Our conversations with Life Sciences companies reveal a quest for initiatives that drive growth, significant performance improvements and competitive advantage. While improvement methods such as lean, six sigma and others are in place and are providing incremental gains, companies are increasingly seeking higher levels of change.
As they push toward more sophisticated approaches, companies across many industries are discovering that complexity and its costs are a rich, untapped source of financial and performance improvement. However, the path to attack complexity costs is less obvious than with many cost improvement initiatives.
You can read more on the challenges to successful complexity management projects in a previous blog.
4 REASONS TO GET SERIOUS ABOUT COMPLEXITY…It is bigger, more strategic and more costly than ever before.
1. Complexity is a barrier to a firm’s strategy.
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It is well documented that Life Sciences companies today face unprecedented pressure on margins. Evidence continues to demonstrate that companies are serious about improving their operational performance. In a2012 survey published by eyefortransport, Pharmaceutical and Medical Device manufacturers rated their top supply chain priorities for the coming year. As this table shows, there are several similarities across sectors. Importantly, complexity is a major factor that challenges success in attaining each of these priorities. Reduce complexity and you improve the probability of success.
2. Complexity is widespread: Portfolios, Networks, and Organizations.
Complexity tends to creep subtly into product portfolios, networks and organization structures. This is especially true in Life Sciences companies where regulation coupled with global expansion adds considerable time, requirements and cost to R&D, manufacturing, distribution and support.
Complexity starts in R&D where the basic product range, variations, sourcing strategy and supply chain network are established. During the life cycle, product portfolios expand to drive revenue increases, fueled by competitive pressures and an insatiable desire for more differentiation, variety and customer satisfaction. As portfolios expand, complexity costs propagate backward through every step of the supply chain all the way to raw material level.
Network complexity grows as supply chains spread with advancing geographic markets, off shore sourcing, acquisitions, and contract manufacturing. Short lead times, ample flexibility and risk management also complicate our networks.
Organizational structures become more complex in response to expansions and acquisitions, as well as growing product and network complexity. Not only can this add organizational cost, but decision-making processes can become sub-optimal and slower. Before long, complexity can add major costs and affect performance in subtle ways, and almost without notice.
3. Complexity costs are difficult to measure.
Complexity introduces an “iceberg effect” into a company’s operating and cost structure. Most costs in our accounting systems are visible on the surface. These are the hard numbers that support key decisions and our evaluations of good or bad performance such as product line profitability.
However, there are many other costs below the surface that do not directly manifest in accounting systems and cost analyses. They show up in R&D, sourcing, manufacturing, distribution and support functions. Getting an understanding of these hidden costs is a real key to complexity management. Companies are turning to advanced modeling to strengthen their analytical capabilities in this area.
To read more about the challenges with complexity costs, refer to our blog.
4. The payoff can be substantial.
As an example of the potential benefits, consider an actual case. We worked with a successful medical device manufacturer on a project to improve operational performance and reduce complexity costs.
This company reduced SKUs by over 25-30% and improved profitability in a major plant where product portfolios had proliferated over time. A complexity reduction team provided management with insights on true profitability after analyzing the nature of the product complexity and the total costs to support it, including hidden costs.
This insight prompted an honest, cross-functional discussion about the value of variety, special products, pricing policies, and even certain customers. As a result, this company reduced the number of SKUs by over 25%, increased prices on special products, and instilled new pricing policies. Financially, they raised product margins and increased sales of higher volume products.
Cross-functional enterprise teams applied innovative analysis to identify and remove the barriers to higher performance levels. This company enjoyed substantial benefits from the analysis of complexity costs and operational performance.
- Inventory levels declined by 40% over an 18 month period
- Scrap cost declined by $42M and scrap rates fell by up to 70%
- Productivity increased up to 100%
- Cycle time reductions up to 50%
- Financial performance increased up to 10%
The value of understanding complexity costs can be substantial. To learn more about this company’s experience, see our case study.
Written by Tom Zych, Partner at Ops Rules Management Consultants