Growing your business can easily add complexity and thus erode the profits you expected from growth. The key is in understanding the nature of complexity and how to simplify your business to grow in a profitable way.

1. Wilson Perumal & Company, Inc.
San Francisco CSO Conference
May 22, 2014
Simplify to Grow
Building
Scale, Speed, & profitability
in a Complex World

2. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 2
• Passionate about complexity
• Across strategy and operations
• We help our clients compete in a complex world
“…an ambitious book packed with
insight and fresh thinking. Separating
good from bad complexity is a critical
task facing companies today, and the
authors provide a compelling
roadmap”
– Michael B. McCallister
President & CEO, Humana Inc.

3. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 3
Cost &
Operations
Growth &
Innovation
Business
& Operational
Risk
Simplify to grow:
 Simpler for customers
 Easier for sales force
 Improved KPIs
 Scale vs.
fragmentation
 Greater margins to
fuel growth
• Hidden costs
• Exponential growth
• Cross subsidization
• Most products are
unprofitable
Cost
0
0 Complexity
• Grows exponentially
with complexity
• Cannot anticipate all
points of failure

4. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc.
Complexity
& Growth
4
Ways to
Simplify
Overcoming
Barriers
“Simplicity does not precede complexity,
but follows it.”
--Alan Perlis, Mathematician and Computer Scientist

5. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 5
Volume
Cost
Pre-Industrial Age
Individual skill/
productivity
Volume
Industrial Age
Fixed costs
leverage
Complexity
Post-Industrial Age
Complexity!

6. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 6
• Customers like variety
- But good vs. bad complexity
- Complexity frontier
• The impact on growth
- Indirect effects (service levels,
focus, sales force)
- Direct effects (over-choice)
• Opportunity: simplify to grow
- & improve profitability

7. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 7
Supply pooling
(reduced COV)
Reduced RM
safety stock levels
Raw material
consolidation
Product
consolidation /
elimination
Fewer RM stock
outs
Supplier
consolidation
Greater supplier
leverage / scale
Greater volume
per supplier
Reduce
changeovers
Redeploy
changeovers
Smaller batches
for remaining
products
Demand pooling
(reduced COV)
Reduced FG safety
stock levels
Greater sales
force focus
More coherent
product line
Fewer orders
(greater vol/prod)
Increased
buyer/planner
focus
Improved PLM
focus
Reduced cust.
confusion
Reduced cust.
service calls
Product lead times
Supplier service levels
Lead time
Product availability
Sales volume
Customer service
RM inventory
Materials costs
Direct labor savings
Startup scrap
FG inventory
Avg. sales margin
Cust. service costFewer products/
segments
Complexity
reduction
Inside the
Plant
Complexity reduction
Growth impact
Cost impact
Example
typical
impacts:

8. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 8
Select Metrics Y1 Y2 Y3
Portfolio (#) 3500 2079 499
New products (#) 0 8 14
On-time delivery 70% 78% 90%
Cust. Satisfaction 27% 55% 90%
Mfg. productivity 1x 2.2x 3.1x
Operating Earnings -6% 3% 7%
Sales 1x 1.6x 3.4x
• 86% reduction in portfolio!
• 63 percentage point increase
in customer satisfaction!
• 13 percentage point increase
in operating earnings!
• 3x growth in sales!
“Complexity kills innovation. Complexity can drive down quality,
increase costs and lengthen lead times. If that’s the state you’re
in, you have poor execution—and you can’t innovate your way
out of poor execution.”

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Organization
Variety in the
products and
services you offer
The number of
processes, steps,
handoffs, etc.
Number of facilities, assets,
functional entities, organizational
units, systems, policies, etc.
Duplication
Rework
Work-arounds
Disarray in the elements of the
firm that execute your processes
and delivery your products
Bloated portfolio
Customer confusion
Strained processes

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VA
NVA
Organization
• Complexity resides on
the axis of the cube
• But complexity costs
reside on the faces of
and within the cube
Complexity costs are much larger than appear
by looking at any one dimension alone

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“Complexity… is a ‘cube’ function. If I
have 10 applications, I may be able to
manage them all. If I have 100
applications, managing them is not
simply 10 times the complexity—it’s
more like 30 times the complexity.”
Lee Coulter, former SVP, Kraft Global
Shared Services Group
Cost
0
0 Complexity
# Items # Links
1 0
2 1
3 3
4 6
5 10
10 45
...

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0% 25% 50% 75% 100%
100%
300%
0%
Productsthat
create profit
Productsthat
“lose” profit
% Total
Profits
% Total Products

13. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 13
1. Optimize your portfolio
2. Unburden your sales force
3. Free up your processes for performance
4. Restructure for speed and customer-centricity

14. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 14
Better an 80% view across
6 facets than a 100% view
of just 1 facet
Value
Time
Legacybusiness
performance
Step change
improvement in
coststructure
New trajectory
from clarity, focus
& alignment
1
2
3
• Reduce costs
• Rebalance mix
• Return business to better
trajectory
jdagu
Strategy
Breakpoints
Integration
framework

15. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 15
“No one in sales can possibly support all our products.”
- Managing Director, French multinational Business Unit Leader
Full product range
Individual sales person’s
complexity threshold
Subset of portfolio
that sales person
can represent

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Combine simplification with process improvement for step-change
improvement in key “breakpoint” KPIs, such as lead time
Value-Addactivity
Non-Value-Addactivity
Non-value-addnon-activity
Complexity is the
#1 driver of process
performance

17. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 17
• My Macy’s initiative:
‒ Eliminated regional operating
companies
‒ Pushed inventory planning and
merchandizing down to more local level
‒ Consolidated buying to national level
‒ Eliminated 1600 positions, redeployed
500 of them (where they matter most)
• $500 million net annual savings
• Launched sustained period of industry
beating same store sales growth
• Despite harsh retail environment,
Macy’s just enjoyed their best year ever!
National
Local
Regional
National
Local
BEFORE AFTER

18. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 18
• Cannot quantify the
business case
• Fear of revenue loss
• A functional perspective
• Reluctance to let go

19. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 19
20%
15%
25%
33%
-17%
17%
11%
27%
20%
-37%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Segment 1 Segment 2 Segment 3 Segment 4 Segment 5
Standard
Complx-adj
High-complexity [segment 4] was actually less profitable than
lower-complexity [segment 3]
OP by Product Segment
EXAMPLE:

20. © Wilson Perumal & Company, Inc. 20
“This was a quick and painless way to understand our true
product profitability, and it challenges how we think about
our business. I am extremely pleased with the results.”
—Fernando Palacios
EVP and Chief Integrated Supply Chain Officer
MillerCoors LLC
• Square-Root Costing
• 1700 products
• All nine breweries
• Down to operating profit
• In just Six Weeks!

21. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 21
$0
$50,000
$100,000
$150,000
$200,000
$250,000
0 500 1000 1500 2000
Gross Margin
SKUs
Red = SKU selected for discontinue
The “Tail”
• Did not just chop off the tail
• Smart decisions around “incremental” sales, margin
• Transformed the profitability and trajectory of the business
while remaining revenue neutral during the process
Substitutability: a client example
 The opposite of
cannibalization
 Simplify, while
minimizing revenue loss
 Eliminate products that
do not generate
incremental revenue
Incremental
Revenue = Revenue * ( 1 – )Revenue
Substitutability

22. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 22
Traditional
approach
Concurrent
approach
SKU RATIONALIZATION
FOOTPRINT CONSOLIDATION
SUPPLY CHAIN REDESIGN
INTEGRATED
VIEW
COORDINATED
ACTIONS FOR
DEEPER
OPPORTUNITY
FOOTPRINT
SUPPLY CHAIN
SKU RANGE
SKU RATIONALIZATION
SUPPLY CHAIN REDESIGN
FOOTPRINT CONSOLIDATION

23. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 23
BEFORE
• Sell anything anywhere
and we’ll get it there
• Many products
• Each plant makes
minority of products
• Many product
movements
• Large and costly
distribution network
AFTER
$40M
benefit
Reduce/eliminate
3-touch moves
Make greater
portion of product
range at each
plant
Consolidate
product offering

24. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 24
Revenue
(diminishing returns)
Complexity costs
(geometric growth)
Level of complexity
you can support
Complexity
$
Complexity

25. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 25
“We can support only 25 to 30 flavors at a time.”
--Paul Kruse, CEO, Blue Bell
• #3 ice cream company in the US
nationally
• #1 in the markets in which it
competes
• Most profitable ice cream company

26. ©W il so n Per uma l & C o mpa ny , Inc .©W il so n Per uma l & C o mpa ny , Inc .© Wilson Perumal & Company, Inc. 26
Benefits:
 Simpler for customers
 Easier for sales force
 Improved KPIs
 Scale vs. fragmentation
 Margins to fuel growth
 Assess complexity costs
 Leverage revenue
substitutability
 Take a “joined up”
approach
 Know your complexity
threshold
1. Optimize your portfolio
2. Unburden the sales force
3. Free up your processes to
hit service-level
breakpoints
4. Restructure for speed &
customer-centricity
Complexity
& Growth
Ways to
Simplify
Overcoming
Barriers

27. Wilson Perumal & Company, Inc.