This presentation was delivered by Andrei Perumal, co-author of Waging War on Complexity Costs and Managing Partner of Wilson Perumal & Company, at the Chief Strategy Officer Conference in London on April 25, 2013.

1. Wilson Perumal & Company, Inc.
London CSO Conference
April 25, 2013

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
Volume
Cost
Pre-Industrial Age
“Individual productivity”
Dominated by
variable costs
Volume
Industrial Age
“Economies of Scale”
Dominated by
fixed costs
Complexity
Post-Industrial Age
“Complexity”
Dominated by
complexity costs

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Traditional UK
Grocery Retail
NEW CHANNELS
NEW GEOGRAPHIES
NEW FORMATS
NEW RANGE

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In many companies, 20-30% of products generate
more than 300% of profits!
0% 25% 50% 75% 100%
100%
300%
0%
Productsthat
create profit
Productsthat
“lose” profit
% Total
Profits
% Total Products

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.
And has
implication
on your:
(Examples)
Business Process
Redesign
Supply Chain
Strategy & Mgmt
Process
PerformanceProduct
Portfolio Mgmt
Organisational
Effectiveness
Operating
Model Design
IT Strategy
Management
Systems
Network
Optimization
Asset
Utilization
Risk Mgmt
Data Protection
& Mgmt
Transaction
Speed
Channel Strategy
Margin
Improvement
Customer
Experience
5
CEO’s identified complexity as the primary
challenge they face. Nearly 80% expect
high levels of complexity over the next five
years. Yet far fewer felt prepared.
Complexity
affects your:
COMPLEXITY
Cost
Structure
Execution
& Growth
Business &
Operational Risk
“Complexity dramatically
increases cost and risk of failure.
It is like a cancer that eats away
at efficiency and profitability.
– Andy Beal
Chairman & CEO, Beal Bank

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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
“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.”
— Eamon Malone, VP, Motorola
• 86% reduction in portfolio!
• 57% increase in cust. satisfaction!
• 13% pt increase in op. earnings!
• 3x growth in sales!

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.
-8%
12%
8%
4%
0%
Jul11
-4%
-12%
-16%
Apr 10Jan 10Oct09Jul09Apr 09Jan 09Oct08 Jul10 Oct10 Jan 11 Apr 11
+7%
+2%
Competitors’ sales
Macy’ssame-storesales
Same Store Sales
(% changefrom12 months prior)
Macy’s
beginsto
break away
7
“The retail landscape has deteriorated, not strengthened.
But our outlook is going the other way.”
--Terry Lundgren, CEO, Macy’s
Impact of My Macy’s initiative:

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• Smaller, coordinating role
• National initiatives on
“opt-in” basis
• Less ability to leverage
national scale
National level
• Less resources at local level
• Not empowered to
respond to local tastes and
preferences
Local level
• Buying, planning
centralized at regional
level (~100 stores)
• Command & control
relationship over stores
• Operate largely
independently from
national level and other
regions
Regional level
• Buying pulled up to
national level, with
aggregate local input
• Greater strength with
suppliers, leading to
greater ability to tailor
offerings
National level
• Inventory planning
pushed down to local
level (~ 10 stores)
• More responsive/
customized stores with
greater employee
ownership
Local level
Previously
regional functions
stretched up to
national and
down to local
level…
…requiring
greater, richer
and asymmetrical
information flow
between local and
national levels
National
Local
Regional
National
Local
PREVIOUS REGIONAL STRUCTURE HYBRID LOCAL-NATIONAL STRUCTURE
Simpleoperating structure but less
responsive to local preferences and
little national scale
Restructured operating model with richer
information flow allows stronger national scale
and greater responsiveness to local customers
8

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“The greatest challenge to any thinker
is stating the problem in a way that
will allow a solution.”
— Bertrand Russell

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VA
NVA
10
Organisation
• Complexity resides on
the axis of the cube
• But complexity costs
reside on the faces of
and within the cube

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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

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Geometric
complexity
costs
Traditional
linear costs
Cumulative
cost
0
0 Cost Driver

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0
0
Total revenue
Total
profit
Complexity
costs
Linear
costs
• Complexity costs grow
to the point that they
overtake revenue
growth and destroy
profitability
• Complexity costs are
often the single
biggest determinant of
cost competitiveness!

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“We can support only 25 to 30 flavors at a time.”
--Paul Kruse, CEO, Blue Bell
• #3 ice cream company in the US
nationally (after Dreyer’s and
Breyers)
• #1 in the markets in which it
competes
• Most profitable ice cream company

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1. Seek understanding over precision
2. Focus on the interactions
3. Take concurrent actions to unlock benefits
4. Avoid false choices (re-imagine the business
to achieve the best of both worlds)

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“By Volume” “By item”
Unit
cost:
Vol.
Total
cost:
Vol.
∝ 𝑣𝑜𝑙.
Vol.
Vol.
∝
1
𝑣𝑜𝑙.
“By SQRT vol.”
Vol.
Vol.
∝
1
𝑣𝑜𝑙.
∝ 𝑣𝑜𝑙.

17. © Wilson Perumal & Company, Inc. 17
Product Unit sales
Volume
ratio
Inventory
ratio
Inventory
holding
cost
Inventory
per unit
ratio
Unit
holding
cost
Product A 16,000 16x 4x $4000 1x $0.25
Product B 1,000 1x 1x $1000 4x $1.00
• Two products: A & B
• 17K total units sold
• $5000 inventory holding costs
• Typical allocation:
$0.29/unit
Small-volume products are almost always
under costed
𝐈𝐧𝐯𝐞𝐧𝐭𝐨𝐫𝐲
𝐔𝐧𝐢𝐭
∝
𝟏
𝐯𝐨𝐥.
All else being equal:
𝐈𝐧𝐯𝐞𝐧𝐭𝐨𝐫𝐲 ∝ 𝐯𝐨𝐥.

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
Volume
Cost
Variable costs
Volume
Economies of Scale
Complexity
Complexity costs
• Under-costs small-volume items and over-costs large ones
• Overestimates economies of scale (i.e., potential for fixed
cost leverage)

19. © Wilson Perumal & Company, Inc. 19
“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
• 1700 products
• All nine breweries
• Down to operating profit
• In just Six Weeks!

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1. How is complexity impacting your business? How
are you currently approaching it?
2. What level of complexity can your current
operating model support? Are you past that level?
3. How would knowing true costs and profitability
impact your business decisions and performance?
4. Is your growth strategy creating scale or creating
complexity?
5. How might you re-imagine your business?

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
“Anybody can make things bigger, more
complex… it takes a touch of genius—
and a lot of courage—to move in the
opposite direction.”
— Albert Einstein

22. Wilson Perumal & Company, Inc.