Earlier this year, Warwick Business School
and consulting firm Simplicity
published the Global Simplicity Index (GSI). For the first time, it quantified the true financial impact of complexity on company profits. It revealed that, on average, complexity is costing businesses over 10 per cent of profits, equivalent to US$237 billion of earnings before interest, tax, depreciation and amortisation for the Forbes top 200 firms.
This complexity tends to manifest itself in overly complicated business processes and lengthy decision-making, leaving firms unable to scale a business quickly or deal with new products or changes in market demands. Complexity derived from the purchasing process is a major contributor.
The study showed that firms gain performance as they add complexity through additional products and processes, but they quickly reach a tipping point, after which additional complexity starts to undermine profitability.
Complicated procurement processes – a driver of complexity in big firms – derive from three factors. First, the number of suppliers in the supply chain and the diversity of these suppliers in terms of location, size, experience and contracting mechanisms. Second, the greater the number of different components or materials that a firm procures, the higher the level of resulting complexity. Finally, there’s the hidden complexity of the procurement process itself, which increases costs for suppliers and purchasers.
To simplify the procurement process, you need to understand where complexity is helping performance and where it is reducing profits, then action plans can be developed to simplify the process. One option is to benchmark the complexity of the procurement processes against your competitors and ‘best in class’ peers.
Then, management behaviours that cause complexity need to be addressed. Managers need to see how their procurement decisions create complexity and then be trained on how to simplify their decisions.
Finally, managers should avoid new sources of complexity by implementing an evaluation process to test the impact of changes to the procurement process.
☛ Register for the Global Simplicity Index at www.simplicitypartnership.com
*Melvin Jay, founder of Simplicity Partnership, also contributed to this article.