Lean product management: High-tech manufacturers boost profits by reducing product complexity  

High-tech manufacturers are discovering the benefits of reducing product complexity. Those companies that are among the first wave to uncover and unleash sustained complexity-management programs will dominate the competition through increased ability to make innovative, desirable products—and higher profit margins.

By Joachim Ebert, Michael Baum--A.T. Kearney January 11, 2008

The combination of lightning-swift product development cycles and intense price competition has left electronics and computer hardware manufacturers looking for new approaches to improve their cost positions. Increasingly, product complexity-reduction efforts are being used as a means to drive down costs and increase efficiency.

While companies in a number of industries have achieved significant cost and quality improvements through complexity-reduction programs, most of these methodologies have failed to work for high-tech companies.
Product complexity manifests itself when a company offers multiple variations of a product, and/or a large number of options and customizable features. Product variation need not be bad in and of itself, as it offers choices to customers,

High-tech manufacturers can achieve significant benefits by adopting a sustainable focus on product-complexity management that goes beyond isolated complexity-reduction efforts.

Complexity challenges in the high-tech industry
A set of circumstances fairly unique to the high-tech industry contributes to its high levels of product complexity.
First, the short life cycles of most high-tech products—which are frequently measured in months rather than years—means that traditional complexity-reduction methodologies can neither take place quickly enough nor be sustained long enough to make a difference.

Second, most high-tech companies fail to link complexity and innovation, as the rapid pace of product development cycles is used to justify excessive complexity.

Third, component commoditization has created a situation in which components are increasingly being sourced on a “spot market,” foregoing the many potential benefits to be gleaned from longer-term supplier relationships. The combination of frequent component supplier changes and the need to qualify components from a variety of vendors increases product complexity and adds to both product development and material costs.

Dynamic decision-making
To overcome the limitations of one-time product complexity-reduction efforts and develop sustainable cost benefits, high-tech companies can adopt complexity-management capabilities like dynamic decision-making tools and cross-functional product development approaches.

Dynamic decision-making tools are used to assess the trade-offs posed by new product variants, components, or build combinations. They quantify complexity in terms of its costs and potential revenue impact throughout the product life cycle. These tools can range from simple, static frameworks based on industry benchmarks to sophisticated cost-benefit models powered by underlying cost-curve assumptions. While the former type is relatively easy to implement, it can lead to suboptimal decisions when based on arbitrary numeric caps of aspects such as components. Cost-benefit modeling tends to be more precise in its output, but highly complex to maintain. Also, these more advanced tools

Successful companies also deploy processes to align cross-organizational decision-making during product development. For instance, engineers can select specific components from a virtual component shelf when designing or improving a product to gain a sense of how well a certain combination of components compares against other options.

Linking complexity reduction and innovation
Leading companies tie complexity management and innovation together in a symbiotic manner: An improved approach to innovation can reduce component complexity and costs, while a robust complexity-reduction and management effort can increase a company’s ability to innovate.

For example, several years ago, Apple replaced the hard drive-based iPod Mini with the Nano in its iPod line of personal audio devices. While consumers were impressed that the new device was even smaller than its predecessor, the true breakthrough that enabled a significant reduction in size was the use of flash memory.
Flash memory-based drives use fewer components than disc-based drives, and they don’teen 2 percent and 4 percent—half the rate of its predecessor. Thus the Nano is lighter and faster, as well as more reliable, durable and energy efficient—i.e., more listening time between recharges—than the device it replaced.

Complexity managementin. That realization caused the manufacturer to initiate a complexity-reduction effort that cut the number of products offered across Europe by 60 percent. To sustain these efforts, the company also introduced decision rules and procedures for development of its low- and high-end products to keep complexity levels low and component commonality high. By focusing on sustained complexity management, this manufacturer has been able to accelerate product innovation for its high-volume units in local markets, and build stronger innovation relationships with local suppliers.

Move away from “spot markets”
The link between innovation and product complexity calls for a new collaboration model between the manufacturer and component supplier. This model runs counter to the current trend of purchasing components on a “spot market,” which potentially increases product complexity as previously outlined.

High-tech companies are moving away from spot-market relationships in crucial areas by applying a more strategic approach to supplier management. They are institutionalizing rigorous programs to segment, select, and evaluate suppliers. Depending on the component and technological advantage, they evaluate suppliers along criteria such as quality, logistics, technology, and innovation acumen. They are introducing incentive programs to encourage suppliers to develop component improvements that result in joint savings.

Again, Apple offers an example of the benefits of this approach. Apple made a strategic decision to work closely with flash-drive supplier Samsung . Flash drives traditionallyte that Apple has achieved as much as 40 percent in savings on flash memory through this relationship, thus maintaining its enviable per-unit profit margin of 50 percent before marketing and distribution.)

Apple and Samsung continue to cooperate in additional component complexity-reduction efforts, bundling functionality that had previously required several chips into one. The two companies

These new manufacturer-supplier relationships also call for a cross-functional product development and collaboration approach. The interaction points between the high-tech manufacturer and its suppliers should be defined both vertically and horizontally to include the “right” people across business units, including category teams, R&D/engineering, and partnership management. Joint teams define the key innovation and improvement areas and develop a joint improvement plan. The collaborative model also requires a concise, results-oriented incentive program with which both the participating functions and the innovation partner can measure and reward market- and process-focused innovation.

The high-tech industry is beginning to realize the substantial benefits of sustained complexity management. Companies like Apple, Nokia , Motorola , and Hewlett-Packard are heading down this path and demonstrating that complexity management can free up resources and create new forms of partnerships and integrated value chains with suppliers. Those companies that are among the first wave to uncover and unleash sustained complexity-management programs will dominate the competition through an increased ability to offer innovative, desirable products—and improved profitability.

A.T. Kearney VP and and partner. He heads up A.T. Kearney’s North American Operations practice and is based in the Chicago office. He can be reached at joachim.ebert@atkearney.com . Michael Baum is a principal for A.T. Kearney based in San Francisco. He can be reached at michael.baum@atkearney.com .

Related Resources