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By Frans BrikÈ (D¸sseldorf)

Lean manufacturing systems can reduce the impact of complexity on costs but cannot remove it entirely. Studies show that the cost of complexity in a modern assembly plant reaches 10 percent to 25 percent of total assembly costs. A typical engine plant's complexity cost level can range from15 percent to 30 percent, while engine dress-up operations (e.g., adding alternators, water pump, hoses) can reach 50 percent. Consequently, even in today's lean manufacturing environment, successfully managing product complexity constitutes an important source of competitive advantage. 

Complexity Parameters

Technical complexity is defined for each of the 50 to 70 systems-engine systems, doors, suspensions-that constitute a modern car. Technical complexity is expressed in terms of system variants, which are structured using a variant tree. Figure 3 illustrates how 120 front bumper variants for a single car line are defined by five complexity drivers. System variants are the main cause of complexity cost in development, component manufacturing, assembly and purchasing. Not all product complexity is bad. For this reason, it is important to distinguish between diversity and proliferation. Diversity is the product complexity that delivers true value to the customer and results in increased profit for the company. Proliferation is added complexity that has no recognizable benefit to the customer, or results in additional costs above what the customer is willing to pay. Deproliferation, therefore, means reducing product complexity to the appropriate diversity level. 

Determining The Cost of Complexity

Conventional product costing systems do not accurately reveal the impact of complexity because costs are not allocated in an activity-based way to specific variants. Take front suspension variants (see figure 4). Conventional costing systems result in an on-cost of only 20 percent for a low running variant (1.000 units p.a.) compared to a high running variant (100.000 units p.a.). Resource-based cost allocation results in a cost reduction of 30 percent for the high runner and a cost increase of 700 percent for the low runner. As long as the low running variant can be sold at a profit, it belongs to the diversity range of the product offer. Even if cost cannot be transferred to the customer, there can be valid reasons not to deproliferate-namely brand- or image-strategy. However, it is important to realize that the low runner product is being sold substantially below cost and to know the size of the "investment" that is being made in the name of strategy. 

The Complexity Cost Model (ccm)

Called the complexity cost model (CCM), it has five modules covering the five main functional areas of the cost chain (product development, component manufacturing, vehicle assembly, purchasing and finished vehicle distribution.1) 

CCM is made up of a database of the complexity cost for each product system and type of variant of that product system. Using CCM, we can determine the cost impact of increases or decreases of product complexity in minutes rather than months. With such a quick response time, proactive variant management can take place in "real-time" throughout the development process. 

The database constitutes the results of investigations into the drivers of complexity cost in the five main functional areas of the cost chain. The following describes how CCM is tailored. Product development module By analyzing past development projects (over a few years) and identifying individual variant types that result, a picture can be drawn of the proportion of the total R&D budget incurred due to product complexity. 

In engine design, for example, an engine development project is undertaken to provide a base gasoline engine with displacements between 1.2 and 1.6 liters from which turbocharged versions, or versions with different fuel injection systems are then developed. The approach sets the initial base engine development cost to an index of 100 and determines (with R&D managers) the relative on-cost of the subsequent development work. 

By looking at a number of projects over a period of a few years, we gain sufficient accuracy to make reliable forecasts of the complexity cost of future projects. In fact, clients are usually surprised at the consistency of the results. While management may already be using such rules of thumb as "Turbocharged variants cost an additional 5 percent of the initial base engine development cost," the model delivers what is unknown-the complexity costs of the many hundreds of lower level variants. Because most of these variants are "low-runners" the impact of increased development cost on unit cost can be very substantial. 

By doing this for all product systems to the appropriate level of detail, a database is created that can be used to evaluate in advance the budget impact of proliferation/deproliferation proposals. 

Component manufacturing module

By capturing this information for the complete set of drivers, we are able to identify the on-cost in manufacturing. We then perform a resource-based product costing by mapping the information to individual variants. 

Assembly module

To capture these success factors, A.T.Kearney developed an approach called the "single variant scenario" to help clients think about the problem in a different way. The basic idea is this: What would our factory look like if we only made a single variant? Imagine, 300,000 cars produced per year, identical in every way. How many fewer resources would we need? With this in mind, current resources were allocated to the four resource types. 

A+B resources are the level of resource required at the single variant point. C+D resources are then, by definition, equal to complexity cost. This allocation is done for all assembly operations, which are also categorized by which product system they relate to: 

This example shows that 20 percent of the effort for this operation is caused by complexity. Adding up these complexity costs per operation by product system may reveal, for example, that of the 32 employees assembling steering related parts, more than six (20 percent) are there solely because of product complexity. This type of data forms the basis of the complexity cost module applied to assembly. 

Purchasing module

Distribution module

Conclusion