Complexity Management: Improve Profitability & Reduce Risk – Forbes

From my experience the majority of people fall into two “camps”. The one’s who claim they know about complexity and already “deal with it” or those who admit to knowing nothing/very little about it and do nothing. What both tend to have in common is that neither can define the problem, explain current/possible solutions.

NONE are able to quantify the impact of the problem upon their profitability or risk profile.

There is very little understanding that unforeseen and unforeseeable are not the same thing.

Most worrying, is that the common sense approach, of managing risk (and complexity) as close to source as possible, is not understood! Conventional Risk Management, even ERM, fails to address complexity and risk carriers, such as banks and insurers prefer the “comfort” of familiar (if flawed) techniques and modelling to a rigorously-tested, scientific, approach that brings a new depth of insight…because it challenges the status quo.

…I am not so sure that their shareholders and stakeholders will be so comfortable when the sting in the tail takes its toll.

As in solving any problem, two steps are necessary:

1) Understand and define the problem;

2) Solve the problem.

Many companies agree complexity is a problem and jump directly to step 2. As a result, they may solve a little of the problem, but create new problems (Walmart cut SKUs too radically and lost sales, etc.). Most companies fail to solve the problem at its source—in the business plan/model and with the senior executives–CEO, COO, President, General Managers, Managing Directors, etc.

The supply chain function catches the brunt of the complexity, so complexity is recognized there first. Unfortunately, trying to fix complexity problems at the supply chain level is like trying to “stomp out a firebug’s fires,” What needs to be done is to “find out who is setting those fires and take away their matches” —or like cleaning up in the middle of a circus parade; someone must still clean up the remaining droppings from the elephants.

The place to fix complexity is at its source—in the C-suite, in Sales, Marketing and New Product Development. This is where complexity originates. This is where it must be controlled first. Then it must be managed, like any other aspect of a business. Once the C-suite understands how the addition of new products, new customers, new markets, etc., drives complexity, then the supply chain management must also do its job. They must also resist the urge to proliferate suppliers and distribution sites. They must learn to live with the reality that “forecasts will be wrong, and customer demands will be unreasonable.” There are ways to manage how and where complexity is created and spread.

via Improve Profitability & Reduce Risk — Thrive in a Recession – Forbes.

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