Attacking Business Complexity
Many have argued that there is an inverse relationship between business or product complexity and customer satisfaction: the more complex a product or business is, the less satisfied the customer tends to be. Yet, many businesses do little to curb their complexity woes.
In 2003, H.J. Heinz recognized their complexity issues and attacked it head-on. In their 2003 Annual Report, we read the following:
Like any large, international enterprise, Heinz has, over time, accumulated complexity and bureaucracy in its administration and production that can be significantly reduced. Management layers and administrative and operational functions can be better aligned and more customer-focused. Tens of thousands of packagin and ingredient specifications can be tracked, managed and reduced. At the outset of Fiscal 2003, Heinz had more than 30,000 Stock Keeping Units (SKUs), many of which were diverting human and capital resources while yielding relatively small sales and earnings compared to Heinz’s more popular and profitable products.
Heinz is aggressively attacking complexity on many levels. The company is working to reduce its large number of legal entities and general ledgers to simplify and streamline the legal and accounting process. The post-spin U.S. businesses are being reorganized to increase efficiency, improve accountability and sharpen customer focus. Heinz has launched VIPER (Vendor Improvement and Product Enhancement and Research), a global computerized platform designed to enable the company to dramatically simplify its myriad product specifications. Heinz also reduced its worldwide SKUs by nearly 30% in Fiscal 2003 and is targeting an additional reduction of 10% by Fiscal 2005.
By removing "clutter,", Heinz expects to improve customer service on fewer, faster-growing products and reduce employee time wasted on bureaucracy. Simpler and more focused management, legal and accounting structures will enable the company to pinpoint accountability, measure effectiveness and empower employees to do value-enhancing work. Better tracking and management of product specifications and vendor relationships are expected to greatly reduce complexity and cost throughout the supply chain. SKU reduction should enable Heinz to lower inventories, improve manufacturing efficiency and apply resources more effectively agasint the growth of its power brands.
I found the statement above in the 2003 Heinz Annual Report to be very frank, honest, and refreshing to read. In their later Annual Reports, they continue their attack on complexity and report progress. I’m very impressed by Heinz’s committment to becoming simpler, more customer-focused, and more efficient.
I’m very interested in business complexity and its impact on the firm — at the cost level and at the revenue level. Complexity has more insidous effects on the workforce also, which isn’t reflected on either the bottom-line or the top-line.
Complexity can be an evil thing in business. Lean Manufacturing and Six Sigma are efforts that improve the flow of products and the quality of products and attack waste wherever it can be found. But, those efforts are largely not considered for product decisions. This is a mistake. Lean can help design and develop products and processes that are customer-focused, simple, elegant, and effective. It is critically important that there is some thought on the products themselves — the proliferation of product lines greatly impacts operations, the costs to manage all the products, and ultimately, margins shrink.
I’m currently studying complexity and its impact on a firm and on the firm’s balance sheet. It is an engaging topic and I’m fascinated by this area.
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An excellent perspective on managing complexity is in the book “Conquering Complexity in Your Business” by Michael George and Stephen Wilson. Unlike most consultants, this book actually has equations and bases much of their analysis on the fundamentals of queueing theory.
Another good source is the recent article by Thomas Olavsson in Supply Chain Management Review and related publications. This is the case study of HP and how they manage complexity reduction efforts.