As companies grow they add products, divisions, sales channels, suppliers, facilities and personnel. If they acquire companies, they may add even more complexities and redundancies to their plates. Eventually, this change may weigh down the company’s ability to operate effectively and harm it’s profits.
An example of a company that has grown through acquisitons is Cisco. In a recent e-mail message entitled “Cisco says it’s cutting 1,300 jobs to reduce costs” sent out to journalists, the company commented on their recent workforce cuts claiming that they are a part of a “continuous process of simplifying the company, as well as assessing the economic environment in certain parts of the world.”
Another example of increasing complexity, in this case in order to compete globally, would be the number of configurations that John Deere offers their customers on the 8R tractor. In a recent Businessweek article, John Deere claims that “From March 2011 to March 2012, Deere says customers ordered more than 7,800 different configurations of the 8R. On average, each configuration was built only 1.5 times. More than half the 8Rs were built just once, for a single customer. Thus, the global tractor: One size does not fit all, from Kansas to Kazakhstan.”
We offer a few proven ways to reduce complexity through operations strategy:
1. Move production closer to the customer – Companies often underestimate the true cost of long lead times and the benefit of moving production closer to demand. This can pay off in many ways such as improved service levels, less inventory and reduced complexity in the supply chain. In fact, near shoring is a recent trend as companies realize that the incentives to supplying demand to the US from as far as China is decreasing with rising cost of transportation and general market volatility. David Simchi-Levi talks more about the hidden costs of outsourcing here.
2. Rationalize products- increasing the number of products or configurations typically creates a tail of highly variable and low or negative margin products. Analyzing this long tail in order to rationalize the product portfolio and even integrating this process into the product development process is key to maintaining profitability.
3. Analyze the supply chain network – the number of suppliers and facilities in the network are a trade off between many factors including transportation, production and inventory costs. In addition, it is important to make sure there are enough suppliers and facilities to cover various risks and enable the required service levels. Performing this kind of analysis regularly and having models ready in case of changes or emergencies is critical.
4. Ensure the right level of flexibility – as David Simchi-Levi notes in his books Operations Rules, a small level of flexibility can improve performance almost as much as full flexibility. This concept can be used in deciding where to produce, how to train employees and in many other operations decisions.
5. Match customer value to operations strategy – another concept from Professor Simchi-Levi’s books, most companies start out with a reasonable match between their customer value and delivery model and thereby, create success for themselves in the market. However, when they add new channels, products or acquire another company, they may not realize the previous strategy is no longer appropriate. For instance, when Dell added retail they tried to service this new channel with the same supply chain that had worked for the Dell direct model. Click for our Dell Transformation White Paper.
By following these 5 steps, your company can use operations strategy to reduce complexity and avoid some of the mistakes companies have made in the past.
Written by Edith Simchi-Levi, VP of Operations at OPS Rules Management Consultants
Read more: Vertical vs. Horizontal Integration: Which is a Better Operations Strategy?