The Complexity in Complexity Reduction
Complexity reduction is one of the key enablers for margin improvement projects in B2B companies and is aimed at reducing low value & volume products(& variants) along with low value/infrequent customers. The logic is that too many products & small customers create high demand variability, frequent changes in the manufacturing shop floor along with planning, sourcing, and distribution complexities, and add to immense hidden costs. These products & customers also add to a lot of profit on paper which may not necessarily translate to actuals and remain as "paper profits".
While at a concept level complexity reduction 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 & behavioral issues involved in implementing these are
1. Reducing "C-Class/Low-Value Customers: From a volume perspective these customers can account for up to 5-10% of the volume but in terms of the number of customers these customers 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 it's at the cost of slightly lower margins. However, the following concerns & challenges will need to be addressed in the right manner
- Some of these customers can also be very old & the 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 the smaller customers?
- Today’s small customers 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 it's an extremely critical item to complete their orders/requirements. The concept of "Basket Order" works here where multiple line items are required to complete an order.
- Another set of C class products can just be variants of a larger volume products and may not have a large impact on shop floor efficiencies/cost but have a regular small customer base. Should they be eliminated?
- A lot of these C-class products may also be one off-products that were manufactured on customer requests with a higher margin. Should the company accept such requests in the future?
Fundamentally if a company is looking at reducing small volume products it must also think about how they would deal with customer requests and also the need to develop newer customers/markets. At an ideal 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 requires some fundamental thinking along with rigorous change management efforts.