Simplify to Grow: Building Scale, Speed, & Profitability in a Complex World

Wilson Perumal & Company, Inc.San Francisco CSO Conference

May 22, 2014

Simplify to GrowBuilding

Scale, Speed, & profitability in a Complex World

© W il so n P er uma l & C o mpa ny, Inc .© W il so n P er uma l & C o mpa ny, Inc .© Wilson Perumal & Company, Inc. 2

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.


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

© W il so n P er uma l & C o mpa ny, Inc .© W il so n P er uma l & C o mpa ny, Inc .© Wilson Perumal & Company, Inc.

Complexity& Growth

Our discussion today

4

Ways to Simplify

Overcoming Barriers

“Simplicity does not precede complexity, but follows it.”

--Alan Perlis, Mathematician and Computer Scientist


The world has changed!

Volume

Cost

Pre-Industrial Age

Individual skill/ productivity

Volume

Industrial Age

Fixed costs leverage

Complexity

Post-Industrial Age

Complexity!


Complexity is the enemy of growth?

6

• 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


Benefits across the business

7

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:


Example: $1 billion tech company

8

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.”


Defining Complexity

9

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


The impact is in the interactions

10

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


Geometric growth

11

“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

. . .


Typically just 20-30% of products generate more than 300% of profits

12

0% 25% 50% 75% 100%

100%

300%

0%

Products that create profit

Products that “lose” profit

% TotalProfits

% Total Products


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



14

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


2. Unburden the sales force

15

“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


3. Free up your processes

16

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


• 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


Common barriers to simplification

• Cannot quantify the business case

• Fear of revenue loss

• A functional perspective

• Reluctance to let go


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!


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


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


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


Barrier: Reluctance to let goMitigation: Know your complexity threshold

Revenue(diminishing returns)

Complexity costs(geometric growth)

Level of complexity you can support

Complexity

$

Complexity


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


Recap

26

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


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

Leadership & Management

Simplify to Grow: Building Scale, Speed, & Profitability in a Complex World