and logistics.  It also places more pressure on companies to adopt technologies like radio frequency identification (RFID).   Transportation is proving more challenging, with greater volumes of international shipping requiring the coordination of more transportation companies and modes in order to serve broader markets with a wider variety of products and services.  Almost all of these elements of complexity directly related to supply chain management also result in another element -- a dramatic increase in the sheer volume of information that must be maintained in an accessible system, and in a usable form.

The impacts on operating performance when it occurs are substantial.  They appear in the "indirect cost" portion of the financial cost of goods sold (COGS), and they are insidious because they are not called out discretely.  These costs simply swell the staffing numbers, systems costs, and transportation costs that have always been a part of the operating cost of the business.  Recent work in this field indicates that overhead related costs resulting from these factors have swollen as much as 30 percent in manufacturing companies producing consumer products ranging from apparel to high-tech electronics.

The companies who are proving most successful in addressing the growing challenges of business complexity are taking steps to prioritize the various categories of complexity in terms of their impact on financial performance.  Then they are attacking it on two fronts: rationalization and simplification.

Prioritizing the categories of business complexity on financial performance can be done by estimating their impact on the various lines of the company's income statement and balance sheet.  It's not an easy process - akin to activity-based costing - but it can be done, and some tools such as the DuPont Model provide a sound structure for this review.  Such a review is not designed to identify the financial impact of the unwieldy supplier base to the exact dollar, but rather to establish whether that category of costs is greater or less impactful than other categories such as an unwieldy array of product lines.  It is a guide to identify which categories of complexity represent the "trivial many" in a Pareto sense, and which are the "significant few" that could be addressed most quickly for the greatest degree of financial benefit.

Once the categories have been identified and prioritized in this way, the most critical areas can be addressed.  The most progressive companies in complexity reduction have come to realize that it is impossible to eliminate complexity immediately, that some forms of complexity will never be eliminated or even substantively reduced, and in those cases they must build mechanisms and processes to rationalize those categories of complexity.  Rationalization is used when it becomes clear that rapid action can yield important benefits, and when better visibility will yield significantly better decisions.  The techniques used by successful companies to rationalize include business intelligence tools for analytics, and service-oriented architectures (SOA) and "middleware" for coordinating disparate information systems and networks.  These tools are deployed to perform work such as product line rationalization, SKU rationalization, customer base rationalization, supplier base rationalization, inventory rationalization, purchased commodity rationalization, and part count rationalization.  In other categories where complexity is reducible, Lean tools and techniques as well as shared services are most frequently being employed to great advantage.  Reduction and elimination of waste through the application of Lean techniques is most appropriate when there is a high degree of redundancy and waste in business processes, information systems, organization structures, and business infrastructure.  Some specific techniques used by successful companies to reduce complexity in these categories include quality techniques (such as variation research and reduction, quality function deployment, and statistical process control), uniform work loading and work balancing, process-based work design (especially in front and back offices), advanced procurement technologies (such as commodity-based contracting, risk-sharing partnerships, and joint OEM/supplier cost reduction workshops), design-for-manufacturability initiatives, and part classification and coding (now usually encompassed in PDM applications).

As the thought leaders in supply chain management continue to come to grips with the growing challenge of business complexity, the principle that is crystallizing is this: the companies who are most effectively dealing with complexity are those who take the time to prioritize the categories of complexity based on their impact to bottom-line financial performance.  Those who simply send their employees out to reduce complexity wherever they find it are finding the results to be less than spectacular.  Common sense?  If only it was!

Source: Computer Sciences Corporation

Business literature is increasingly permeated with explorations and ruminations about the impact of "complexity science" on business operations and performance.  In every area of business today, the world seems at times to be going mad.  The proliferation of choices available to the end consumer in almost every category of product is indicative of the underlying challenge.  The number of choices translates - for the manufacturer - into a broader and broader array of design variations, engineering change orders, part numbers to inventory, manufacturing processes and work instructions to manage, revision levels to monitor, and packaging solutions to enable.  It also often requires a swelling of the supplier base, with all of the attendant complications of integrating components into the final product, and managing larger and larger volumes of purchase orders, invoices, and so on.

In some of the more progressive Fortune 100 companies, multimillion-dollar initiatives are under way right now to identify, understand and deal with the burgeoning complexities of their business.  These initiatives span a wide number of business areas and include everything from the application of business intelligence (BI) tools to supplier base and customer base rationalization.

Complexity in modern businesses is described by current thought leaders such as John Mariotti (The Complexity Crisis) as the result of a proliferation among many elements of modern business, including: transactions, customers, suppliers, competitors, obsolescence, forecasts, shipments, and information systems as well as others.  In fact, a number of leaders in this field have developed their own formula for the calculation of business complexity, and some companies are using this as a measure of where it is most prudent to make investments in streamlining processes and pruning back the volume of business elements in order to maximize their return on capital invested.  One such calculation, offered by Mariotti, is:

Number of finished products (SKUs) x Number of markets served x Number of company legal entities x Number of facilities x (Number of employees + Number of suppliers + Number of customers) divided by Sales revenue.

Most companies involved in a Complexity Reduction initiative develop their own formula, but many have used this formula as a foundation from which to launch their own development work.   However, the companies that are most insightful about their approach have discovered that these elements are more symptomatic than they are reflective of root causes.  The underlying causes for business complexity as it is most commonly manifested today include:

• Unassimilated business acquisitions, where businesses continue to operate with different business processes, information systems, and organization structures.

• Overlapping technology platforms and applications, where businesses maintain redundant systems and technology platforms resulting in license fees, maintenance costs, and a loss of visibility across business units that would otherwise provide financial leverage to the company as a whole.

• An increasingly regulated operating environment, resulting in a substantial and growing staffing requirement to develop, produce, and maintain documentation that demonstrates compliance.

• Globalization and the resulting growth in customer bases, supplier bases, and competitors, requiring an unprecedented level of coordination among geographic operations that incorporates the various cultural nuances of those regions as well as dealing with multiple languages, currencies and regulatory (tax, import/export) structures.

• The burgeoning density of information content in our products and services, which requires an ever-growing information storage capacity and knowledge management capability.

Complexity also manifests itself differently in different types of businesses.  For example, in businesses focused primarily on cost leadership, where their primary market-facing business strategy is overall cost leadership, the environment is typified by a large base of competitors, a comparatively large transaction volume, and a broad customer base.  In these cases, complexity often manifests itself in the forms of large volumes of purchase orders, shipments, material moves and warranty claims as well as a wide array of competitive intelligence sources, data bases and records.  On the other hand, a business focused primarily on differentiation, where their primary focus is on commanding a high premium for their products as a result of exceptional quality, the environment is typified by a wide array of product options, more sophisticated customer requirements, and a broad supplier base.  In these cases, complexity often manifests itself in the forms of a large number of design variations, a high number of SKUs, a large number of variants in manufacturing process / work instructions/ process specifications, and high volumes of data related to customer requirements.  There are other types of businesses - each with their own unique characteristics, and each manifesting their own set of complexity factors.

However, business complexity is manifesting itself in supply chain management across all types of manufacturing companies as a growth in the complexity and sheer volume of supplier networks.  As OEMs attempt to "move up the value chain" to wider profit margins, eschewing themselves of fabrication and subassembly operations, their supply chains are developing more tiers, and becoming increasingly challenging to manage.  It is also showing up in voluminous import and export regulations, especially in this post-9/11 era.  This results in more work and more risk in packaging, transportation, and logistics.  It also places more pressure on companies to adopt technologies like radio frequency identification (RFID).   Transportation is proving more challenging, with greater volumes of international shipping requiring the coordination of more transportation companies and modes in order to serve broader markets with a wider variety of products and services.  Almost all of these elements of complexity directly related to supply chain management also result in another element -- a dramatic increase in the sheer volume of information that must be maintained in an accessible system, and in a usable form.

The impacts on operating performance when it occurs are substantial.  They appear in the "indirect cost" portion of the financial cost of goods sold (COGS), and they are insidious because they are not called out discretely.  These costs simply swell the staffing numbers, systems costs, and transportation costs that have always been a part of the operating cost of the business.  Recent work in this field indicates that overhead related costs resulting from these factors have swollen as much as 30 percent in manufacturing companies producing consumer products ranging from apparel to high-tech electronics.

The companies who are proving most successful in addressing the growing challenges of business complexity are taking steps to prioritize the various categories of complexity in terms of their impact on financial performance.  Then they are attacking it on two fronts: rationalization and simplification.

Prioritizing the categories of business complexity on financial performance can be done by estimating their impact on the various lines of the company's income statement and balance sheet.  It's not an easy process - akin to activity-based costing - but it can be done, and some tools such as the DuPont Model provide a sound structure for this review.  Such a review is not designed to identify the financial impact of the unwieldy supplier base to the exact dollar, but rather to establish whether that category of costs is greater or less impactful than other categories such as an unwieldy array of product lines.  It is a guide to identify which categories of complexity represent the "trivial many" in a Pareto sense, and which are the "significant few" that could be addressed most quickly for the greatest degree of financial benefit.

Once the categories have been identified and prioritized in this way, the most critical areas can be addressed.  The most progressive companies in complexity reduction have come to realize that it is impossible to eliminate complexity immediately, that some forms of complexity will never be eliminated or even substantively reduced, and in those cases they must build mechanisms and processes to rationalize those categories of complexity.  Rationalization is used when it becomes clear that rapid action can yield important benefits, and when better visibility will yield significantly better decisions.  The techniques used by successful companies to rationalize include business intelligence tools for analytics, and service-oriented architectures (SOA) and "middleware" for coordinating disparate information systems and networks.  These tools are deployed to perform work such as product line rationalization, SKU rationalization, customer base rationalization, supplier base rationalization, inventory rationalization, purchased commodity rationalization, and part count rationalization.  In other categories where complexity is reducible, Lean tools and techniques as well as shared services are most frequently being employed to great advantage.  Reduction and elimination of waste through the application of Lean techniques is most appropriate when there is a high degree of redundancy and waste in business processes, information systems, organization structures, and business infrastructure.  Some specific techniques used by successful companies to reduce complexity in these categories include quality techniques (such as variation research and reduction, quality function deployment, and statistical process control), uniform work loading and work balancing, process-based work design (especially in front and back offices), advanced procurement technologies (such as commodity-based contracting, risk-sharing partnerships, and joint OEM/supplier cost reduction workshops), design-for-manufacturability initiatives, and part classification and coding (now usually encompassed in PDM applications).

As the thought leaders in supply chain management continue to come to grips with the growing challenge of business complexity, the principle that is crystallizing is this: the companies who are most effectively dealing with complexity are those who take the time to prioritize the categories of complexity based on their impact to bottom-line financial performance.  Those who simply send their employees out to reduce complexity wherever they find it are finding the results to be less than spectacular.  Common sense?  If only it was!

Source: Computer Sciences Corporation