Complexity kills the supply chain

Business failures are often attributed to such things as external market pressures, increased competition or lowered efficiency.

While these factors can be killers of business success in their own right, as Ross Kennedy of CTPM Australasia explains, often complexity is the root cause of suboptimal business performance...

What is complexity?

Organisational complexity is when your company is performing a high number of low value activities, which add little or no value to the customer or the bottom line.

These low value activities have a disproportionate cost/value relationship. That is, they represent a high proportion of your company's overheads or cost structure but generate little or no profit.

How do you know if complexity is at work in your organisation?

Consider the following early warning signs:

  • Employee morale and enthusiasm is low, people are too busy "sweating the small stuff" to attend to the real issues
  • Productivity is low
  • The breakeven point of your company is increasing
  • Salaried workforce levels have increased at a greater rate than production employees - staff have forgotten who adds value to the customer
  • Inventory as a percentage of sales is growing
  • Operating income as a percentage of sales has declined
  • Sales of high-volume "bread and butter products" are under increasing pressure from competitors
  • Customers are complaining about delivery performance
  • Product quality levels are not meeting company or industry standards
  • Product proliferation
  • Low-volume products represent an increasing percentage of sales
  • New systems have been introduced to rectify the problems of the "current" system
  • Many problems are recurring as employees do not have time to perform root cause problem solving.

The 50/5 rule

The 50/5 rule is one of the most obvious signs that complexity is killing your company.

The 50/5 rule says that if 50% of a company's customers, products, suppliers and manufactured parts account for less than 5% of the organisation's value-added contribution, the presence of these low value-added activities is one of the driving forces of operational inefficiencies and excess cost.

In addition to peoples' time, these products require floor space, tooling, inventory and planning, yet contribute little to profitability.

What can be done if complexity is killing your organisation?

A complexity reduction program is a major profit opportunity. In addition to the direct benefits, employees will have more time to concentrate on the big issues in the organisation, rather than "sweating the small stuff".

Things you can do to reduce complexity include:

1. Eliminate

The first priority should be to eliminate as many low value items as possible. There is a common misconception that eliminating items will stunt company growth, when in fact, the opposite is true.

By reducing overhead and structure costs, and focusing on truly significant products, organisations can take full advantage of their competitive edge in design or manufacturing capability, with the added benefit of increasing capacity with no capital investment.

2. Prevent part proliferation

Evaluate new products to be introduced, and establish a volume estimate for every item being added to the product line.

3. Consolidate

Make a commitment to an aggressive supplier consolidation programme. Target a 50% reduction in the number of suppliers each year for three years.

4. Understand value adding and non-value adding

For the products that make up 50% of your sales (typically around 6% of your total product offering), identify all value adding and non-value adding activities, in terms of labour activity, equipment performance and process design. Aggressively eliminate non-value adding activity and create flow for these products.

At the frontline, it is important employees understand the ratio of value-adding time to the total time spent at work. Your target for employees should be 85%. That is, the ratio of value adding time to the total time spent at work, excluding breaks, should be 85%.

Ross Kennedy is President and Managing Director of CTPM Australasia, a membership-based organisation assisting companies to develop and unleash the full potential of their people, equipment and processes. Please send any comments or questions you have in relation to this article to: ross.kennedy@ctpm.org.au