Fri, 02/29/2008 - 10:26am
Wouldn’t it be nice if everything in the world was simple and easy? Sadly, outside of fairy tales, complexity is a part of life — particularly if you’re a manufacturer.
Although it wouldn’t necessarily be the best business decision, you could possibly get by only producing one particular item to one particular set of specifications. But maybe a fierce competitor is forcing you to add to your product line to maintain your market share. Or maybe a customer is asking you for some modifications.
“It’s a tendency of human nature — the temptation to broaden your offerings — and, it’s in your best interest to differentiate your products,” said Foster Finley, Managing Director in AlixPartners’ Performance Improvement practice. “But it’s the introduction of a new type of requirement. It’s not necessarily a problem.”
Whether it was a result of a customer’s choice or your own, complexity happens. The trick is being able to recognize it, evaluate it, and effectively manage it.
A specialty steelmaker, for example, may only produce a two-inch round steel bar. In that situation, no process changes need to be made, with the exception of usual maintenance procedures.
For the same steelmaker to add one-, three- and four-inch bars to its product offerings, it would have to reset its mill to make any changes, and go through a process of trial and error to reset the equipment to handle the changing sizes. The steelmaker would also have to build a safety stockpile, should demand increase for one size while the company has the equipment set to another size.
“Complexity can be an operational burden. If you have an unchecked proliferation of products, you could have smaller run sizes, frequent changeovers, less time at your peak operating performance, and increased inventory,” Finley said.
And the situation gets worse the more asset-intensive your industry is. Think about the automotive or electronics industry where one piece of equipment is used in several operations.
“Asset-intensive industries like steel, pulp and paper, and chemical struggle the most handling increasing complexity, but they can also benefit the most from it,” Finley noted.
Ok, now that you recognize that your operations have become more complex than you want them to be, what do you do? You could have a portfolio of hundreds of products, some more profitable than others. How do you find the best balance?
“Managing additional complexity is an art more than a science,” Finley commented. “You can quantify and prioritize your offerings, organizing them from most profitable to least profitable. Then you can see the areas where you begin to lose money.”
However, while you may be tempted to just stop producing your least profitable items, Finley warns that the solution may not be that cut and dry.
“If an airline realizes that certain flights aren’t worth flying, they could cut them, but they’d still be left with the idle plane.” Finley explains. “If you decide to stop making a product, you may still be left with some shared equipment. Or, you may damage relationships with customers who rely on that particular product.”
Instead of making the move to halt production, you can consider one of the following options:
- Raise prices — while not a popular choice with customers, it would reduce the amount of money you’re losing.
- Cost reduction — if you can find a way to attain a cost reduction, you can mitigate the problem.
- Equivalents — find a comparable product for the customer that is more profitable for you.
- Use a combination of the solutions listed above
“If the customer won’t pay more for it, instead of keeping a product in stock, you could start a make-to-order process,” Finley suggests. “The customer would be required to give you more advance notice to produce the product.”
If you’re in a cyclical industry, Finley suggests it may be worth it to just stick it out through the period of complexity if you expect a change for the better.
“You should work on managing the problem product if you can get an adequate return for the complexity you’re adding to the system,” Finley noted. “If you don’t, it puts you at a disadvantage to competitors who could steal away your customers and your market share.”
In times of economic uncertainty, particularly when dealing in a global marketplace that offers more options to customers than ever before, every little bit helps. Taking the time to step back and evaluate your operations could help you get ahead and stay ahead.
Complexity isn’t a problem — it’s an opportunity to help you get the most value out of what you’re already doing.