The document summarizes a symposium on supply chain complexity. It discusses how complexity facing companies has increased dramatically and is now the dominant cost driver over volume and scale. Complexity arises from numerous interconnecting factors and can be difficult to predict and control. The impacts of complexity grow exponentially and include higher costs, more risk, and barriers to growth. Companies are advised to quantify complexity costs more accurately and look for ways to eliminate unnecessary complexity in products, processes, and organizational structure.
Bauer Supply Chain Center Spring 2015 Symposium Keynote
1. Bauer
Supply
Chain
Spring
2015
Symposium
Supply
Chain
Complexity
March
6,
2015
2. Wilson
Perumal
&
Company,
Inc. 2
Agenda
• Complexity
facing
companies
today
• QuanDfying
the
impact
of
complexity
• EliminaDng
and
managing
complexity
3. Wilson
Perumal
&
Company,
Inc. 3
The
world
has
changed!
Volume
Cost
Pre-‐Industrial
Age
“Individual
producDvity”
Dominated
by
variable
costs
Volume
Industrial
Age
“Economies
of
Scale”
Dominated
by
fixed
costs
Complexity
Post-‐Industrial
Age
“Complexity”
Dominated
by
complexity
costs
4. Wilson
Perumal
&
Company,
Inc. 4
Complexity
and
its
impacts
grow
exponenEally
CharacterisEcs
of
Complex
Systems
1. Non-‐linear
reacDons
2. Emerging
properDes
3. Feedback
loops
4. Unknown
interacDons
These
characteris+cs
make
Complex
Systems
almost
impossible
to
predict
and
control
5. Wilson
Perumal
&
Company,
Inc. 5
Complexity
is
stretching
companies’
capabiliEes
TECHNOLOGY
IS
MORE
COMPLEX
PRODUCTS
AND
SERVICES
MORE
COMPLEX
PROCESSES
MORE
COMPLEX
ORGANIZATIONS
MORE
COMPLEX
REGULATIONS
MORE
COMPLEX
MARKETS
MORE
COMPLEX
X
X
X
X X
6. Wilson
Perumal
&
Company,
Inc. 6
Many
companies
are
passing
a
complexity
threshold
VALUE
(diminishing
returns)
COST
&
RISK
(exponenDal
growth)
Level
of
complexity
you
can
support
$
Complexity
Costs
and
opera+onal
risk
grow
exponen+ally
with
complexity
Few
companies
are
s+ll
here
Many
companies
are
here
An
increasing
number
of
companies
are
here
7. Wilson
Perumal
&
Company,
Inc. 7
Complexity
impacts
all
aspects
of
your
business
Cost
&
OperaEons
Business
&
OperaEonal
Risk
Growth
&
InnovaEon
• Hidden
costs
• ExponenDal
growth
• Cross
subsidizaDon
• Most
products
are
unprofitable
• Grows
exponenDally
with
complexity
• Cannot
anDcipate
all
points
of
failure
• Slows
new
product
development
• Overwhelms
customers
• Distracts
sales
force
8. Wilson
Perumal
&
Company,
Inc. 8
Product,
Process
&
OrganizaEon
Complexity
interact
to
drive
higher
costs
&
risk
Organization
Value add
Non-value add
The
Complexity
Cube
Product
Process
OrganizaEon
Number
of
processes,
steps,
handoffs,
etc.
Number
of
products
and
services
you
offer
Number
of
assets,
faciliDes,
enDDes,
partners,
etc.
9. Wilson
Perumal
&
Company,
Inc. 9
Complexity
can
be
good
or
bad,
but
companies
almost
always
have
too
much
The
variety
of
and
within
the
products
(and
services)
you
offer
The
number
of
processes,
steps,
handoffs,
etc.
The
number
of
faciliDes,
assets,
funcDonal
enDDes,
organizaDonal
units,
systems,
policies,
etc.
• Bloated
por6olio
• Customer
confusion
• Strained
processes
• Duplica:on
• Rework
• Work-‐arounds
• Bloated
organiza:on
• Func:onal
silos
• Disarray
• No
clear
picture
Product
Process
OrganizaDon
Type
of
complexity
DescripEon
Impact
of
too
much
10. Wilson
Perumal
&
Company,
Inc. 10
Complexity
impacts
all
aspects
of
supply
chain
performance
Complexity-‐driven
supply
chain
challenges
Bloated
Inventories
More
Supply
Chain
DisrupEons
Increased
NVA
Cost/
Overhead
Slower
Response
Times
Poor
S&OP
Accuracy
11. Wilson
Perumal
&
Company,
Inc. 11
Agenda
• Complexity
facing
companies
today
• QuanDfying
the
impact
of
complexity
• EliminaDng
and
managing
complexity
12. Wilson
Perumal
&
Company,
Inc. 12
How
do
you
allocate
costs?
Total
cost
Volume
Unit
cost
Total
cost
Volume
Unit
cost
By
“Volume”
Volume
Volume
By
“Item”
13. Wilson
Perumal
&
Company,
Inc. 13
Complexity
costs
follow
a
square
root
of
volume
relaEonship
Most
NVA
costs
fall
in
between
“by
volume”
and
“by
unit”
extremes
We
see
the
SQRT
rela:onship
over
and
over
• Cost
rises
with
volume
but
not
as
much
as
in
“by
volume”
approach
• Unit
cost
drops
off
with
volume
but
not
as
much
as
in
“by
item”
approach
14. Wilson
Perumal
&
Company,
Inc. 14
Cost
allocaEon
methods
CosEng
approach
By
actual
costs
By
allocaEon
By
‘volume’
By
‘SQRT
vol.’
By
‘item’
• Best
approach
• But
not
always
pracDcal
(e.g.,
acDvity-‐based
cosDng)
Cost
allocated
in
proporDon
to
either
#
units,
revenue,
cost,
etc.
I.e.,
“Peanut
bucer
spread”
• Costs
divided
equally
between
products,
stores,
regions,
etc.
regardless
of
volume
• In
between
“by
volume”
and
“by
item”
methods
• Higher-‐vol.
items
receive
greater
aggregate
cost
• Lower-‐vol.
items
receive
greater
unit
cost
• NVA/complexity
costs
follow
the
“SQRT
of
volume”
relaDonship
• Without
this
tool,
most
companies
allocate
these
costs
using
the
“by
volume”
method,
leading
to
over-‐cosEng
of
high-‐volume
items
and
under-‐cosEng
of
low-‐volume
items
15. Wilson
Perumal
&
Company,
Inc. 15
EXAMPLE:
Square
root
cosEng
$1
$1
$6
$0.88
$25
$0.50
“By
Volume”
“By
Item”
“By
SQRT
Vol.”
• Product
“A”:
volume
of
1
unit
• Product
“B”:
volume
of
50
units
• Total
cost
to
allocate
=
$50
“In
between”
is
not
simply
the
average
of
the
two
extremes
Unit
cost:
AllocaEon
method:
Scenario:
16. Wilson
Perumal
&
Company,
Inc. 16
Only
complexity-‐driven
costs
are
allocated
using
square
root
cosEng
Variable
(α
Vol.)
Fixed
Variable
(α
Vol.)
Fixed
SQRT
costs
TradiEonal
AllocaEon
CategorizaEon
“Square
Root”
AllocaEon
CategorizaEon
• Unmasks
cross-‐
subsidizaDon
• Corrects
for
under-‐
cosEng
small
volume
items/acEviEes
• Corrects
for
over-‐
esEmaEng
potenEal
for
fixed
cost
leverage
17. Wilson
Perumal
&
Company,
Inc. 17
ReallocaEng
costs
Total
Costs
Corporate
SG&A
Packaging
Materials
MarkeDng
Spend
Distri-‐
buDon
Conversion
Costs
Brewing
Materials
11%
36%
19%
10%
14%
11%
100%
1044
3413
1860
920
1316
1058
9611
Allocate
only
those
costs
driven
by
NVA
complexity
Annual
Costs
($M)
18. Wilson
Perumal
&
Company,
Inc. 18
The
powerful
impact
of
complexity
cost
allocaEon
9%
13%
14%
26%
14%
5%
10%
19%
9%
14%
0%
10%
20%
30%
Budget
Below
Premium
Premium
Cram
Average
%
OperaDng
Margin
Vol.
(bbls):
12.5M
16.4M
44.3M
4.8M
78.0M
Typical
standard
cosDng
Complexity-‐adjusted
cosDng
19. Wilson
Perumal
&
Company,
Inc. 19
Agenda
• Complexity
facing
companies
today
• QuanDfying
the
impact
of
complexity
• EliminaDng
and
managing
complexity
20. Wilson
Perumal
&
Company,
Inc.
20
Complexity
creates
a
vicious
cycle
21. Wilson
Perumal
&
Company,
Inc. 21
Mastering
complexity
requires
a
two-‐pronged
approach
Product/
service
rationalization
Brand
elimination Material
consolidation
Vendor, dealer,
distributor, supplier
consolidation
Geography
or market
rationalization
Management
System
Reduce
amount
of
complexity?
Operating
model
redesign
Process
flexibility
Dynamic
modeling
High
Reliability
Culture
Or
make
complexity
less
expensive?
QUESTION:
ANSWER:
• Both
• We
do
not
live
in
a
“plain
vanilla”
world
(we
need
variety)
• Customers
demand
good
prices
(we
need
cost-‐compeEEveness)
• But
no
real
operaEon
is
lean
enough
to
support
infinite
variety
22. Wilson
Perumal
&
Company,
Inc. 22
Conclusion
• Complexity
has
become
a
key
factor
driving
performance
for
many
companies…
• …but
most
companies
are
ill-‐prepared
to
idenDfy
and
manage
complexity
in
their
operaDons
• Companies
can
becer
deal
with
increasing
complexity
by:
– Understanding
the
sources
of
complexity
and
the
impacts
(cost
&
performance)
– EliminaDng
NVA
complexity
and
becer
managing
necessary
complexity