Complexity management
Encyclopedia
Complexity management is a business methodology that deals with the analysis and optimization of complexity
in enterprises. Effects of complexity pertain to all business process
es along the value chain
and hence complexity management requires a holistic
approach. Effective complexity management is based on four pillars: a sound strategy alignment with the overall company strategy, transparency over all costs and values of complexity, an approach which identifies the optimization benefits, related measures and management of the trade-off
s between the total value chain functions, and finally ensurement of the sustainable infrastructure such as IT tools, incentives and processes.
Complexity management recently emerged at top of the agenda due to new technology enablement, leading to detailed analytics and simulation of complexity optimization measures and their related domino effects within the entire value chain.
Complexity in enterprises is driven by:
, the world's largest companies are on average losing more than $1billion each due to unnecessary complexity. Reducing complexity requires subsequent activities around the four pillars: strategy
, transparency
, total value chain
and sustainability
.
is being evaluated. If complexity has an important role for the success of an enterprise it needs to be embedded in the corporate strategy.
effort. "Good complexity" (value adding) is distinguished from "bad complexity" (costly complexity not paid by the customer). Value-adding/good complexity is to be efficiently managed and possibly increased whereas excessive costly/bad complexity is to be minimized.
) and quantitative (lower cost) benefits are determined. At this time it becomes critical to actively manage the change and trade-offs between the value chain functions (such as R&D
, procurement
, manufacturing
, logistics
, and marketing
& sales
), so that the overall company-wide optimum can be achieved.
, a stringent organization and reengineered
processes.
Complexity
In general usage, complexity tends to be used to characterize something with many parts in intricate arrangement. The study of these complex linkages is the main goal of complex systems theory. In science there are at this time a number of approaches to characterizing complexity, many of which are...
in enterprises. Effects of complexity pertain to all business process
Business process
A business process or business method is a collection of related, structured activities or tasks that produce a specific service or product for a particular customer or customers...
es along the value chain
Value chain
The value chain, is a concept from business management that was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.-Firm Level:...
and hence complexity management requires a holistic
Holism
Holism is the idea that all the properties of a given system cannot be determined or explained by its component parts alone...
approach. Effective complexity management is based on four pillars: a sound strategy alignment with the overall company strategy, transparency over all costs and values of complexity, an approach which identifies the optimization benefits, related measures and management of the trade-off
Trade-off
A trade-off is a situation that involves losing one quality or aspect of something in return for gaining another quality or aspect...
s between the total value chain functions, and finally ensurement of the sustainable infrastructure such as IT tools, incentives and processes.
Complexity management recently emerged at top of the agenda due to new technology enablement, leading to detailed analytics and simulation of complexity optimization measures and their related domino effects within the entire value chain.
Fields of complexity in enterprises
Complexity appears in the following fields:- ProductProduct (business)In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...
portfolio: number and type of products, features and services sold to the customer base (e.g. SKUs) - MarketMarketA market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
s/segmentsMarket segmentMarket segmentation is a concept in economics and marketing. A market segment is a sub-set of a market made up of people or organizations with one or more characteristics that cause them to demand similar product and/or services based on qualities of those products such as price or function...
: number and type of market segments in the respective countries/regions served - CustomerCustomerA customer is usually used to refer to a current or potential buyer or user of the products of an individual or organization, called the supplier, seller, or vendor. This is typically through purchasing or renting goods or services...
portfolio: number and variety of all customers served (including customer accounts and ship-to customers) - MaterialRaw materialA raw material or feedstock is the basic material from which a product is manufactured or made, frequently used with an extended meaning. For example, the term is used to denote material that came from nature and is in an unprocessed or minimally processed state. Latex, iron ore, logs, and crude...
/components: Variety of raw materials, components and services used in value generation - IT systems: Variety and type of systems and applications
- OrganizationOrganizationAn organization is a social group which distributes tasks for a collective goal. The word itself is derived from the Greek word organon, itself derived from the better-known word ergon - as we know `organ` - and it means a compartment for a particular job.There are a variety of legal types of...
: Company organization, structures and governance - ProcessesBusiness processA business process or business method is a collection of related, structured activities or tasks that produce a specific service or product for a particular customer or customers...
: Number and type of processes in the enterprise - ProductionManufacturingManufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
/Supply chainSupply chainA supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to...
: Production plants and network, manufacturing processes, asset base, distribution - TechnologiesTechnologyTechnology is the making, usage, and knowledge of tools, machines, techniques, crafts, systems or methods of organization in order to solve a problem or perform a specific function. It can also refer to the collection of such tools, machinery, and procedures. The word technology comes ;...
: R&D platforms and project portfolio and product technologies involved
Complexity in enterprises is driven by:
- Market volatility: changing market conditions like raw material supply and sales volumes drive business process complexity
- Fragmented customer demands drive product portfolio and feature complexity
- GlobalizationGlobalizationGlobalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...
drives complexity of served markets and company locations - Mergers & acquisitions drive complexity in all fields
- Silo-oriented cultures drive complexity in organization, IT systems and business processes
- Increasing customer pressure drives complexity in product portfolio and features
Approach
Constant complexity management can result in a significant profitability increase of an enterprise. According to The Global Simplicity IndexThe Global Simplicity Index
The Global Simplicity Index 2011 is the first ever study to calculate the cost of complexity in the world's largest organisations. The research was conducted jointly by management consultancy, Simplicity, and Warwick Business School...
, the world's largest companies are on average losing more than $1billion each due to unnecessary complexity. Reducing complexity requires subsequent activities around the four pillars: strategy
Strategy
Strategy, a word of military origin, refers to a plan of action designed to achieve a particular goal. In military usage strategy is distinct from tactics, which are concerned with the conduct of an engagement, while strategy is concerned with how different engagements are linked...
, transparency
Corporate transparency
Corporate transparency is set of information, privacy, and business policies to improve corporate decisionmaking and operations openness to employees, stakeholders, shareholders and the general public. Standard & Poor's has included a definition of corporate transparency in its aimed at analysis...
, total value chain
Value chain
The value chain, is a concept from business management that was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.-Firm Level:...
and sustainability
Sustainability
Sustainability is the capacity to endure. For humans, sustainability is the long-term maintenance of well being, which has environmental, economic, and social dimensions, and encompasses the concept of union, an interdependent relationship and mutual responsible position with all living and non...
.
Strategy
The relevance of complexity for the success of a given business modelBusiness model
A business model describes the rationale of how an organization creates, delivers, and captures value...
is being evaluated. If complexity has an important role for the success of an enterprise it needs to be embedded in the corporate strategy.
Transparency
Fact based transparency over the costs of complexity as well as its value is created along the entire value chain. The structure of complexity is analyzed and visualized by using tools such as variant trees or complexity funnels. Quantitative transparency regarding true contribution is established by a pragmatic activity-based costingActivity-based costing
Activity-based costing is a special costing model that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each...
effort. "Good complexity" (value adding) is distinguished from "bad complexity" (costly complexity not paid by the customer). Value-adding/good complexity is to be efficiently managed and possibly increased whereas excessive costly/bad complexity is to be minimized.
Total value chain
Based on the defined strategy and the achieved transparency, the optimal complexity is identified for each of the fields within the enterprise. Measures to optimize complexity into the target status are defined and related qualitative (e.g. improved time to marketTime to market
In commerce, time to market is the length of time it takes from a product being conceived until its being available for sale. TTM is important in industries where products are outmoded quickly...
) and quantitative (lower cost) benefits are determined. At this time it becomes critical to actively manage the change and trade-offs between the value chain functions (such as R&D
Research and development
The phrase research and development , according to the Organization for Economic Co-operation and Development, refers to "creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of...
, procurement
Procurement
Procurement is the acquisition of goods or services. It is favourable that the goods/services are appropriate and that they are procured at the best possible cost to meet the needs of the purchaser in terms of quality and quantity, time, and location...
, manufacturing
Manufacturing
Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
, logistics
Logistics
Logistics is the management of the flow of goods between the point of origin and the point of destination in order to meet the requirements of customers or corporations. Logistics involves the integration of information, transportation, inventory, warehousing, material handling, and packaging, and...
, and marketing
Marketing
Marketing is the process used to determine what products or services may be of interest to customers, and the strategy to use in sales, communications and business development. It generates the strategy that underlies sales techniques, business communication, and business developments...
& sales
Sales
A sale is the act of selling a product or service in return for money or other compensation. It is an act of completion of a commercial activity....
), so that the overall company-wide optimum can be achieved.
Sustainability
To make the achieved advantages and the overall optimum sustainable, an appropriate infrastructure for complexity management needs to be established. This infrastructure comprises IT systems and applications (e.g. optimized cost accounting and reporting), rules, KPIs, incentive schemesIncentive program
An incentive program is a formal scheme used to promote or encourage specific actions or behavior by a specific group of people during a defined period of time. Incentive programs are particularly used in business management to motivate employees, and in sales to attract and retain customers...
, a stringent organization and reengineered
Business process reengineering
Business process re-engineering is the analysis and design of workflows and processes within an organization.According to Davenport a business process is a set of logically related tasks performed to achieve a defined business outcome....
processes.
External links
- mycomplexity.com - Complexity Management Self-Assessment Tool