Post on 20-May-2015
description
Wilson Perumal & Company, Inc.San Francisco CSO Conference
May 22, 2014
Simplify to GrowBuilding
Scale, Speed, & profitability in a Complex World
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Wilson Perumal & Company
• Passionate about complexity• Across strategy and operations• We help our clients compete in a complex world
“…an ambitious book packed with insight and fresh thinking. Separating good from bad complexity is a critical task facing companies today, and the
authors provide a compelling roadmap”
– Michael B. McCallisterPresident & CEO, Humana Inc.
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Complexity has impact across your business
Cost & Operations
Growth & Innovation
Business & Operational
Risk
Simplify to grow:
Simpler for customers Easier for sales force Improved KPIs Scale vs.
fragmentation Greater margins to
fuel growth
• Hidden costs• Exponential growth• Cross subsidization• Most products are
unprofitable
Cost
00 Complexity
• Grows exponentially with complexity• Cannot anticipate all
points of failure
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Complexity& Growth
Our discussion today
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Ways to Simplify
Overcoming Barriers
“Simplicity does not precede complexity, but follows it.”
--Alan Perlis, Mathematician and Computer Scientist
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The world has changed!
Volume
Cost
Pre-Industrial Age
Individual skill/ productivity
Volume
Industrial Age
Fixed costs leverage
Complexity
Post-Industrial Age
Complexity!
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Complexity is the enemy of growth?
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• Customers like variety- But good vs. bad complexity- Complexity frontier
• The impact on growth- Indirect effects (service levels,
focus, sales force)- Direct effects (over-choice)
• Opportunity: simplify to grow- & improve profitability
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Benefits across the business
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Supply pooling (reduced COV)
Reduced RM safety stock levels
Raw material consolidation
Product consolidation /
elimination
Fewer RM stock outs
Supplier consolidation
Greater supplier leverage / scale
Greater volume per supplier
Reduce changeovers
Redeploy changeovers
Smaller batches for remaining
products
Demand pooling (reduced COV)
Reduced FG safety stock levels
Greater sales force focus
More coherent product line
Fewer orders (greater vol/prod)
Increased buyer/planner
focus
Improved PLM focus
Reduced cust. confusion
Reduced cust. service calls
Product lead times
Supplier service levels
Lead time
Product availability
Sales volume
Customer service
RM inventory
Materials costs
Direct labor savings
Startup scrap
FG inventory
Avg. sales margin
Cust. service costFewer products/ segments
Complexity reduction
Inside the Plant
Complexity reduction
Growth impact
Cost impact
Example typical impacts:
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Example: $1 billion tech company
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Select Metrics Y1 Y2 Y3
Portfolio (#) 3500 2079 499
New products (#) 0 8 14
On-time delivery 70% 78% 90%
Cust. Satisfaction 27% 55% 90%
Mfg. productivity 1x 2.2x 3.1x
Operating Earnings -6% 3% 7%
Sales 1x 1.6x 3.4x
• 86% reduction in portfolio!
• 63 percentage point increase in customer satisfaction!
• 13 percentage point increase in operating earnings!
• 3x growth in sales!
“Complexity kills innovation. Complexity can drive down quality, increase costs and lengthen lead times. If that’s the state you’re in, you have poor execution—and you can’t innovate your way
out of poor execution.”
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Defining Complexity
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ProcessProduct
Organization
Variety in the products and services you offer
The number of processes, steps, handoffs, etc.
Number of facilities, assets, functional entities, organizational units, systems, policies, etc.
DuplicationReworkWork-arounds
Disarray in the elements of the firm that execute your processes and delivery your products
Bloated portfolioCustomer confusionStrained processes
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The impact is in the interactions
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VA
NVA ProcessProduct
Organization
• Complexity resides on the axis of the cube
• But complexity costs reside on the faces of and within the cube
Complexity costs are much larger than appear by looking at any one dimension alone
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Geometric growth
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“Complexity… is a ‘cube’ function. If I have 10 applications, I may be able to manage them all. If I have 100 applications, managing them is not simply 10 times the complexity—it’s more like 30 times the complexity.”
Lee Coulter, former SVP, Kraft Global Shared Services Group
Cost
00 Complexity
# Items # Links
1 0
2 1
3 3
4 6
5 10
10 45
. . .
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Typically just 20-30% of products generate more than 300% of profits
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0% 25% 50% 75% 100%
100%
300%
0%
Products that create profit
Products that “lose” profit
% TotalProfits
% Total Products
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Four ways to simplify to grow
1. Optimize your portfolio
2. Unburden your sales force
3. Free up your processes for performance
4. Restructure for speed and customer-centricity
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1. Optimize your portfolio
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Better an 80% view across 6 facets than a 100% view of just 1 facet
Value
Time
Legacy business performance
Step change improvement in
cost structure
New trajectory from clarity, focus
& alignment
1
2
3 • Reduce costs• Rebalance mix• Return business to better
trajectory
jdagu
Strategy Coverage
Prof
itabi
lityBenefits
BreakpointsOp
erat
ions
Integration framework
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2. Unburden the sales force
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“No one in sales can possibly support all our products.”- Managing Director, French multinational Business Unit Leader
Full product range
Individual sales person’s complexity threshold
Subset of portfolio that sales person can represent
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3. Free up your processes
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Combine simplification with process improvement for step-change improvement in key “breakpoint” KPIs, such as lead time
Value-Add activity
Non-Value-Add activity
Non-value-add non-activity
Complexity is the #1 driver of process
performance
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• My Macy’s initiative:‒ Eliminated regional operating
companies‒ Pushed inventory planning and
merchandizing down to more local level‒ Consolidated buying to national level‒ Eliminated 1600 positions, redeployed
500 of them (where they matter most)
• $500 million net annual savings• Launched sustained period of industry
beating same store sales growth• Despite harsh retail environment,
Macy’s just enjoyed their best year ever!
4. Restructure for speed & customer-centricity
National
Local
Regional
National
Local
BEFORE AFTER
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Common barriers to simplification
• Cannot quantify the business case
• Fear of revenue loss
• A functional perspective
• Reluctance to let go
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Segment 1 Segment 2 Segment 3 Segment 4 Segment 5-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
20%15%
25%33%
-17%
17% 11%
27%20%
-37%
StandardComplx-adj
High-complexity [segment 4] was actually less profitable than lower-complexity [segment 3]
OP by Product Segment
EXAMPLE:
Barrier: Cannot quantify the business caseMitigation: Account for complexity costs
© Wilson Perumal & Company, Inc. 20
Example: MillerCoors
“This was a quick and painless way to understand our true product profitability, and it challenges how we think about
our business. I am extremely pleased with the results.”—Fernando Palacios
EVP and Chief Integrated Supply Chain OfficerMillerCoors LLC
• Square-Root Costing
• 1700 products
• All nine breweries
• Down to operating profit
• In just Six Weeks!
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Barrier: Fear of losing revenueMitigation: Leverage substitutability
$0
$50,000
$100,000
$150,000
$200,000
$250,000
0 500 1000 1500 2000
Gross Margin
SKUs
Red = SKU selected for discontinue
The “Tail”
• Did not just chop off the tail• Smart decisions around “incremental” sales, margin• Transformed the profitability and trajectory of the business
while remaining revenue neutral during the process
Substitutability: a client example
The opposite of cannibalization
Simplify, while minimizing revenue loss
Eliminate products that do not generate incremental revenue
IncrementalRevenue = Revenue * ( 1 – )Revenue
Substitutability
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Barrier: Functional perspectiveMitigation: Take a “joined-up” approach
Traditional approach
Concurrent approach
SKU RATIONALIZATION
FOOTPRINT CONSOLIDATION
SUPPLY CHAIN REDESIGN
INTEGRATED VIEW
COORDINATED ACTIONS FOR
DEEPER OPPORTUNITY
FOOTPRINT
SUPPLY CHAIN
SKU RANGE
SKU RATIONALIZATION
SUPPLY CHAIN REDESIGN
FOOTPRINT CONSOLIDATION
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Example: Animal feed companyBEFORE
• Sell anything anywhere and we’ll get it there
• Many products
• Each plant makes minority of products
• Many product movements
• Large and costly distribution network
AFTER
$40M benefit
Reduce/eliminate 3-touch moves
Make greater portion of product range at each plant
Consolidateproduct offering
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Barrier: Reluctance to let goMitigation: Know your complexity threshold
Revenue(diminishing returns)
Complexity costs(geometric growth)
Level of complexity you can support
Complexity
$
Complexity
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Example: Blue Bell Ice Cream
“We can support only 25 to 30 flavors at a time.”--Paul Kruse, CEO, Blue Bell
• #3 ice cream company in the US nationally
• #1 in the markets in which it competes
• Most profitable ice cream company
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Recap
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Benefits: Simpler for customers Easier for sales force Improved KPIs Scale vs. fragmentation Margins to fuel growth
Assess complexity costs Leverage revenue
substitutability Take a “joined up”
approach Know your complexity
threshold
1. Optimize your portfolio
2. Unburden the sales force
3. Free up your processes to hit service-level breakpoints
4. Restructure for speed & customer-centricity
Questions?
Complexity& Growth
Ways to Simplify
Overcoming Barriers
Wilson Perumal & Company, Inc.
www.wilsonperumal.com