First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  August 21, 2008  

The War on Supply Chain Complexity


In June, I featured a very popular column on “The Supply Chain Complexity Crisis,” triggered in part by a presentation and conversation I had with John Mariotti, a former president of Huffy Bikes and a division of Rubbermaid, and author of the recent (and excellent) book The Complexity Crisis.

The basic theme of the book and my column: complexity is simply destroying the profitability at many companies, and that executives often can’t see what the true cause is. They blame poor execution of what, in truth, are strategies doomed by the complexity they add, especially in the supply chain. More suppliers, more parts, more forecasting, more customers to ship to, more returns to manage, etc. Our accounting systems also lack the ability to well capture the true cost of this complexity, keeping it hidden.

Gilmore Says:
If anyone understands the cost of complexity, it is supply chain managers. We should take the lead in trying to quantify those costs for the rest of the company and our industry.

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I spent enough words summarizing the problem in that first column that I didn’t have room for any ideas on solutions, which I promised for a later date, and which is the focus of today’s column.

I asked one of the smartest men in the supply chain, Chris Gopal, currently EVP of Global Operations for Open Energy Corp., and with a long and distinguished supply chain consulting career before that, for his thoughts on this topic.

“I agree with Mariotti - complexity is destroying profitability in many companies,” Gopal said. “I believe that companies must reduce complexity and increase commonality (I was in charge of one such initiative at Dell for Tom Meredith) if they are to survive and be profitable in a sustainable fashion.” (Interesting to note that Dell again is trying to reduce supply chain complexity).

Gopal added: “There are, of course, those bigots of "complete focus" who try and skew the discussion to the other end - but both are wrong.”

In other words, you also can’t so narrowcast what you do that you can’t expand your market either.

“One major reason for increasing complexity is that companies do not do a realistic cost/benefit analysis on adding complexity. Even if the accounting systems do not comprehend this, I have rarely seen even a one-time financial analysis done!” Gopal said.

“Another factor is that complexity creeps up on companies - through marketing, distribution, design engineering, etc.” Gopal also said. “I think that the flip side to complexity is commonality - parts, components, processes, systems, carriers, distribution channels, packaging, manufacturing, postponement/vanilla/faux customization, etc. This is something that needs to be emphasized as well.”

This “creeping” effect is something that Mariotti also focuses on. Adding complexity isn’t a conscious decision – it’s the result of hundreds or thousands of little decisions that build a house of complexity brick by brick.

Mariotti himself offers an interesting notion – start using a “Complexity Factor” (CF) index. What is that, pray tell?  He says you calculate it as follows:

CF = # of suppliers * # of customers * # of employees * # of SKUs * # of markets * # of supply chain locations * # of countries/ total company or division revenue

In other words, it’s like a calculation of how much sales dollars each moving part of the business generates. The smaller the number, the less complex the company is.

Is it a perfect or universally applicable measure? No. Is it a decent place to start? Probably so. And while I am nearly sure there is no empirical data on this, I would be pretty confident in wagering that companies with a lower score are on average more profitable than those with higher scores, and that a general plan to reduce the score probably will have some excellent benefits.

Of course, the world and markets today are more complex. To take just a few examples, many companies are finding that the potential for growth is much greater now in the developing countries than domestic or developed economies. But that adds a lot of complexity, and often new product designs (and new suppliers, etc.) that can meet developing market capability and price point requirements. Many companies of late are also adding suppliers, after finding that single sourcing components is very high risk. There was also a lawsuit decades ago that charged that the giant US cereal makers developed innumerable offerings in part as a barrier to new competition. The suit failed – but may have been in part directionally correct.

In other words, complexity is rarely irrational, and may often at least appear the very smart thing to do.

There was a relatively well-known report from Deloitte Consulting a couple of years ago on “Complexity Masters,” which argued that profitability leaders were largely those companies that found a way to harness supply chain complexity.

In his presentation, Mariotti himself acknowledged that it was possible to harness complexity for competitive advantage, if done right.

Yet, to repeat and correct the quote I was trying to find in the first column (thanks Mark Baxa of Monsanto) from Tom Blackstock, Vice President Supply Chain Operations Coca-Cola North America: "If you are in Supply Chain Management today, then complexity is a cancer you have to fight. Process management is the weapon. Understand that Supply Chain Management is too important to be simply a function. It is everybody's job."

If anyone understands the cost of complexity, it is supply chain managers. We should take the lead in trying to quantify those costs for the rest of the company and our industry.

More on all this again soon.

Do you have any answers to the supply chain complexity crisis? How do you know when complexity is simply required, and when it is a net negative? Can complexity really be “mastered?” Let us know your thoughts at the Feedback button below.

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