New tools that help pinpoint complexity’s cost—and where it comes from—can help companies make better tradeoffs in managing product portfolios.
For many industrial companies, product complexity is a way of life. In the context of global markets, customers’ need for tailored products—whether to comply with variations in environmental, safety, and health regulations or simply to meet different market preferences—makes a diverse product portfolio a strategic necessity.
But the proliferation of niche products, with an endless creation of new variants, often results in lower-than-expected profitability. In response, many companies embark on extensive cost-reduction programs, often centering on design-to-cost (DTC) or design-to-value (DTV) principles. Yet these methodologies, as valuable as they may be in reducing the cost of materials and components, cannot reveal the entire cost of increased complexity across a full product range.
This limitation means few companies know what complexity is truly costing them. That has two effects. First, it can lead executives to believe that the net benefit of their DTC and DTV initiatives is so small that they are not worth the effort. And second, it can lead them to misdiagnose the true source of the cost pressures they seek to relieve.
But a new approach to understanding cost complexity allows industrial manufacturers to understand what complexity is costing them, and where it comes from. A white-goods manufacturer, for example, developed a detailed model that allows it to size complexity along the entire value chain as part of ongoing project reviews. At a machinery company, all new-product and product-improvement initiatives now include an explicit “cost of complexity penalty.” And an automotive player has used this technique to reduce costs by three percent for one of its components—a significant reduction in a mature sector.
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