Wilson Perumal Company Inc The latest thinking on

Wilson Perumal & Company, Inc.

The latest thinking on COMPLEXITY • Pragmatic approach to measuring and attacking complexity • Synthesized from years in the field • Mc. Graw-Hill (November 2009) © Wilson Perumal & Company, Inc. 2

“We’re surrounded. That simplifies the problem. ” —General Lewis B. “Chesty” Puller U. S. Marine Corps © Wilson Perumal & Company, Inc. 3

Tesco Stores NEW GEOGRAPHIES NEW RANGE Traditional UK Grocery Retail NEW FORMATS NEW CHANNELS © Wilson Perumal & Company, Inc. 4

The problem of complexity • Pace of complexity is increasing • New Normal: costs tied to ‘lost’ revenue • Biggest determinant of costcompetitiveness A big prize: 15 -30% cost opportunity © Wilson Perumal & Company, Inc. 5

The magnitude of the problem In many companies, 20 -30% of products generate more than 300% of profits! © Wilson Perumal & Company, Inc. 6

What stops companies from going after this prize • No quantification of the opportunity • Size and scale of the issue • Not the type of problem companies are good at solving • False starts & analysis-paralysis © Wilson Perumal & Company, Inc. 7

“The greatest challenge to any thinker is stating the problem in a way that will allow a solution. ” — Bertrand Russell © Wilson Perumal & Company, Inc. 8

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COMPLEXITY’s three dimensions Pro s s e oc du ct Pr Bloated Variety inportfolio the Customer products and confusion Strained services you processes offer Duplication The number of processes, steps, Rework handoffs, etc. Work-arounds Organization Disarray of Number in facilities, the elements assets, of the functional firm that execute entities, your organizational processes units, delivery and systems, your policies, products etc. © Wilson Perumal & Company, Inc. 10

The COMPLEXITY CUBE Pro du ct NVA VA s s e roc P • Complexity resides on the axis of the cube • But complexity costs reside on the faces of and within the cube Organization NVA costs are much larger than appear by looking at any one dimension alone © Wilson Perumal & Company, Inc. 11

Geometric nature of COMPLEXITY Cumulative cost Complexity cost (geometric) Non-complexity costs (≈ linear) 0 0 Cost Driver Traditional management and accounting methods are not well-equipped to deal with geometric costs © Wilson Perumal & Company, Inc. 12

Complexity costs growth # Items # Links 1 0 2 1 3 3 4 6 5 10 • Complexity is the number of ‘items’ • Complexity costs are driven by the number of ‘links’ between items . . . 10 45 © Wilson Perumal & Company, Inc. 13

Geometric growth drives the shape of the WHALE CURVE Total profit eu en v Re 0 0 fit o Pr ity r Pa Linear costs • Complexity costs grow to the point that they overtake revenue growth and destroy profitability Complexity costs Total revenue • Complexity costs are often the single biggest determinant of cost competitiveness! © Wilson Perumal & Company, Inc. 14

Complexity is also about GROWTH • Complexity impacts your ability to deliver • Complexity injects noise between you and your customer • Complexity erodes profitability • Unprofitable growth is not sustainable © Wilson Perumal & Company, Inc. 15

How we think about COMPLEXITY • Along product, process, and organizational dimensions • Costs happen at the intersections • Costs grow geometrically • #1 driver of cost competitiveness • Not just about cost but growth as well © Wilson Perumal & Company, Inc. 16

Wilson Perumal & Company, Inc.

Start with four fundamentals for taking out complexity costs 1) Start with a multi-dimensional view 2) Take concurrent actions 3) Utilize top-down costing 4) Leverage substitutability © Wilson Perumal & Company, Inc. 18

1. A multi-dimensional view Where complexity… Pro du ct Arises • Biggest opportunity? s s e c • Traditional focus: Pro product complexity Takes root Hides • Process complexity increasing Organization • Complexity creeps in, is released in chunks © Wilson Perumal & Company, Inc. 19

A two-pronged approach… Reduce amount of complexity BOTH Brand elimination Product/ service rationalization Geography or market rationalization Component rationalization Make complexity less expensive Organizational alignment Vendor, dealer, distributor, supplier consolidation Process flexibility (e. g. , setup time reduction) System consolidation Dynamic modeling © Wilson Perumal & Company, Inc. 20

2. Concurrent actions TRADITIONAL APPROACH: SKU RATIONALIZATION FOOTPRINT CONSOLIDATION SUPPLY CHAIN REDESIGN CONCURRENT APPROACH: SUPPLY CHAIN SKU RANGE SKU RATIONALIZATION INTEGRATED VIEW COORDINATED ACTIONS FOR FOOTPRINT CONSOLIDATION DEEPER OPPORTUNITY SUPPLY CHAIN REDESIGN © Wilson Perumal & Company, Inc. 21

Cadbury’s–Keep it Simple and Sweet • Cadburys: “More complex than it needs to be. ” • Products, footprint, structure, supply chain • Fewer, faster, bigger, better • Impact: ‒ Margins up 160 bps to 13. 5% ‒ 5% top-line growth “Now, thinking is more joined-up and there is a more coordinated focus on revenue and margin growth… that joined-up approach has enabled us to rationalize our offer…” —Todd Stitzer, CEO © Wilson Perumal & Company, Inc. 22

3. Top-down costing • Instead of measuring complexity costs directly, measure VA costs and subtract from total NVA VA • Value completeness over precision • Leverage better allocation rules of thumb © Wilson Perumal & Company, Inc. 23

Complexity costing rule of thumb EXAMPLE: • • Two products: A & B 17 K total units sold $5000 inventory holding costs “Peanut butter” allocation: All else being equal: $0. 29/unit Volume ratio Inventory holding per unit cost ratio Unit holding cost Product Unit sales Product A 16, 000 16 x 4 x $4000 1 x $0. 25 Product B 1, 000 1 x 1 x $1000 4 x $1. 00 Small-volume products are almost always under costed © Wilson Perumal & Company, Inc. 24

4. Substitutability • What really matters is incremental revenue Inc. Rev. = Revenue *(1 – Substitutability) Portfolio optimization looks less like this…. And more like this… Total profit Cumulative revenue © Wilson Perumal & Company, Inc. 25

A focus on substitutability… Cumulative Profit New peak Shifted curve Old peak Original curve Cumulative revenue …makes good complexity better; maximizing cost reduction while minimizing revenue risk © Wilson Perumal & Company, Inc. 26

Recap: four fundamentals 1) Start with a multi-dimensional view 2) Take concurrent actions 3) Utilize top-down costing 4) Leverage substitutability © Wilson Perumal & Company, Inc. 27

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The GROWTH PARADOX… That actions often taken in the quest for growth actually limit the company’s ability to grow © Wilson Perumal & Company, Inc. 29

Two ways to GROW 1) Doing what you do better 2) Doing more things • The latter is easier and more common • The former is harder but more profitable • Only profitable growth is truly sustainable © Wilson Perumal & Company, Inc. 30

The three SIRENS of growth SCALE • Economies of scale are better termed economies of density DIFFERENTATION • Lasting competitive advantage is the ability to effectively differentiate, not differentiation itself NEW MARKETS • Broad, ambitious growth strategies often dilute or destroy sources of competitive advantage © Wilson Perumal & Company, Inc. 31

Coming Spring 2011 • Impact of complexity on growth • The Three Sirens • The Disciplines • Path to profitable growth The Sirens of Growth How your company’s pursuit of growth may land it on the rocks, and what to do about it Andrei Perumal & Stephen Wilson Publish date: Spring 2011 (Mc. Graw-Hill) © Wilson Perumal & Company, Inc. 32

“Anybody can make things bigger, more complex… it takes a touch of genius—and a lot of courage—to move in the opposite direction. ” — Albert Einstein © Wilson Perumal & Company, Inc. 33

Challenge questions • How has your organization become complex over the last 5 or 10 years? • What are your company’s ‘islands of profit in a sea of costs’? • What would it mean competitively if you no longer were paying this ‘complexity tax’? • What is the SIZE OF THE PRIZE and what will you do to go after it? • How would less complexity in your business change your growth trajectory? © Wilson Perumal & Company, Inc. 34

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