On the surface, your company is successful. Turnover is growing, more products are being introduced, capacity is being expanded and more customers are being added. You are really busy. So why change anything?
Because the secret friend of growth – complexity – eats away large portions of the company’s earnings.
Research shows that complexity can eat up to 40 percent of company earnings. The whale curve illustrates how complexity only adds value up to a certain level, beyond which complexity begins to chip away at value.
Healthy and unhealthy complexity
Complexity is like weeds. It is easy to create, but difficult to keep down. It is the result of the easy way, whereby you let things happen without making the tough decisions. But complexity is also a natural part of growing bigger. Therefore, it is an important management task to identify and distinguish between healthy and unhealthy complexity and ensure that the organisation keeps its focus on the most value-creating assets.
Keeping complexity at bay is an ongoing management discipline, and it requires focus and the ability to say no. This is a difficult and rarely popular discipline, as choosing not to pursue new activities is runs contrary to new initiatives, development and growth. In the long run, however, it will give the organisation more oxygen, better returns and more satisfied customers.
The journey towards a profitable range of products and customers
It is remarkable how many companies – defying all reason – choose to retain products and customers that are unprofitable. In most cases, this is due to a lack of transparency.
When it comes to making a company’s range of products and customers 100% profitable, companies are at one of four stages. Where does your company fit?
Complexity hurts. The company is focusing on growth, but 10–20% of the product and customer portfolio is unprofitable. This rubs off on the bottom line, but the dialogue about a solution remains deadlocked.
Profitability on the agenda. Management realises that complexity has reached a critical level. The company is analysing its range of products and customers, but the tough decisions remain untaken for a little longer, as the culture works against them.
Profitable growth. The company has found the formula and is able to accommodate growth at lower costs. Management does away with “one size fits all” and plants the seeds of a new culture and mindset in the company.
A new level of transparency. The organisation looks at how costs are distributed among customers. Darlings are killed and a new and more profitable way of serving customers is budding in the organisation.
Let’s Change Supply Chain