20150306 Bauer Supply Chain Spring Symposium
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The document summarizes a symposium on supply chain complexity. It discusses how complexity is stretching companies' capabilities across their technology, products, processes, organizations, and markets. Complexity interacts between a company's products, processes, and organization to drive higher costs and risks. It impacts all aspects of supply chain performance, including increased inventories, disruptions, and slower response times. The document also provides methods for quantifying and allocating complexity costs, noting they often follow a square root of volume relationship rather than straight volume-based allocation.
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Semelhante a 20150306 Bauer Supply Chain Spring Symposium
Semelhante a 20150306 Bauer Supply Chain Spring Symposium (20)
20150306 Bauer Supply Chain Spring Symposium
- 1. Bauer Supply Chain Spring 2015 Symposium Supply Chain Complexity March 6, 2015
- 2. Wilson Perumal & Company, Inc. 2 Agenda • Complexity facing companies today • QuanDfying the impact of complexity • EliminaDng and managing complexity
- 3. Wilson Perumal & Company, Inc. 3 The world has changed! Volume Cost Pre-‐Industrial Age “Individual producDvity” Dominated by variable costs Volume Industrial Age “Economies of Scale” Dominated by fixed costs Complexity Post-‐Industrial Age “Complexity” Dominated by complexity costs
- 4. Wilson Perumal & Company, Inc. 4 Complexity and its impacts grow exponenEally CharacterisEcs of Complex Systems 1. Non-‐linear reacDons 2. Emerging properDes 3. Feedback loops 4. Unknown interacDons These characteris+cs make Complex Systems almost impossible to predict and control
- 5. Wilson Perumal & Company, Inc. 5 Complexity is stretching companies’ capabiliEes TECHNOLOGY IS MORE COMPLEX PRODUCTS AND SERVICES MORE COMPLEX PROCESSES MORE COMPLEX ORGANIZATIONS MORE COMPLEX REGULATIONS MORE COMPLEX MARKETS MORE COMPLEX X X X X X
- 6. Wilson Perumal & Company, Inc. 6 Many companies are passing a complexity threshold VALUE (diminishing returns) COST & RISK (exponenDal growth) Level of complexity you can support $ Complexity Costs and opera+onal risk grow exponen+ally with complexity Few companies are s+ll here Many companies are here An increasing number of companies are here
- 7. Wilson Perumal & Company, Inc. 7 Complexity impacts all aspects of your business Cost & OperaEons Business & OperaEonal Risk Growth & InnovaEon • Hidden costs • ExponenDal growth • Cross subsidizaDon • Most products are unprofitable • Grows exponenDally with complexity • Cannot anDcipate all points of failure • Slows new product development • Overwhelms customers • Distracts sales force
- 8. Wilson Perumal & Company, Inc. 8 Product, Process & OrganizaEon Complexity interact to drive higher costs & risk Organization Value add Non-value add The Complexity Cube Product Process OrganizaEon Number of processes, steps, handoffs, etc. Number of products and services you offer Number of assets, faciliDes, enDDes, partners, etc.
- 9. Wilson Perumal & Company, Inc. 9 Complexity can be good or bad, but companies almost always have too much The variety of and within the products (and services) you offer The number of processes, steps, handoffs, etc. The number of faciliDes, assets, funcDonal enDDes, organizaDonal units, systems, policies, etc. • Bloated por6olio • Customer confusion • Strained processes • Duplica:on • Rework • Work-‐arounds • Bloated organiza:on • Func:onal silos • Disarray • No clear picture Product Process OrganizaDon Type of complexity DescripEon Impact of too much
- 10. Wilson Perumal & Company, Inc. 10 Complexity impacts all aspects of supply chain performance Complexity-‐driven supply chain challenges Bloated Inventories More Supply Chain DisrupEons Increased NVA Cost/ Overhead Slower Response Times Poor S&OP Accuracy
- 11. Wilson Perumal & Company, Inc. 11 Agenda • Complexity facing companies today • QuanDfying the impact of complexity • EliminaDng and managing complexity
- 12. Wilson Perumal & Company, Inc. 12 How do you allocate costs? Total cost Volume Unit cost Total cost Volume Unit cost By “Volume” Volume Volume By “Item”
- 13. Wilson Perumal & Company, Inc. 13 Complexity costs follow a square root of volume relaEonship Most NVA costs fall in between “by volume” and “by unit” extremes We see the SQRT rela:onship over and over • Cost rises with volume but not as much as in “by volume” approach • Unit cost drops off with volume but not as much as in “by item” approach
- 14. Wilson Perumal & Company, Inc. 14 Cost allocaEon methods CosEng approach By actual costs By allocaEon By ‘volume’ By ‘SQRT vol.’ By ‘item’ • Best approach • But not always pracDcal (e.g., acDvity-‐based cosDng) Cost allocated in proporDon to either # units, revenue, cost, etc. I.e., “Peanut bucer spread” • Costs divided equally between products, stores, regions, etc. regardless of volume • In between “by volume” and “by item” methods • Higher-‐vol. items receive greater aggregate cost • Lower-‐vol. items receive greater unit cost • NVA/complexity costs follow the “SQRT of volume” relaDonship • Without this tool, most companies allocate these costs using the “by volume” method, leading to over-‐cosEng of high-‐volume items and under-‐cosEng of low-‐volume items
- 15. Wilson Perumal & Company, Inc. 15 EXAMPLE: Square root cosEng $1 $1 $6 $0.88 $25 $0.50 “By Volume” “By Item” “By SQRT Vol.” • Product “A”: volume of 1 unit • Product “B”: volume of 50 units • Total cost to allocate = $50 “In between” is not simply the average of the two extremes Unit cost: AllocaEon method: Scenario:
- 16. Wilson Perumal & Company, Inc. 16 Only complexity-‐driven costs are allocated using square root cosEng Variable (α Vol.) Fixed Variable (α Vol.) Fixed SQRT costs TradiEonal AllocaEon CategorizaEon “Square Root” AllocaEon CategorizaEon • Unmasks cross-‐ subsidizaDon • Corrects for under-‐ cosEng small volume items/acEviEes • Corrects for over-‐ esEmaEng potenEal for fixed cost leverage
- 17. Wilson Perumal & Company, Inc. 17 ReallocaEng costs Total Costs Corporate SG&A Packaging Materials MarkeDng Spend Distri-‐ buDon Conversion Costs Brewing Materials 11% 36% 19% 10% 14% 11% 100% 1044 3413 1860 920 1316 1058 9611 Allocate only those costs driven by NVA complexity Annual Costs ($M)
- 18. Wilson Perumal & Company, Inc. 18 The powerful impact of complexity cost allocaEon 9% 13% 14% 26% 14% 5% 10% 19% 9% 14% 0% 10% 20% 30% Budget Below Premium Premium Cram Average % OperaDng Margin Vol. (bbls): 12.5M 16.4M 44.3M 4.8M 78.0M Typical standard cosDng Complexity-‐adjusted cosDng
- 19. Wilson Perumal & Company, Inc. 19 Agenda • Complexity facing companies today • QuanDfying the impact of complexity • EliminaDng and managing complexity
- 20. Wilson Perumal & Company, Inc. 20 Complexity creates a vicious cycle
- 21. Wilson Perumal & Company, Inc. 21 Mastering complexity requires a two-‐pronged approach Product/ service rationalization Brand elimination Material consolidation Vendor, dealer, distributor, supplier consolidation Geography or market rationalization Management System Reduce amount of complexity? Operating model redesign Process flexibility Dynamic modeling High Reliability Culture Or make complexity less expensive? QUESTION: ANSWER: • Both • We do not live in a “plain vanilla” world (we need variety) • Customers demand good prices (we need cost-‐compeEEveness) • But no real operaEon is lean enough to support infinite variety
- 22. Wilson Perumal & Company, Inc. 22 Conclusion • Complexity has become a key factor driving performance for many companies… • …but most companies are ill-‐prepared to idenDfy and manage complexity in their operaDons • Companies can becer deal with increasing complexity by: – Understanding the sources of complexity and the impacts (cost & performance) – EliminaDng NVA complexity and becer managing necessary complexity