Conquering Complexity in Your Business Breaking Through the Ceiling on Profits and Growth

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


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


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…?


Complexity Can Impede Responsiveness to Customers and Process Excellence

Impact of Low Volume Offerings in the Absence of Variation

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Low Volume Offerings

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ing

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cess

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Impact of Variation and Low Volume Offerings

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Coefficient of Variation

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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


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 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


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


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


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)


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


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


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”


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


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%


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


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


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


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


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.

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Conquering Complexity in Your Business Breaking Through the Ceiling on Profits and Growth