A hidden danger named complexity
In the list of effective ways to destroy a well performing supply chain, increasing complexity might well be on the number one position. Highly underestimated, difficult to measure but oh so dangerous.
Complexity is like a drug: once you start with it, you need more and more until it weakens your system and breaks it down.
When reading her new book “Supply Chain Metrics that Matter”, I noticed that Lora Cecere mentions Complexity as one of the four elements of the Effective Frontier. And that argument really resonated with me. Over the fifteen years I’m advising industrial companies, I thought, I have seen so many cases where complexity was the cause of low performance.
Complexity rarely enters at once. It gradually creeps in. It can be around for quite a while without anyone noticing how it has nested in all parts of the value chain. If we want to stay master of it, we must start by naming it. How does complexity look like?
- Complexity can take the form of an ever growing product portfolio.
- Complexity can take the form of a growing production footprint and increasing flows between factories
- Complexity can take the form of a growing number of markets and customer segments with different requirements and expectations.
- Complexity can come in the ever increasing speed of new product introductions
- Complexity can come in more and more promotions and marketing events
- Complexity can come in ever increasing quality requirements
- Complexity can come in more sophisticated organizations with multi-dimensional reporting lines
All of these forms of complexity make a company’s simple plan and control mechanisms stop functioning. Some will fail because they cannot manage the sheer mass of information they are supposed to treat. Others will lose their effectiveness because they do not allow coherent decision-making across the functional silos that manage the different parts of the flow. Still others will become too slow and run behind the constantly increasing speed of the business. Even if they worked well at some point in time, they do not manage to cope with complexity. So what can we do?
There are only two solutions to cope with complexity: kill it or tame it. Or die.
The best way to treat complexity is to get rid of it. Does the company actually need so many articles? Or could part of the product portfolio be stopped with little (or no) impact on revenues or margins? Do all articles bring margin? Rationalizing stock keeping units is not a low-level activity for someone who doesn’t think about the business. It is a strategic choice to reduce complexity and therefore improve the company’s performance.
Are those production constraints that make planning so complex really unavoidable? Or could we chose to make the production assets and the workforce more flexible and more reliable? Simplifying production flows, making them faster and more reliable might seem less important than reducing the cost per unit. In reality it is a strategic choice to reduce internal complexity.
One last example is organizational complexity. Does the company really need those multiple lines of hierarchy that make decisions long and cumbersome (a colleague gave me the example of the time it can take in companies for a very simple operation like requesting a new mobile phone)? Or can responsibilities be given to one function so that it can decide quickly and autonomously, based on clear guidelines and a sufficient level of trust? In many cases it is possible to reduce the complexity of a value chain. That might take time but through a continued effort of continuous improvement, it can be progressively taken out.
At first sight, it might seem to reduce sales or increase production cost or purchase cost but a smart reduction of complexity always leads to more profitable operations.
Some complexity is unavoidable when a company reaches a certain size or scope or when it has certain ambitions. Then, processes must be redesigned to cope with the complexity in a reliable and effective way. Take the organizational complexity. When companies grow, functions grow apart by nature, each function specializing in only part of the business. Mergers and acquisitions can amplify this phenomenon. If at the same time business and innovation cycles become faster, it takes too much time to continuously find consensus between conflicting objectives.
Only by designing strong cross-functional decision processes, supported by the right tools and based on trust and common objectives, companies can overcome the flaws of silo-thinking and too long decision cycles.
Increasing network complexity is another frequent cause of lower performance. Some network complexity can probably be avoided through network redesign, but new markets and new products or suppliers are often needed to grow a business. In those cases, companies should realize that local processes with local focus will not be able to manage operations correctly.
Only by creating global visibility and setting up functions that have the authority and credibility to orchestrate the entire value chain, it will be possible to manage integrated networks across multiple plants and multiple sales regions.
A couple of years ago, I worked for a cosmetics company that struggled with the way its supply chain was organized. A few years earlier, the company had decided to outsource all production to reduce manufacturing costs. Now, the company felt huge pressure on its product development lead-times: with consumer markets changing quickly and responding to unpredictable triggers from all kinds of media, the traditional 24 months to develop and launch a new collection had become much too long. Stuck between long lead-times and a rapidly changing market, the company suffered severely.
Another company in aerospace we worked with suffered severely from complexity when it saw its manufacturing flow becoming more and more complex. While the company was perfectly able to manage its internal production operations, it was not up to the challenge of coordinating a production chain with multiple subcontractors. It took a number of crisis situations to introduce a new operating model.
A retailer we work with is another good example of what one of my colleagues calls this complexity creep. Although it has a base strategy of low prices, the company sees its product portfolio grow. By entering into multi-channel, it has added another layer of distribution complexity. Luckily, the company has decided to enforce the competences of its management to cope with these challenges.
Complexity is hidden disease. It creeps into our operations over time or it suddenly becomes apparent through a merger or acquisition. In any case, complexity can severely jeopardize company performance. Reducing complexity is a strategic choice, taming complexity a matter of conscious process design. But letting complexity grow unchecked never comes without consequences.