A Radically New Approach to Complexity Cost

A Radically New Approach to Complexity Cost

A new way to reduce complexity cost in your organization.   One of the questions we frequently receive from customers is if we can help with their complexity cost; complexity cost caused by the amount of suppliers, of products, of process variants, etc. We absolutely can: with a radically new approach simulating complexity effect on free cash and profitability to derive decision criteria for taking action—supplier by supplier, product by product, process variant by process variant, etc. Complexity costs grow quadratically with the amount of moving parts such as SKUs, process variants, payment terms and alike. An analysis by ATKearney found that “EBIT reserves of more than €30 billion are just waiting to be tapped,” and that “companies can increase their EBIT by 3 to 5 percentage points on average.” Yet why do we have a difficult time unraveling complexity cost issues? It begins with the term “complexity costs.” While the term is correct in describing the phenomenon that complexity drives costs, the term is misleading because it suggests that we have to analyze costs in order to be able to do something about it. This is wrong. Complexity is not a bad thing, per se. There’ s “good” as well as “bad” complexity. “Good” complexity is  value adding whereas “bad” complexity is value diminishing. Hence, the challenge is to differentiate between “good” and “bad” complexity. Our approach starts by defining “value.” Though value targets vary per enterprise, they typically revolve around the capability to generate cash and profits and thus are composed out of cash (working capital) and profitability goals. That is the basis for our new idea....