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In His Upcoming Book, THE COMPLEXITY CRISIS, John Mariotti Declares War on Complexity

By John L. Mariotti

There is a new war waiting to be waged. Thus far it has evaded detection in most companies while the casualties mount. Top heavy balance sheets and inexplicable losses on the income statement are its symptoms. The problem is one of unrecognized, management-induced complexity.

How did this problem of complexity go unnoticed until it reached epidemic proportions? The answer is as simple-and as complex-as the problem. Businesses must compete in more, different-and complex-markets than ever before. Companies seeking growth at double-digit rates in single-digit-growth, flat or declining markets, add this runaway complexity by proliferating products, customers, suppliers, services, locations, and more. All of these defocus management efforts, waste valuable time and money, and reduce shareholder value. The problem is destroying corporate profitability while it has evaded everyone's radar screens because none of the current corporate metrics properly account for complexity.

Product costs are product specific. Nowhere are the proliferation of product variations assigned costs beyond the components of conventional cost systems: material, labor, overhead (or in newer Activity Based systems, conversion costs). The same goes for customers. Each customer's profitability might be considered, but nowhere is the aggregate cost of customer proliferation quantified.

Take the simple coffee mug, and assume that it is your product. If you have one style, one color, one size, in one package, sourced from one supplier, packaged and stocked in one location, you can pretty accurately compute the "standard cost" of your mug in terms of material, labor and overhead (the old way) or material plus cost of acquisition plus fixed and variable conversion costs (a newer way).

Expand your coffee mug product line to 4 styles, 4 colors, 2 sizes, and 2 package variations. There are now 64 mugs you might sell with an associated increase in raw materials, tooling, inventory, etc. The "standard cost" of the mugs can still be computed the same way as before, and will yield apparently accurate results. But something is wrong. Intuitively you suspect that somehow there are other costs that the old metrics don't measure.

Expand the product line; purchase it from 2 suppliers, package and stock it in 3 locations, and sell into (just) 3 different countries. Assuming no major differences in prices or productivity (although that may not even be a safe assumption) the "standard cost" of the mugs remains largely unchanged. But now, the possible combinations and permutations have grown to 1152, and that's before ripple effects impact marketing materials, purchases, forecast volatility and particularly before someone in marketing starts mixing models in assortments that vary by market, customer, production plant, distribution center and country.

Now you have a small taste of "The Curse of Complexity" at work. If a simple calculation (A Complexity Factor) can be used to signal that "something is wrong here", it becomes like taking a person's temperature to detect the presence of an illness. It is not a definitive, metric, but it is a very useful one, whose message is "look further". Calculating a Complexity Factor is simple-IF companies have the information readily available, which most don't. Just multiply six numbers together: the number of products and part numbers; the number of customers; the number of suppliers; the number of employees; the number of facility locations; and the number of countries where you do business as an entity (buy/sell/produce/employ, etc.) Then divide by annual sales. The result is The Complexity Factor, and the larger the number the worse your company will be afflicted by the curse of complexity.

Southwest Airlines uses one kind of aircraft, serves no meals, and does not reserve seating. The so-called "major airlines"-American, United, Delta, etc. al.-use 10-20 different aircraft, with multiple seating configurations for the same aircraft, varying meal/snack services, and so on. Which airline model is more complex to operate? Which is more (or less) profitable? I think the answers are obvious.

What must be done is to declare a "War on Complexity". There are several logical steps to take in launching this "war".

Limit Finished Goods SKUs

Sort the sources of complexity in descending order of annual revenue or cost to reveal hidden complexity. The bottom of the product list is certain to be made up of losers-products whose volume and profit cannot possibly exceed the cost of their very existence. Setting a sales value cutoff point, below which to eliminate SKUs is the first step to conquering complexity.

Analyze the makeup of products to identify unique parts, materials, processes and so forth. When products do not use common design platforms and standard components, complexity grows rapidly. Recognize sources of complexity by tracking the "new" parts, processes, etc. required for a new product. Use this as a control point to reject needlessly complex new designs.

Motorola, for one prominent example, discovered this curse of complexity in its cellular phone business in recent years, and has declared a global "War on Complexity" with promising results. It created a "Complexity Index", which it uses to screen new designs and control or avoid complexity.

Most companies have entire departments to create new products, and no one (well, maybe one lonely soul) whose job it is to "kill the dogs" and dispose of the leftovers. Unless sales are growing substantially, this should be a zero-sum game. "Add a product, drop a product" is a good rule.

Limit Customers and Suppliers

Companies are loath to "fire customers" but that is exactly what they must do in a War on Complexity. When a customer list is sorted in descending sales order, the bottom customers are usually losers. Sales people may claim that these are beloved old customers that buy high margin products. But they buy too seldom, too few and too sporadically to be profitable.

Supplier reduction became popular far ahead of customer reduction. The quality movement of the 1980s pointed out costly complexity added by variability from multiple suppliers for the same material. Consolidating volume with fewer suppliers provides increased price negotiation leverage and still more savings in transaction costs.

Limit Locations and Facilities

There was an era when decentralization was the norm in corporate structure. It provided local customer responsiveness with focused management/control and discrete P & L accountability without arbitrary allocation of expenses. Just as total centralization is usually wrong, so is total decentralization. Decentralization provides excellent accountability, local focus and clearly identified financial performance. It also contributes to complexity in insidious ways, duplicating functions, building fiefdoms, trapping resources, etc.

Expansion into new, global markets offers great opportunity for growth and even greater opportunity for unrecognized costs of complexity. The costs of new legal entities, currency exchange-rate fluctuations, different standards and regulations, language variations, travel costs and cultural differences that don't fit anywhere within existing accounting metrics.

Reduce and Redesign Processes

Over time processes in a business become overgrown and tangled like landscaping and vines in a garden. What started as a simple process is changed year after year to accommodate different customers, products, distribution and systems. The same elements that form the basis of complexity drag these tangled processes along with them. Globalization adds new layers of complexity to the already overburdened processes.

Create Measures to Track Complexity Costs

Few companies keep score of the costs of complexity. Why? Because these costs are not tracked by conventional accounting systems-they just spill into variances and inflated overhead or SG&A costs; even Activity Based Costing (ABC) only captures a few of the costs of complexity. Develop cost estimates for setting up and maintaining new part numbers, products, customers, suppliers, locations, and so forth. Develop costs for transactions and management activities. Refine these costs as actual information is accumulated into a new set of metrics that identify and track the costs of complexity.

Apply Technology to Contain Complexity

Computer and web technology can help control complexity. A designer often chooses a unique component because it's easier than searching for a suitable one that already exists. Data warehouses and query-based databases can alleviate this problem. Web-based resources can also help contain the growth of complexity by providing easy access to specifications, catalogs, product photos, etc.

Use Outsourcing to Contain Complexity

A recent trend has been growth in strategic outsourcing. Done properly, this is a powerful tool and a good way to reduce complexity. Done incorrectly, outsourcing relocates complex problems further from where they must be solved and abdicates the responsibility for solving with them.

Conclusion

The popular clich is that these are increasingly complex times. Because that's true, managing complexity is a critical skill for today's managers and companies. As companies struggle to grow in this highly competitive, low growth environment, the proliferation of almost everything runs rampant. It's time to declare War on Complexity-to recognize it, measure it, reduce it, and once driven out, prevent its recurrence. Unless companies wage and win this War on Complexity, they will find themselves drowning in a virtual quicksand of their own creation-dying a slow and painful death, whose cause was never fully understood.

John L. Mariotti is the President, CEO & Founder of The Enterprise Group - a coalition of time-shared executive advisors, which he founded in 1994. He is the former President of Huffy Bicycles, and Rubbermaid's Office Products Group. Over the past decade, Mariotti has been an advisor or director for many well-known companies including Amrep, Inc., Union Tools, Titleist-Footjoy, The Scotts Co., Deere & Co., Emerson Electric, CharBroil, DirtDevil, Hill's Pet Nutrition, Southern Company, TVA, Shearer's Foods, Astec Industries, and is widely regarded an expert on Strategy, Marketing and Partnerships. Mariotti currently serves as a Director on five corporate boards including World Kitchen, Inc., Henkel Consumer Adhesives, Doskocil Manufacturing, DF Company LLC, and HomeCare Industries.

Note: This material is derived from John Mariotti's forthcoming book THE COMPLEXITY CRISIS-Why Too Many Products, Markets, And Customers Are Crippling Your Company-And What To Do About It, which will be available early in 2008. John L. Mariotti, All rights reserved.