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What is Optimal Product Complexity?

By Luther Johnson

The Pain of Product Complexity

Pain, although unpleasant, is your body’s way of signaling to your brain that something is not right. Your brain can then figure out what to do in response to avoid further damage and determine a path to heal your body. When the cause of the pain is not obvious, we must identify a list of symptoms to describe the pain and problem solve until we determine the cause.

We often use the analogy of pain to similarly describe signals within a company that something is not right. Ask any executive whose company is falling short of their growth or profitability targets what their major “pains” are, and you will hear a familiar list of symptoms.

Low Margins

“We are growing our revenue, but our fixed and indirect costs are growing at the same rate. Even at higher production volumes, we are not able to leverage that into lower direct material and labor costs.”

Engineering Bottlenecks

“We are too slow to introduce new products, and we are losing price and market share. Our engineers are occupied with sustaining current products and spend most of their time addressing component obsolescence, new regulatory requirements, cost reductions, and quality issues. There is little time left for innovation, so we settle for incremental changes to our existing product family.

Quality

“Our cost of poor quality is too high. We can’t get it under control because we are chasing too many quality issues. On top of this, I know that we are masking how much internal rework we do because, over time, it has become embedded in our standard costs.”

Inventory

“We have trouble managing our inventory. We have too much tied-up capital, which hurts our cash flow. Our low turn rate leads to aging inventory and obsolescence.”

Lead Time

“Our lead times are too long, and despite our improvements from our lean initiative, we are still losing orders to faster competitors.”

The Value of Optimal Product Complexity

 

What is Product Complexity vs. Market Complexity

Individually, each symptom may have some isolated sources of pain, which can be addressed with a targeted response but taken together, the common cause in many companies is too much complexity. Complexity can assume many forms within an organization, but specific to the symptoms above, a primary root cause is that product complexity stemming from too many unique platforms which share little in common across the product families and too many unique parts required to build them.

This view of complexity is an inside-out perspective on the pain it brings to the organization. There is also an outside-in view which can be thought of as market complexity. Customers in both commercial and consumer markets have been on a decades-long trajectory of increasingly demanding products and services that are more closely matched to their needs. As time moves forward and companies grow, they are exposed to an ever-larger share of the market and, consequently, to more unique customer demands. Unlike the internal sources of complexity-driven pain, companies have no control over market complexity. They can only control which segments they target and how efficiently they are able to meet them.

  • Outside-in, Market Complexity, Driven Companies: focus is on revenue growth and often embrace market complexity and simply bear the pain of internal complexity
  • Inside-out, Product Complexity, Driven Companies:  focus is on margin,  typically reduce their internal complexity by reducing their exposure to market complexity by targeting a smaller share of the market

How did you get there?

Companies do not set out on a journey to create “too much complexity,” so what is the driver behind this common result? The driver, as described above, is the market or, more specifically, the diverse needs of customers across each market segment who seek out a unique solution matched to their demands. To grow market share and the increased revenue it brings, companies take actions to leverage new opportunities. This strategy results in more product variants, channels, and brands. The positive benefits of those actions can also result in the negative consequence of too much internal product complexity.

These are the four most common paths companies take on the journey towards too much complexity:

Acquisitions or mergers

The fastest way to gain market share, channels, or brands is through an acquisition of, or the merger with, a company that operates in the same or adjacent market. This path comes with an instant boost in volume and the promise of better margins in the combined company through synergies. The elimination of redundancies in the executive team, management, and finance usually provide short-term cost savings, but the internal complexity of many similar or overlapping products means that the additional volume doesn’t translate into scale for engineering, operations, or supply chain. It often lowers efficiency in these functions. Recommended reading: What is Cost of Complexity? And how to Calculate it?

Niche focused organization

An organizational structure that is niche-focused is a common management technique to drive growth by creating business units that are intensely focused on a specific set of customers aligned by industry, region, application, or brand. This alignment typically creates narrowly targeted product platforms that build market share by operating in their niche silos. This also leads to continually divergent product families which share less commonality in the supply chain, operations, and engineering processes over time. More about Needs-Based Market Segmentation here. 

Sales and Engineering Driven

Engineer to Order businesses typically has loosely defined product families that have evolved one deal at a time. Growth generated by selling unique customer solutions creates complexity with every new order. This revenue produces higher rates of complexity growth and the longer the product lifetime, the higher this inflated level of complexity gets.

New “Low Cost” Product Family

Companies whose locations have traditionally been in high-cost countries often find that their products are not competitive in “low-cost country” markets, due to local competitors. At times these low-cost country companies also compete in the high-cost markets using price pressure to challenge their market share. A common reaction is to develop an additional value-engineered product family, with a reduced specification level, produced in a low-cost country, and having no commonality with the existing product family. This increases complexity and overhead for the entire organization and often does result in winning products for the low-cost market.

Do any of these paths look familiar? What journey has your company taken to address revenue growth, margin expansion, or battle low-cost competition? Are you in a good place today and what path are you on to win in the future?

 

Cutting Product Complexity or Optimizing Product Complexity?

Regardless of the journey taken, you will likely recognize the pain of complexity within your own company stemming from the creation and maintenance of too many unrelated products and too many unique parts. An excellent proxy for a company’s complexity is the number of unique parts being managed.

It is also likely that you have lived through an initiative (or several) aimed at reducing complexity. Many of these initiatives follow the tactical approach of reducing complexity by “getting rid of the low runners”, meaning cutting the tail off the volume curve. A common way to view part candidates for complexity reduction is to plot Unique Part Count versus Annual Volume per part. This usually produces the characteristic shape with the “long tail” phenomenon. However, there is also a typical “long tail” when Annual Sales Volume per Unique Product is plotted. The hope is that you will be able to make a significant reduction in the number of unique parts without a significant impact on the products you can offer and the corresponding loss in revenue. Stated another way, the desire is to cut a significant length off the part tail without cutting off too much of the product tail.

The challenge is that the relationship between what can be offered to the market and how many unique part numbers are required is closely linked. This is because the product architecture has been designed to be tightly integrated with a specific set of parts instead of intentionally Modular which facilitates interchangeability. This is the paradigm illustrated by the complexity pyramid of an integrated architecture.

 

Picture1 (7)

Integrated Architectures have tightly coupled relationships between the parts and finished products

The supply chain and operations organizations identify parts with low annual volumes as candidates to be cut. Sales does not want to lose the incremental revenue from the affected products that those parts are designed into. Engineering lacks the capacity to redesign the products using parts more effectively due to the integrated designs. Without a more systematic and strategic approach, most of these efforts yield typical results of 5% or less in part number reduction.

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This coupled relationship often limits the reduction to only cutting off the tip of the tail

Any reduction in complexity is beneficial, but to make a measurable impact on the pains it causes, the reduction needs to be >25% without inflicting a corresponding loss of product offerings and their revenues.

How to Reach an Optimal Level of Product Complexity? 

The ideal solution is effective at meeting market-driven needs while being internally efficient at creating product variance. Modularization as a technique aims to do just this; reduce complexity while leveraging the interchangeability of modules to configure the right product for each customer. But to achieve an even greater level of company benefit requires that modularization is understood to be a strategic means to deliver the external variety valued by the market while managing the internal complexity which burdens the entire organization. Organizations must aim at finding the optimal level of complexity for their target markets today and into the future. This strategic approach versus tactical standardization or rationalization efforts is what leads to long-term success.

5 step guide to create a Modular Product Architecture

A core principle of this way of thinking is to create a deeper level of understanding as to what & why product variance is valued in the market, and intentionally identify what, how & why this will change over time. The why questions can be thought of as the variance drivers of what in your product needs to vary both now and in the future. With this deeper level of understanding, you can then know how to decouple what in your product should vary from what should not.

Market complexity, as was discussed previously, is not controlled by the company but product variance is. Increasing product variance or product complexity to the extent it fulfills a larger range of customer needs creates value for the company. Internal product complexity in the form of unique parts and unique platforms drives cost. Typically these costs are not experienced as pains within the company until the threshold of “too much” complexity is reached, at which point the company decides to addresses the pain by attempting to remove the complexity. But we know you cannot have product variance without some part variance, so having too few unique parts to support needed product variance can cause pain of a different sort in the form of lower market share or lower margins. Complexity itself is then neither good nor bad, but since it drives cost, then it should be treated similarly to the allocation of other business costs by making strategic decisions about where and how much complexity should be invested to achieve the maximum value to the business. The goal should be complexity optimization rather than complexity reduction.

The Three Value Disciplines Framework

A useful framework in applying this strategic thinking to the optimization of complexity is the Three Value Disciplines. By aligning the variance drivers of your product to each of the three value disciplines, you can view complexity through the lens of business strategy. This view provides insight into two key strategic questions.

  • What value and excess costs does your current complexity create for your company?
  • What is the ideal allocation of complexity to achieve an optimal level of value for my company?

The axis of the Three Value Disciplines are Operational Excellence, Customer Intimacy and Product Leadership.

Operational Excellence

From a market perspective, any functions within the product where variance is not valued should be categorized as Operational Excellence. The parts required to fulfill these functions should have very little variance. Complexity along this axis creates cost without adding value.

Product Leadership

The variance associated with Product Leadership is primarily around technology and premium performance. Variance is relatively low and generational, meaning that you will likely have the same amount of low variance at any one time, but the parts that support Product Leadership will change over time with the latest generation displacing the oldest in order to maintain a premium price position.

Customer Intimacy

Retaining and growing market share requires having product variants that fulfill the entire range of customer needs within your targeted market segments. Variance in these functions is high and will evolve with changing market needs, growing as more market segments are targeted. As a result, you will have a high variation of parts that perform the same function in the product but fulfill different market needs. If you have successfully decoupled Customer Intimacy functions from those categorized as Operational Excellence and Product Leadership, adding new unique parts should efficiently create more product variants that you can offer the market.

The company’s strategic view of market complexity versus product variance on the three value-axis

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Applying this strategic view of variance to the volume curve graph, the allocation of Unique Parts to the drivers of variance which will result in a characteristic distribution of complexity among the three categories of parts.

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Your current distribution of part numbers is likely not so neatly aligned to this strategic view of variance. Too many independently developed platforms, integrated architectures with tightly couple designs and a disregard of the cost burden to the organization of creating more part numbers have left you with a long, narrow tail that has little strategic alignment to the value those parts bring to the company.

Reducing complexity by cutting the tail may bring some short-term relief to the symptoms of pain, but the lasting cure from pain comes from achieving an optimal level of complexity. By restructuring or redesigning your platforms with a strategic method to create variance only when it brings value to both your customers and to the company, you too can thrive, pain free.

If you found this blog interesting and like to know more about how to quantify and realize the value of having an optimal product complexity I suggest you watch our webinar series The Value of Optimal Product Complexity

 

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Luther JohnsonLuther Johnson

President
Modular Management North America

luther.johnson@modularmanagement.com
+1 952 854 6800
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