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Supply chain performance is a measurable indicator based on turnover, costs, and capital employed. We have identified 8 root causes for supply chains lagging behind their performance that we are happy to share with you in a series of articles. Today we will dive deeper into the one cause with the biggest impact on your supply chain performance: product portfolio complexity.
The 8 root causes we have identified are:
- Product portfolio complexity
- Speed of innovation
- New types of competition
- Multi-channel sales complexity
- The complexity of supplier network
- Regulatory complexity
- Sustainable requirements
- Internal complexity
The kick-off article summarizes each of the main causes we will develop further in our series. It is our goal to increase your short-term and strategic ability of identifying, prioritizing and implementing effective and efficient measures to improve your supply chain performance. Let’s get right into the first and foremost root cause:
Product portfolio and product architecture have the biggest impact on supply chain performance. The actual purpose of the supply chain is to supply physical goods.
The number of physical goods and their complexity (the number of raw materials, components, variants) determine directly the quality of forecast, the amount of safety stocks, and the delivery performance of the supply chain.
Thus, the more complex the portfolio the more complex the planning processes and the related supply chain.
Customer individualized products cause increasing complexity in product structures
Strong demand from customers for individualized products is driving the number of variants which has a multiplier effect on complex product structures at the component level. The large number of components in turn makes planning in general and service level promises in particular more difficult. Furthermore, it leads to increased inventory levels.
Typical examples concerning growing numbers of product variants come from the automotive industry. Let’s take BMW: 40 years ago, BMW had five different models in its line-up: The 3 series, the 5 series, the 6 series, the 7 series, and the very exclusive M1 sports car. 10 years later the line-up increased to 7 models. Around the 2000s it was at 10. Another 10 years later BMW had almost tripled its line-up with 23 different models to choose from. Today, with the transition from combustion engines to electrical cars, BMW offers a portfolio of 87 different models. All of those can be customized to your personal taste to make it one-of-a-kind.
To deal with such complexity, the automotive industry has implemented platform strategies. Through modularization and standardization, they were able to create a large product variability on the market. That means numerous end product variants can be made from a limited number of components. The first step is to set up a product architecture and to identify options for building modular product structures.
A product architecture captures market requirements and decomposes the overall product function into a function hierarchy. Detailed product functions are then mapped to parts, those are grouped along the bill-of-material to sub-assemblies, assemblies, and the overall product. A product architecture enables the identification of modularization options, standardizing the physical representation of similar product functions, and rationalizing the overall set of parts and assemblies needed for a product portfolio.
Positive effects of product modularization and optimization of a product architecture are the consolidation of parts to a smaller number of standard components, reduced operational costs and a cash-effective working capital, resp. inventory reduction. Further, by re-using the standard components in multiple ways, product variance can be increased without imposing additional complexity on the supply chain, resulting in a broader product portfolio and more flexibility to meet customer demand.
The diagram shows an example project where the number of electric motors used in the products was reduced to 12 standard motors and 5 special assemblies. The savings effects from reduced complexity in the supply chain and service, as well as the savings in purchasing far outweighed the additional costs for oversizing and a higher unit price of an electrical motor for some products.
Tackling product portfolio complexity by reducing the number of variants
Another basic approach to tackle product portfolio complexity is to reduce the number of variants offered. Many companies are well aware of this; however, a concrete solution approach is often missing. As a consequence, the supply chain function lacks convincing reasons towards their sales and product management and the need of reducing the product portfolio is throttled. From our experience, companies typically overestimate the demand and necessity of certain products and solutions. BCG stated: „Many companies have found that offering a diverse product portfolio is essential for maintaining a competitive edge.“
By identifying variants with low sales respectively contribution margins and taking into account the strategic product relevance a targeted portfolio adjustment can be realized. Let’s have a look at this example of U.S. consumer goods companies: from 2002 - 2011 the number of newly launched products increased by 60% annually, while total sales during this period grew at just 2.8% per year, and supply chain costs increased significantly.
In order to reduce the number of variants in a product portfolio, the material and information flow in a supply chain must be made visible in an end-to-end analytics system, covering customers, distribution, transportation, production, and suppliers. An end-to-end analytics system enables us to identify candidate products that might be terminated, understand options for substituting products and segment the product portfolio according to demand patterns of the customers. Every segment needs a clear purpose, a consistent set of targets, rules, processes, and structures, and alignment across all functional units. Based on the results from end-to-end analytics and the segmentation scheme, the product portfolio will be rationalized. After the decision on the product portfolio rationalization, every decision needs to be followed-up, in order to ensure execution and implementation of the optimized portfolio.
Even with an optimal portfolio structure the number of variants offered today is significantly higher than years ago. This complexity requires advanced planning approaches using dedicated segmentation strategies. These strategies have far-reaching implications for all involved functions from purchasing to planning, production, sales and service.
Dangers of product portfolio complexity
It is necessary to overlook the full extent of dangers and requirements resulting from higher product portfolio complexity. The following list, shared by BCG, shows the most relevant:
- Reequipping of production facilities necessary leads to more downtimes, reduced production capacity, and increased processing costs; BCG shared that complexity-driven downtime can decrease overall equipment effectiveness (OEE) by up to 20%.
- Procurement complexity increases and with that supplier network complexity rises; procurement costs resulting from higher complexity can rise from 2 - 5 % of the cost of goods sold (COGS)
- Working capital increases parallel to higher stock levels resulting from inadequate forecasting
- Lower availability
- Admin and overhead costs explode as the company struggles to manage the large product portfolio
- Product management and sales have difficulties to identify and prioritize their effort on the most valuable products in the portfolio; complexity leads to a lack of clear value proposition as well, which causes ineffective marketing and promotion budgeting; the results are higher marketing costs and lower sales-force effectiveness
Furthermore, companies face challenges in reducing their product complexity such as identifying the right products to eliminate. Low-volume products in most cases are the very first to be deleted, despite they often rarely address the root cause of complexity’s higher costs, because they, for example, are produced at different plants or production lines. BCG shared a survey of top consumer goods executives which stated that more than 90 % of the companies had launched projects to reduce product complexity, but only 15% considered their projects to be effective.
Supply chain management’s impact on reduced product complexity
It is the goal of supply chain management to provide customers with physical goods in the right quantity and quality at the right time and place. But not any product - the right product. Business success is caused by its understanding of customer needs and preferences. Supply chain insights are key to standardize product components responsible for the highest costs of complexity. This leads companies to analyze their product network and thereby create necessary transparency in product specifications or components that primarily lead to bottlenecks, downtimes, and higher costs. “For example, a white-goods company determined that its multiple formats for display and handle cutouts in refrigerator doors drove its greatest supply-chain complexity; however, market research found that these attributes did not significantly affect consumers’ purchasing decisions. The company determined that it could reduce changeover times and free up valuable production capacity by reducing the number of formats by half.” (BCG, 2014)
For a start companies can do a health check on their product complexity level:
- How many different products does the portfolio contain? (Include types brands and also variants)
- Do consumers and customers value this variety?
- Does the company understand the purpose and value proposition of each product variation?
- For products with a complex bill-of-material: What is the degree of modularisation of the product portfolio? How many different modules is the variability of the product portfolio based on?
- Does the company understand the impact on supply chain complexity based on every product variation?
- Does the company know the true cost of changeovers associated?
- How does the company ensure an overall and cross-functional perspective on trade-offs between value and complexity (especially between marketing and supply chain)?
- Due to product innovations, does the company know the increasing value AND added complexity?
- Could a harmonization of product portfolio per region be a significant opportunity to reduce complexity and or the number of facilities?
Which improvement potentials are occurring to you after this quick health check?
It is necessary to combine market and supply chain perspectives to reliably identify your potential for reduction in product portfolio complexity. This can be an important and crucial competitive advantage by not only reducing costs but also higher value in your product portfolio.
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