Tag: complexity
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Self-Service simplifies Product Offerings and increases Margins
Self service is a term we all know, such as pay-at-the-pump gas and self-checkout stations at some grocery stores, and now more obscure things like video game kiosks by GameFly, but the true tidal wave of self-service hasn’t even started, and it’s going to be good for both the consumer and the manufacturer, if done right.
Self Service Grocery Scanner
When you checkout your soda and cereal by swiping products across a scanner at the auto-checkout stations, there isn’t much complexity other than when you get a problem with the scanner reading a smudged bar code or trying to locate the button for ‘snap beans’ when you put those on the scale. The transaction is smooth, quick and you are in control, which is a good feeling as a buyer, you are not being sold, you are buying just what you want, quickly and easily.
But what happens if you try to buy a “configurable product“? In the grocery store, the only thing configurable is the weight of produce, but other than that, the costs and configurations are set in stone and are detected by reading the bar codes. Easy to understand as the buyer and relatively easy to deal with as the seller. Configurable products are those where you have to make many choices before you can order the one product. Products like computers, cars and thousands of others where the buyer has to describe their preferences or choices so the product can be created and delivered. It’s even more complex in a B2B environment than it is in B2C, where the products available and choices are astronomical. Products like Lighting, Valves, Agriculture and Construction Equipment, Lifts, Electrical equipment, cooking equipment and conveyors have more choices and variants than you can imagine and that variety makes it hard to order, build and deliver efficiently.
Usually a large direct sales force is sent out with complex price books (sometimes online in PDF form) to sit with customers and prospects and help them combine choices in hopefully valid ways. The choices a customer have to make are quite extensive, ranging from tens to hundreds of choices. Most of these choices the customer doesn’t care about, but they are required by the manufacturer just so they can build a valid product. Customers care about the few things that matter to them but after that, they will just choose things that “seem to make sense” just to complete the order. Sometimes they don’t even do that, they get so frustrated with 60 more questions about features and options on the product (many of which they don’t understand) that they walk away.
In some cases companies believe that putting in a configurator is the solution to their problem. Configurator’s automate the order process by ensuring that the order is VALID. The engineering and marketing rules that drive what can be built and offered are setup in a configurator such that the user ordering the product is led through valid questions and end up with a build-able product. Now this product may be build-able but it also may be a one-off low-margin brand new SKU that manufacturing hasn’t built before and requires some parts they aren’t carrying at this time. All this for something that was only 2 choices from a very popular configuration. And those 2 differences only happened because the customer was asked 20 more questions after they entered the 5 things they cared about. They chose as best they could, but without any guidance or suggestions, ended up on a new SKU which will ultimately explode into huge numbers of parts and processes to support the new SKU.
Now if the customer only had to enter the 5 things they cared about and the system recommended the combination of other choices such that the customer’s price limit was met and the configuration wasn’t a new SKU and the SKU had a good margin, then it would have been a win-win for everyone. And the whole process could be complete quickly and easily. The customer wouldn’t have to answer any other questions and would feel that same feeling that you do when you swipe your can of soup across the scanner at the market. The manufacturer wins as well because the customer was guided toward an existing configuration so the cost of creating and supporting a new SKU was avoided. It’s happening now with recommendation engines that leverage buying patterns to suggest full configurations based on the few attributes a customer gives it. Just like Amazon can recommend other books you might want to read based on the current “fly fishing” book you are looking at now, suggestion engines can be utilized to provide this convenience for much more complex products.
That’s the self-service tidal wave that’s coming, when all products, not matter how complicated can be ordered by simply asking for the attributes that YOU care about, what your price limit is and then Voila! it’s done. Customers will order more from companies that offer this convenience. Just think about how often you walk into the gas station to pay as opposed to pay at the pump. And if you had two stations to fill up at, one was pay at the pump and the other required you stand in line after pumping the gas, which do you think you would most often go to? Simplification is good for everyone, and profitable too.
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Q&A with Mark Gottfredson, Bain & Company
In today’s post, we talk to Mark Gottfredson about product complexity and customer choice.
Emcien: It’s natural for companies to add products and features to keep customers happy. What are the downfalls?
MG: The challenge of adding complexity is it’s the most natural thing in the world. Marketing comes up with new ideas for products or configurations to get the next bit of market share or a little bit more share of wallet. But most companies aren’t so good at retiring products; they don’t have a similarly robust process for taking things out of the catalog that no longer sell, or sell only small amounts. They don’t do a good job of balancing.
Most decisions we make are based on incremental economics. Each decision makes sense in its own right, but the costs of complexity tend to grow systemically. You can’t tie them to a single product decision. Take tinted windshields, for example, that you can sell as an option for $120 and 40% of customers will buy. Assuming the costs of tinting the windshield including inventory impacts, etc., are $9, it will always make sense to add the option. By itself, it is a rational decision, but when coupled with hundreds of other decisions, we end up with dozens of options like power windows, 13 exterior colors, 10 interior colors, 7 different radio and speaker combinations, etc. Eventually, the vehicle can be made in 10 billion different ways, and you don’t know what the next order will be. Since you can’t effectively forecast anymore, you get frustrated and buy a $50 million forecasting module to try to manage all the complexity. You have difficulty balancing your lines, build inventory and increase supply chain costs. Unfortunately, when most companies finally decide to reduce complexity, they “cut off the tail” of low-running options or SKUs. But they don’t remove the systemic costs, and they don’t see any benefits.
Emcien: Companies often overestimate the value buyers place on having many choices. What are the downsides?
MG: Go to a banking website like Citibank or Bank of America. The site describes itself as a full-service bank that has all the items you could want. There are long lists of products like credit cards with different reward programs, as if to say, “We have a lot of products. Surely there’s one here for you. Good luck finding it.” High complexity is a priori evidence that you don’t know what your customers want.
Emcien: When do fewer choices mean higher sales?
MG: When you understand customers. Dell understands customers well. Dell’s website is Spartan; there are just a few choices. If you choose a desktop, up pops three computers: high, medium and low cost. These three configurations are what your segment – home, professional, government – wants. You can customize each one, but you’ll make it as expensive as the next higher model, so then you switch to that and you’re still buying a standard configuration. Every time I have seen complexity reduction done right, sales have increased.
Emcien: How do overoptimistic sales expectations help to spread complexity?
MG: What happens is sales looks for a gimmick that gets them the next sale. Many manufacturers think whatever’s thrown over the wall from product management and sales must be good to go. And sales thinks more is better! Engineers love to engineer; they’ll give you complexity. Most firms build complexity systematically into operations, and then they build systems to handle the complexity, and that’s high cost.
Companies should think about what business would be like with a zero-complexity baseline – how they would operate if they offered just one product or service. The purpose of zero-based thinking isn’t to eradicate complexity; it’s an exercise to reimagine the business with the optimum amount of complexity.
Mark Gottfredson is a director of Bain & Company’s office in Dallas, Texas, which he founded in 1990. Over the past 26 years, he has advised chief executives and top-level managers in a wide range of industries. Currently, he serves as the Global Head of Bain’s Performance Improvement Practice and is also a leader in the firm’s business strategy, airline, financial services, manufacturing and energy practices.
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Variation is valuable
Advances in interconnection technologies are driving an increasingly demand-driven market. Customers are learning to expect to get what they want, when they want it, how they want it. And they tell you in each and every interaction they have with your company, or not. In a demand-driven world, increasing product variation and complexity in your business model is inevitable. Left untended, your business can become a tangled web of counterproductive business strategies with a dense portfolio of product families comprising thousands, even millions, of variants.
However, make no mistake, variation is valuable. To deny complexity or view the long tail of product variation as a management failure is to deny diversity of the world in which we make our living. Eliminate complexity in your product offer and you will find yourself competing with boatloads of product from China, India or any of a number of low-wage production markets.
The “keep it simple” principle is the root of good management. However, as Oliver Wendell Holmes, Jr. has observed, “I would not give a fig for the simplicity this side of complexity, but I would give my life for the simplicity on the other side of complexity,” it matters which form of simplicity you choose. The wrong simple answer is to try to focus on the 20% of product variants that make up 80% of your revenue, the head of the ubiquitous Pareto distribution, and find ways to minimize or eliminate the so-called unprofitable remaining 80% of product variants that lurk in the tail. Hello commodity, goodbye margins. The right simple answer is to deliver Intelligent Variation based on the voice of the customer shouting through the many interactions they have with you each and every day.
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Guiding salespeople
We have talked a lot about how configurations and complexity affect an organization, but often we forget to look at customer-facing roles. While managing product complexity is important for product teams and production teams, it should also extend to the sales force.
At the end of the day, the number one mission for your sales team is to SELL. And often this push for revenue brings additional complexity back into the organization through new one-off configurations salespeople have promised to customers. Even worse is that these configurations might be one or two small changes away from a very popular and maybe more profitable configuration.
Product configurations can be used to shape not only customer demand but also sales behavior. Using a set of pre-ranked configurations based on metrics such as margin, days to sell or current inventory level, you can offer your sales team a structured plan that incents sales through tiered commissions.
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Help the sales team help the customer
This morning I was talking to the VP of business process improvement for a company that sells industrial machinery. Their products are highly configurable. She told me that every year they have 50% new configurations they have never seen before. The number of choices on their products has grown over time. ”A salesperson can’t know everything about the product,” she said. “Customers want a few choices, and before you know it, the quote has crept into a configuration that’s bad for the customer and bad for us. “
As the VP explained, the biggest opportunity for complexity management is at the point of taking an order. A customer wants to be guided to complete their order. This concept is called Demand Shaping. There are myriad ways a configurable product can be ordered. However, each customer cares only about a few features that are of high importance to him or her.
Extending the product configuration to gain insight
One of the most important components in choice complexity is the product configuration itself, the mixture of product options that give a product its unique signature. Obviously the typical product orderable options are needed to analyze the complexity of a product, but other more abstract options can offer surprising insights into product and customer behaviors.
A typical car configuration has options such as sedan, V6 engine, automatic, blue, cloth, AM/FM/CD, sunroof. But more abstract items can be recorded along with these to offer more insight. Sales type can be recorded to analyze what types of product configurations sell better in promotional sales events as opposed to normal sales transactions. An attribute to record an extended factory warranty option may provide new ideas for packaging options together with additional warranty services that customers are moving towards.
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When the tide goes out, it exposes products that were under water
The number of companies with complexity reduction initiatives has skyrocketed. Unlike five years ago, these are serious initiatives with management sponsorship and timelines.
A good friend of mine, who is a salesperson at a Caterpillar dealership, told me that when times are good he can sell any machine. When the times are bad, the bad stuff just sits around exposed.
Companies have proliferated their product offerings – there are almost infinite variations of everything that they offer. The rationale is that they will make one more sale because of that variation. But as product variations grow, the cost structure grows very fast as well, and the probability of finding that one customer who wants the new variation is quite slim. This results in excess inventory across the supply chain. And when the economic tide goes out, it exposes the cost of those product variations.
The companies with complexity reduction initiatives recognize that during good times and bad, managing product variants makes good business sense. Companies are now starting to implement metrics to measure product complexity because we all know that what gets measured gets managed! Product complexity metrics quickly expose underwater products.
The comment by my friend at Caterpillar reminded me of a trip I took to the Bay of Fundy. It is amazing how much is exposed when the tide really goes out, just like in this economy. The good news is that when the tide turns, the bad product lines it once covered will be significantly fewer, resulting in healthier and more competitive companies.
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Key Concepts To understanding Product Variety
1. Product
A product is something offered for sale to customers. This is deliberately vague, because we want to encompass services as well as tangible products. Most of our discussion and examples involve manufactured products, but our framework also applies to services with many variants like insurance policies and cell phone calling plans.
2. Instance
An instance of a product is a specific unit of the product: the car that Joe buys, which has a specific VIN (Vehicle Identification Number).
3. Configurable Product
A configurable product is a product where the instances are not all identical. No. 2 pencils are not configurable. Computers, cars, tractors, refrigerators and cell phones are configurable.
Optimization is the big win – but getting started is key
When I started studying complexity and realized the huge adverse impact it was having on companies, I was determined to “find it and get rid of it.” There are many places where that formula will lead to big improvements in everything – profits, service, quality and more. More and more companies are discovering how to do this. In some cases it is pretty simple. Just having the courage of their convictions that it will make things better is all that stands in the way of eliminating complexity.
Well, I found that is not completely true – at least not all the time. There are some situations where what seems to be a simple complexity elimination process turns out to be quite a bit more… complex! The real issue is not just complexity reduction. It is “optimization” of complexity. Get rid of the wasteful part and structure processes to use the right level of complexity.
The Root Cause of Product Complexity!
Emcien defines product complexity as simply the ability to predict what the next order coming into the company will be.
Think about it: If you only made product configuration A, you have 100% confidence in knowing that the next order in the door will be configuration A (assuming you get an order in the door at all, not a total given in this economy). But if you have configurations A and B, it’s harder to know and with A, B and C, it’s even harder, and so on. When you have thousands of configurations, predicting the next one is very difficult.
It’s not just the number of configurations that’s important but also how they’re distributed. If I have 10 configurations but 90% of my orders are for config A, then it’s still safe to predict that the next order is config A. But having 10 configs that have each been ordered 10% of the time is extremely complex!
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