Increased operational complexity – where does it come from?
Operational complexity is a result of internal and external factors impacting company’s ways to manage operations to produce products and services. Complexity can stem from the following, for example:
- Product life cycles are becoming shorter and companies need to launch new products at a faster pace. This results in an increasing number of stock keeping units (SKU), as companies don’t usually quit production of their old and potentially unprofitable SKUs at the same pace.
- Customers are starting to demand products that are more customized for their specific needs, which increases the width of the product portfolio.
- Companies have not updated their internal processes to meet the more agile business environment, which can result in confusion, lack of communication, and last minute changes.
- Company sales personnel are accepting too short delivery times, or too late customer changes, as a result of demands to be more agile.
What will increased complexity cause?
Having a broad product portfolio, offering customized products or giving customers the right to make last minute changes might sound like good customer service – which it probably is. However, companies need to understand that this does not come without a price. It can have the following consequences, for example:
- A large product portfolio can make sales forecasting more demanding, as it becomes more difficult to anticipate the demand for each SKU. The likely outcome is an increase in safety stock levels to minimize the risk of missing sales.
- Unstructured ways of working, as a result of not meeting the more agile business environment, will result in last minute changes and confusion, causing e.g. manufacturing inefficiencies in the form of additional setup times, smaller production batches and increased idle time.
- Large product portfolios will most likely cause manufacturing inefficiencies. Production batches will probably be smaller, with more setup times, which will result in more idle time.
- In larger product portfolios the risk of product cannibalization will be higher, leading to smaller volumes per SKU.
- With a larger number of SKUs, the value of the total inventory (raw materials and end products) will most likely increase. Adding the potential increase in safety stock, due to less accurate sales forecasting, will further boost inventory.
- With a larger number of SKUs, the number of different raw materials will most likely increase, resulting in a higher number of suppliers and making supplier management more complex.
- Outbound logistics can be affected, due to more challenging order fulfillment, which can drive up transportation costs.
Since there are a whole variety of sources that can drive operational complexity and its significant impact on company efficiency, companies need to handle this matter carefully. Drastically reducing complexity can be difficult, or even unrealistic – therefore companies need to devote more time and energy to finding ways to manage it!