First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  June 12 , 2008  

Supply Chain Complexity Crisis



Gilmore Says:
Among the many persuasive arguments that Mariotti makes is that a factor in all of this is that our accounting systems are simply not designed to “cost out” complexity. There are obviously no general ledger entries that capture it directly.

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“Complexity is like a cancer that destroys supply chain efficiency.”

That quote, or something quite close to it, was from a supply chain executive at Pepsi several years ago, whose exact name I can’t find, but it has stuck with me ever since. (If anyone has the exact source, please email me at the Feedback button below).

I also had the pleasure a few weeks back of hearing John Mariotti memorably speak on complexity at the combined meeting of the CSCMP Atlanta Roundtable and Georgia Tech Supply Chain Executive Forum. John, Pat Sinnott (VP of Supply Chain for Canadian Tire) and I followed that with a spirited discussion at dinner that night on similar themes.

Mariotti, in fact, just wrote a book he titled The Complexity Crisis, and he is a lot more than just an author. He was previously president of Rubbermaid’s Office Products Group and, before that, Huffy bicycles, and now spends his time doing a lot of consulting with CEOs. (As a quick aside, Mariotti said that when Huffy’s board wanted to shut down the world’s largest bicycle plant in Dayton, OH, he offered a plan that would have used postponement and other strategies to keep much of the final assembly in the US, but the idea fell on deaf ears).

While Mariotti’s focus isn’t on the supply chain directly, it’s obvious that’s where, in fact, most of the complexity is in the end expressed.

“Companies are starting to realize that this Complexity Crisis is crippling them, destroying their profits, and draining their resources,’’ Mariotti says.

He sites an example from his own career. Mariotti, at the time, was president of Huffy’s mass retail division, which sold bikes to large store chains. At some point, the company decided that to grow, it needed to penetrate the small dealer channel, which required changes across everything from product design to marketing to pricing management and collections. It added killer complexity to what had been a relatively simple business.

“This complexity came in layers,” Mariotti writes in the book. “A different, more fragmented distribution system; a much less price-sensitive, elitist consumer base; different products focused on high spec, light weight, performance and “snob appeal,” etc. What seemed like subtle market and product differences at the outset “added unseen complexity – layers of structure, process, cultural, and relationship differences that would be hard to even imagine until you encountered them.”

Sound familiar?

Mariotti says this 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.

Yes, companies need new products and new markets to grow, but there are limits – the complexity created in chasing those markets, especially if there is not a rigorous parallel effort to minimize the level of complexity created, can simply rise to a level beyond which the company can profitably handle.

“It’s usually the best of intentions that lead to a complexity crisis,” Mariotti said.

Among the many persuasive arguments that Mariotti makes is that a factor in all of this is that our accounting systems are simply not designed to “cost out” complexity. There are, obviously, no general ledger entries that capture it directly.

Instead, “the costs of complexity are hidden in all sorts of accounts – variances, allowances, overhead, scrap, rework, inventory obsolescence, expedited transportation, etc.,” Mariotti said.

And as these new products, markets and channels are developed, those of us in the supply chain “are like the ones who have to clean up after the parade,” Mariotti said to the audience in Atlanta, which elicited a strong chorus of knowing laughs and nodding heads, as did his comment that no company seems to have “un-marketing departments.”

He also makes this great point – complexity is most often the result of trying to goose high growth from what are fundamentally low-growth markets. In other words, niche the products even further in these areas to try to capture a bit of share; penetrate these new, but small channels, etc.

Mariotti also ask the crowd if anyone really knew what it costs their companies to process an order.

“If you do, you will be about the first,” he said.

The point was that those costs alone make it very difficult to be truly profitable for small volume customers – whose numbers are often a key dimension of complexity.

Of course, companies are generally loath to cut off any customers, even small ones. Mariotti said when he was at Huffy, he came very close to ending shipping to the now defunct Caldor’s chain, because it was so late in its invoice payment to Huffy. The cost of, in effect, floating that inventory – actually, the entire supply chain - to Caldor’s destroyed the profit it made from the sale. Only when Mariotti went to the Caldor CEO and said he was prepared to stop shipping to what was, at the time, a very large customer did the payment situation get resolved.

Globalization, information flow, brutal competition, are all adding to the natural tendency to add complexity.

So, here is the problem, and one that is acute at many companies, from my conversations with supply chain executives. What I think Mariotti has done brilliantly is articulate the impact not just on the supply chain parade cleaners, but on corporate profits.

What to do? Mariotti has some suggestions, but we’re out of room, and I’d love to hear your ideas too. More soon.

Do you agree that many companies have a “complexity crisis?” Do accounting systems lack the ability to capture the impact on profits? What are steps companies and supply chains can take – or should supply chain simply try to clean up the parade? Let us know your thoughts at the Feedback button below.


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