Can Your Business Afford the Cost of Complexity?
Complexity may be the Number One enemy of most companies. It manifests itself in so many ways – from product offerings to the number of suppliers and component sourcing. The problem is that most companies don’t quantify, track or understand the impact that complexity has on the overall efficiency and effectiveness of an organization.
As an advocate for activity based management, I can’t help but be concerned about complexity and its disproportionate impact on an organization above almost everything else. As the former Chief Procurement Officer for Chrysler, one of my favorite examples is in the auto industry: over twenty-five years ago, Honda launched a new car brand within the United States – the Acura. Originally introduced in 1986, the Acura had its first full year of operations within the U.S. in 1987. The Acura offered just two vehicles: the Legend and the Integra. The Legend was considered the high-end vehicle and over 66,000 were sold at an average price (inflation adjusted to 2013) of approximately $45,000.
None of this information is very earth shattering until you include the “complexity” factor into the analysis. The Legend was offered in 32 potential build combinations – and this included five basic color combinations. If we examine a recent new vehicle launch by Chrysler we find a very different story. The Journey, originally launched in 2008 as a crossover vehicle had a ‘build combination’ of over 4,000 various designs. In the first full year of production, the Journey sold only 22,000 units or an average of 50 units per ‘build combination’. More importantly, a simple pareto would show that over 80% of the volume was in fewer than 20% of the configurations.
This analogy of the Acura to the Journey points us to the following observations:
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- The various ‘build combinations’ require a great deal of planning for the components. Just imagine that the headliner of the Journey had 44 alternate build combinations in just one color! Each variation requires distinct tooling for the automated cuts, separate scheduling and line control, differentiated line sets to assembly, and it goes on and on. This complexity resulted in errors in the assembly line when the wrong configuration was applied to a vehicle coming down the line.
- Even taking into account the production breakthroughs in robotics and automation, by reducing the variability of the build you can significantly drive down the cost of production and improve quality at the same time.
If variability is reduced by offering the end customer a higher perceived value by inclusion of higher-end options into the base price, the cost of the options can be leveraged as well as increased perceived value. In fact, the Japanese auto makers included fewer bundled options originally for an increase in perceived value and to shorten production times. Complexity reduction and increased profitability was a by-product of this strategy.
No Accounting System in use Today can put a Cost on Complexity
Only through a very detailed activity based approach performed by an expert in activity based costing can you simulate the cost being incurred by the complexity of the product offered for sale. I have performed these for several organizations, and without exception clients are surprised at the results.
Additionally, manufacturers may build incentives for engineers to be creative and continually develop a new model or new configuration of styling or component options that can be added to the portfolio of options that are offered. While this is done in the hope of resulting sales, it adds complexity costs.
How Can You Impact the Complexity in your Organization?
As procurement specialists, one of our obligations is to continually look for efficiencies and savings opportunities for our organizations. One of the first questions you can ask is “Will the added complexity provide the organization with the desired results and what impact will that added complexity have on the bottom line?” By asking this fundamental question, you can have a significant impact on the efficiency of the organization.
Ask yourself these additional questions:
- What impact will the added complexity have on design for manufacturability and do we truly understand all of the associated costs?
- What impact does the added complexity have on our back office? How many additional PO’s need to be cut, suppliers added and related logistics cost?
- Have we had an independent group examine the complexity which already exists in our organization and to help us identify the costs associated with this added complexity?
Using our experts, have we modeled a better way to achieve our goals with less complexity?
The challenge for CPOs is no longer just “did we get the right price and quantity on time where it was needed,” but also “are we enhancing the profitability of the entire supply chain?” Until you can work with your supply networks in a collaborative manner, you will not be able to compete as effectively as possibly against your global competitors.
Firestorm Expert Council Member John P. Campi is the founder and Managing Partner of Genesis Management, LLC, an organization specializing in supply chain and cost management initiatives. Previously, he served as Executive Vice President and Chief Procurement Officer of Global Sourcing for Chrysler,L LC where he was responsible for all worldwide purchasing and supplier quality activities.
Mr. Campi has extensive experience in the field of cost management and is recognized as a founder of the strategic cost-management discipline known as Activity-Based Cost Management. Before joining Chrysler, he served as the Senior Vice President of Sourcing and Vendor Management for The Home Depot where he led the drive for standardization and optimization of The Home Depot Global Supply Chain. Prior to joining The Home Depot, he served as Vice President and Chief Procurement Officer for Du Pont Global Sourcing and Logistics. Previous to joining DuPont, Mr. Campi also led the Global Sourcing activities for GE Power Energy (previously GE Power Systems). Additionally he has also held a variety of positions within the automotive industry – beginning his career at Federal Mogul before joining Parker Hannifin Corporation, and as a consultant to manufacturing and distribution organizations at PriceWaterhouseCoopers.
Mr. Campi completed his undergraduate studies at Indiana University earning a Bachelor of Science in Business majoring in Accounting. He also completed his MBA at Case Western Reserve University in Cleveland, Ohio. It was during this period that Mr. Campi became more involved in Global Supply Chain research an engagement that ultimately led to his being recently recognized by A.T. Kearney for his outstanding leadership in the Field of Supply Chain Management.
Mr. Campi currently serves on the Board of Trustees for Case Western Reserve University and the Supply Chain Management Advisory Board for Clark Atlanta University. He is generally recognized as one of the outstanding leaders in the field of supply chain within the United States. Additionally he has also served as a member of the Advisory Board of directors for three startup companies and is a past member of the Financial Executives Institute and the Institute of Management Accountants (member of the National Committee on Academic Relations), and he has served as President of the Alumni Board of Directors of the Case Western Reserve University Weatherhead School of Management.
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