The price of complexity

Increasing profitability in the investment goods field by means of optimized product portfolios

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Stern Stewart & CO. GmbH
Salvatorplatz 4
80333 Monaco

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MANAGEMENT SUMMARY

In searching for the hidden levers for profitability, one issue comes to the fore that continues to have a negative impact on the earnings situation of many companies, namely product and variant-driven complexity – and the issue still exists even after several performance-enhancing programs have been implemented.
Common approaches, such as cutting back on product features (decontenting), technical simplification, or design-to-cost approaches for the cost-based design and construction of products address this problem from the production and development perspective. They seek to reduce the number of variants, to manufacture more cost-efficiently, or to simply cut out the suspected loss-generating elements altogether. However, because the complexity costs cannot be identified directly from the profit and loss statement, indirect costs are itemized in order to provide clarity in terms of profitability. Yet any lack of clarity resulting from this itemization is intensified on the market side, because the avoidance behavior of customers is generally only recorded statically. It is only when the entire product mix together with the customer avoidance behavior is taken into account that reduction of the product-driven and variant-driven complexity becomes possible. Three steps are required:

1. Identification of the complexity drivers and assessment of the variant situation in all product categories with direct costs and complexity costs

2. Simulation of customer behavior subsequent to a planned change in the range of variants

3. Modeling of optimal product portfolios on the basis of customer migration behavior
The achievable improvements affect many levels and deliver concrete results such as:

Companies from the investment goods field were able to achieve an increase in the EBIT margin in the upper single-digit percentage range, thanks to consistent implementation of the outlined steps.


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