The Complexity in Complexity Reduction
Updated: Apr 3, 2021
Complexity reduction is one of the key enabler for margin improvement projects in B2B companies and is aimed on reducing low value & volume products(& variants) along with low value/infrequent customers. The logic being that too many products & small customers create high demand variability, frequent changes in the manufacturing shop floor along with planning, sourcing and distribution complexities. They also add to lot of profit on paper which may not necessarily translate to actuals.
While at a concept level this sounds perfect, in reality, the challenges in implementing these are many and the exercise needs to be thought through well before going ahead. Some of the key structural, commercial & behavioural issues involved in implementing these are
Reducing "C-Class/Low Value Customers: From a volume perspective these customers can account for upto 5-10% of volume but in terms of number of customers these customer can account for 20-50% of the total. Ideally, it’s never a good idea to leave any customer but given the added complexity in managing small customers, it’s better to grow and gain that extra 5-10% volume from large customers even if its at the cost of slightly lower margins. However, following concerns & challenges will need to be addressed in the right manner
Some of these customers can also be very old & first set of customers who are solely dependent on your supplies; should you stop supplies?
Smaller customers also may be working with your dealer and not your direct customer. Can we restrict our dealers from dealing with these customers especially when companies create the dealer network to reach out to smaller customer.
Today’s small customer can become tomorrow’s leaders; there is no way to know.
Smaller customers can also provide an indication on the pricing /max value of your products as compared to larger customers and in addition can provide the volumes in times of slowdowns
Some of these customers may be buying on the A or B class products which have technically no impact on complexity.
2. Reducing C class products and variants; Some of the above challenges apply here as well along with a few additional ones
Some of the C class products are required by A class customers on a consistent basis and even though volume is low its extremely critical item to complete their orders/requirements. The concept of "Basket Order" works here where multiple items are requirement to complete an order
Another set of C class products can be just variants of a larger volume products and may not have large impact on shop floor efficiencies
Lot of these C class products may also be one off-products which were manufactured on customer requests with higher margin. Should the company accept such request?
Fundamentally if a company is looking at reducing small volume products it must also think on how they would deal with customer requests and also the need to develop newer customer/markets. At an idea level, complexity reduction on one hand and newer market development are in conflict and needs to be clarified to all stakeholder.
Overall, though on paper complexity reduction is a great enabler, it needs to be approached with caution and required some fundamental thinking along with rigorous change management efforts.