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Conquering Complexity in Your Business
Breaking Through the Ceiling on Profits and Growth
Michael L. GeorgeCo-author of Conquering Complexity in Your Business
CEO – George Group
Conquering Complexity in Your Business 2
Conquering Complexity: Driving Step-Change Improvement to New Levels of Service, Profits, Growth
Value Creation
& Process Efficiency
Low
High
Time from LaunchNear-Term
Medium-Term
Conquering Complexity AND Lean Six Sigma
Process Improvement
(Lean Six Sigma)
Profit and Growth Ceiling
Gains from Process Improvement and
Conquering Complexity
Gains from Process
Improvement
The complexity of product & service offerings can be the single biggest factor impeding customer service levels, profitability and capacity to grow
Conquering Complexity in Your Business 3
The Bottom Line: Will Customers Pay for the Complexity in Your Business?
Value-Add
Non-Value-Add
Systemic Impact“Complexity creeps into organizations incrementally, and each additional decision is, by itself, almost always justifiable.”
- Gerard Arpey, CEO, American Airlines
“I have this simple law of economic redemption – and it suggests that if you do something that’s valuable, you should be able to make a profit…
… And there are not a lot of companies in our business that do anything that’s valuable”
- Michael Dell
Options, features, services, products that earn a premium from customers
Complexity that is internal or transparent to the customer, in your processes, products or parts
Options, features, services, products, etc that earn no premium from customers
Systemic impact can:
- Increase costs
- Slow growth
- Impede processes
- Confuse customers
Without explicit focus, non-value-add complexity will dominate over time. Eliminating this can have huge impact on profits, processes & growth
Therefore, a critical first step is understanding truly what is earning a premium, once we account for the systemic costs introduced
Conquering Complexity in Your Business 4
Higher Complexity often the Single Biggest Driver of Non-Value-Add Costs
International Power Machines redesigned 8 different models to use 80% common components, increasing Gross Profit from 17 to 34%
If you foresee a growth trajectory, what’s the impact of remaining at the “before” state versus the “after” state…?
Conquering Complexity in Your Business 5
Complexity Can Impede Responsiveness to Customers and Process Excellence
Impact of Low Volume Offerings in the Absence of Variation
0
2000
4000
6000
8000
10000
12000
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Low Volume Offerings
Exc
ess
Th
ing
s in
Pro
cess
2
4
6
Impact of Variation and Low Volume Offerings
0.00
5000.00
10000.00
15000.00
20000.00
25000.00
0 0.25 0.5 0.75 1
Coefficient of Variation
Exc
ess
Th
ing
s in
Pro
cess
1
6
10
11
12
In the absence of variation, the impact of adding additional offerings is relatively
linear, although still increasing the amount of excess things-in-process substantially.
With variation just on the low volume offerings, the amount of excess things-in-process begins to skyrocket with relatively
few additional offerings. The effects of queuing theory combined with the
complexity equation show the dramatic cost of complexity in a real-world environment of
variability.
No Variation With Variation
Conquering Complexity in Your Business 6
PCE is Destroyed by Large Variation in Demand of Low Volume Offerings
3-Dimensional View of Graphs on Previous Slide Shows Relationship between Process Cycle Efficiency, complexity (# low volume offerings) and Variation in Demand
Conquering Complexity in Your Business 7
Conquering Complexity to Dominate the Market: Southwest Airlines
Southwest Airlines vs. American Airlines Southwest uses only Boeing 737s vs. 14 aircraft types for American Has attained dominant cost position in the industry
“The cost of complexity isn’t offset by what you can charge. Complexity creates opportunities for you to fail your customer” - AMR CEO, Gerard Arpey
Airline Performance 1996 – 2001 Southwest (LUV) vs. American Airlines (AMR) stock performance
Conquering Complexity in Your Business 8
Dell Computer: The Complexity Customers Want (Without Any That They Don’t Want)
Dell Computer vs. Compaq Dell first to recognize that
exploding product complexity was adding cost that was non-value add in customers’ view
Reduced internal complexity and improved flexibility such that it could produce any model in 3 days
Direct model meant that Dell’s costs half those of Compaq; with less obsolescence risk; and more cycles with customers
Fast follower (Dell) rather than innovator (Compaq)
Naturally Occurring Configurations
Conquering Complexity in Your Business 9
Capital One Outperforms and Outgrows Competitors by Offering More Complexity Capital One Financial vs. MBNA, Bank of America, et al.
Market offered a single product (19.8%) regardless of risk Capital One built private databases of credit information and developed
proprietary algorithms to segment the market by risk Enabled company to offer increase complexity at low cost by offering
different rates to different people, based on risk, using technology But gradually over time, increase in complexity of products led to
regulatory concerns over risk – and led to temporary hit on share price
Stock performance:Capital One vs competitor MBNA
Informal memorandum issued on Capital One based
on perceived risk from complexity
(Capital One)
(MBNA)
Ability to exploit opportunities for more complexity propelled Capital
One’s 40% compound growth rate per year with highest returns
and lowest charge-off rate in the industry
Conquering Complexity in Your Business 10
Porsche AG Conquers Complexity to Drive Turnaround
Porsche AG Turnaround Late 80s saw sales plummet 75% with
high costs Complexity of 9 families of air-cooled
and water-cooled models Collapsed to water-cooled only after 30
years of air-cooled engines: emotional wrench
Attempting to apply process improvements without prior reduction of complexity would have failed to achieve profitability - Porsche
Reducing complexity to grow! Outsource 85% of production so as to
focus resources on Strategic 15% Focus on what is value-add (engine,
body design) to customers, and what is simply functional
Innovation focused on the value-add; not wholesale redesign
The redesigned 911 (top) and the Boxster share the same engine, similar parts and a similar design resulting in simpler development process, higher volumes for individual parts and a common assembly line
Porsche profitability 1992-2002 (in Millions of Euros)
Conquering Complexity in Your Business 11
Consider the Following Statements… We deeply understand our true delivered product and service costs, including the impact of
complexity, and use that information to continually optimize our portfolios of offerings and customers
Our operations are configured in a way such that they are not materially impacted by addition of new products and services
Our different products and services greatly leverage common underlying platforms
We have a rigorous process for adding and deleting products and services; once complexity is reduced it does not creep back into the system
Operations understands where and why additional complexity creates value; Sales & Marketing understands where additional complexity drives incremental costs and factors those costs into commercial decisions; everyone works together to reach the optimal balance
Management fully understands the implicit tradeoff between “number of things in process” (complexity) and customer responsiveness
We ruthlessly and continually eliminate internal complexity in products, services, customers and processes that does not add value in our customers eyes
To disagree with one or more of the above likely indicates an unaddressed opportunity for increasing profits and growth by conquering complexity
Conquering Complexity in Your Business 12
Customer service requirements
(in order of importance)
On-time delivery
Delivery lead time
Quality of warranty
Price of spares
Quality of sales support
Product range
Training & documentation quality
“Des
ira
ble
”“M
ust
hav
e”
Poor Average Good Excellent
Company and competitors performance
Client X Competitor A Competitor B
Overall performance
Service zone of indifference
Driver of Complexity: Lack of Focus on What is Critical to Customers
Client over investing in complexity here?
High complexity reduces performance here
“We often talk to customers about ‘relevant technology’… We think it’s our job to help our customers sort out the technology relevant to today’s needs from the bleeding edge” - Michael Dell
Conquering Complexity in Your Business 13
Driver of Complexity: Lack of Metrics
How to quantify the impact of complexity on your processes?
What is the metric of the perfect process?
Value-Add TimeTotal Lead Time
Process Cycle Efficiency =
Value-Add Time: Changing form, feature or function – of value in the eyes of the customer
Lean Six Sigma and Complexity reduction both impact PCE
As PCE approaches 100%, moving towards the “perfect process”
Conquering Complexity in Your Business 14
The Complexity Equation Unifies Product and Process Dimensions
2V(1 – X-PD)(2A+1)NS
Where:
N = number of different tasks performed in process step (relates to number of offerings)
S = the longest change-over time between activities
A = the number of activities or steps in a process
X = the reject or error rate in your products or services
P = the processing time per unit
D = the total demand rate for products/services
V = total value-add time in the process
TLT = Total Lead Time
PCE = =
The Complexity Equation Management Implications
We know that adding new products (N) – without reducing the setup times (S) – will decrease our PCE and increase our costs
Adding more N, with no other adjustments, will impact our lead time: Is this a key buying factor? What is the customer impact of this?
We can double our product breadth with no impact on PCE if we first half our setup times
To “commonize” our internal components, we’re essentially reducing N. … improving our processes or enabling more external product variety
Simplified version of the Complexity Equation. For more details on the full Equation, See Conquering Complexity in your Business (McGraw Hill)
VTLT
Max
Conquering Complexity in Your Business 15
Case 1: Costs Drop by 36%, As We Move Towards Perfect Process
Case #1: Lead Time (inversely proportionate to PCE) goes from 369 days to 225, total cost goes from $221 million to $141 million
Source: Activity-Based Cost Management, Cokins
X
X
Total Cost After Improvements
Total Cost Before Improvements
Cost Improvement: $80M (36%)
Lead Time Improves by 39%
Conquering Complexity in Your Business 16
Case 2: GPM Doubles as PCE Goes from 3% to 17%
Case #2: PCE goes from 3% to 17%, Gross Profit Margin doubles
What happens to growth? Conquering Complexity can trigger growth by enabling superior levels of service … Service Level Breakpoints
Conquering Complexity in Your Business 17
Quantifying the Impact of Complexity:Cutting Through the Gordian Knot
Conquering Complexity and Process Improvement are two sides of the same coin: Shareholder Value
Separation of market strategy from operational decision leads to suboptimal decisions
We need to understand the impact of complexity to determine where to focus and what to do
What is the optimal combination of offering and process changes?
“I have long recognized that complexity is a big problem, but those units with the biggest problem act like Gordian knots.”– Lou Giuliano, CEO ITT Industries
Conquering Complexity in Your Business 18
Roadmap to Conquering Complexity
To size the value at stake resulting from conquering complexity in the initial scope (typically a Business Unit, part of the business, etc)
Management interviews
“Learn and Align” workshop
High-Level Analysis to Bound Opportunity
To diagnose the process and financial impact of complexity and identify the agenda of projects that will lead to value creation
Establish Fact Base
Complexity Value Stream Mapping
Form Complexity Value Agenda
Deep-Dive Analysis and Diagnostic
To sustain the gains, and institutionalize approach to operations, strategy, innovation, etc, to only create value-add complexity (e.g. focus on metrics, incentives)
Put in place new metrics for avoiding “complexity-creep”
Establish infrastructure (VP of Complexity)
Align incentives
To execute the projects and capture the value of the areas identified by the Diagnostic
Deletion of products/services
Standardize and commonize
Thinning of configurations
Process Improvements
To extend the initial scope and capture the value across the corporation
Apply lessons from initial diagnostic
Scale to next BU diagnostic
Attack cross-organizational issues
ExtendDiagnose
PHASE 1
Execute Sustain
PHASE 2 PHASE 3 PHASE 4PHASE 0
Size the Prize
Phase Objectives:
“Bound the Opportunity”
“Find the Projects”
“Execute the Projects”
“Extend Value Capture”
“Institutionalize the Advantage”
2-4 Weeks 2-4 months, dependent on the scope of the target
Situation-dependentDiagnostic-dependent; accretive; most actions completed < 6 months
Situation-dependent
Example Activities:
The Road Map:
Timeline:
How to Get Started
Conquering Complexity in Your Business 19
Product and service variety increases processing time, cost and reduces the efficiency of your processes and inhibits growth
But Complexity can be both Value-Add or Non-Value-Add Do we know the difference?
Conquering Complexity cuts costs, optimizes service levels, frees critical innovation/growth resources and improves customer experience Cost Improvement and Revenue Growth Opportunities!
Lean Six Sigma and Conquering Complexity both impact non-value-add cost and improve customer responsiveness Process improvement alone will eventually hit a ceiling in quest for profits
and growth Conquering Complexity can magnify the benefits of your improvement
initiatives Complexity creeps in incrementally
Requires an institutional approach to sustain the gains Cost of complexity demands discipline in the innovation process
Takeaways
Conquering Complexity in Your Business 20
Our Clients Are Industry and Brand Leaders Who Demand Excellence and Superior Results
Business Services
About George Group
George Group’s unique methodologies unify strategy and execution. We transfer these capabilities to our clients, providing accelerated results and a sustainable platform for growth.
Our progressive thought leadership is demonstrated in our books, Lean Six Sigma, Lean Six Sigma for Service, What is Lean Six Sigma?, The Lean Six Sigma Pocket Toolbook, and Conquering Complexity in Your Business.
We are the leader in Lean Six Sigma and have supported more global deployments in more industries than any other consulting firm. As the innovator and leader in Conquering Complexity, we bring new methods to measure the impact of product and service complexity and provide the foundation for increased profits and growth.
Since our beginnings in 1986, we have been creating real economic value for Fortune 1000 clients through the development, execution and implementation of critical strategic initiatives. The results speak for themselves. To date, George Group clients have achieved more than $5 billion in operating profit growth and capital reductions and consistently outperform all major stock indices.
To learn more, attend one of our upcoming Executive Roundtables. Information is available at www.georgegroup.com or by contacting us at 800-777-8066.