Helping Companies Thrive in a Complex World
Getting Product Portfolio
Management Right
PDMA Boston Chapter
October 4, 2016
Andrei Perumal
Author of Waging War on Complexity Costs and
Growth in the Age of Complexity
Managing Partner, Wilson Perumal & Company, Inc.
Agenda
Signs that we are having trouble
Complexity and the current Age
Implications for growth and profitability
Implications for product portfolio management
www.wilsonperumal.com
Most products today actually lose money!
The Whale Curve
% Total
Profits
Products that
create profit
Products that
lose profit
300%
100%
0%
0%
25%
50%
75%
100%
% Total Products
Often the most profitable 20% to 30% of products generate more
than 300% of the profits in a company; meaning the remaining 70%
to 80% lose 200% of the profits!
Source: Sievanen, Suomala, and Paranko, Activity-Based Costing and Product Profitability (Tampere, Finland:
Institute for Industrial Management, Tampere University of Technology)
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Pharma R&D efficiency is imploding!
Number of drugs per billion US$ R&D spending*
EROOMS LAW:
The number of new drugs approved per dollar
spent on R&D drops by half every 9 years!
* Inflation-adjusted
Source: Diagnosing the decline in pharmaceutical R&D efficiency, Scannell, Blanckley, Boldon, & Warrington,
Nature Reviews Drug Discovery, March 2012
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Clinical trial complexity has driven up costs
Trends in Clinical Trial Protocol Complexity
2000-2003
2008-2011
Increase in
Complexity
Total Procedures per Trial Protocol (median)
(e.g., bloodwork, routine exams, x-rays, etc.)
105.9
166.6
57%
Total Investigative Site Work Burden
(median units)
28.9
47.5
64%
Total Eligibility Criteria
31
46
58%
Clinical Trial Treatment Period
(median days)
140
175
25%
No. of Case Report Form Pages per Protocol
(median)
55
171
227%
Source: Variability in Protocol Design Complexity by Phase and Therapeutic Area, Getz, Campo, Kaitlin; Drug
Information Journal, 2011
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Aircraft development times are exploding!
Aircraft Development Duration (years)
SR-71
Blackbird
F-18
Hornet
F-35
Lightning
3 years
6 years
18 years!
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In contrast, Americas first jet fighter was
built in just 143 days!
Clarence Kelly Johnson
Objective was to build the first U.S.
jet fighter in 180 days
Completed with 37 days to spare
Done with just 23 engineers and 30
support people
The number of people having any connection
with the project must be restricted in an almost
vicious manner. Use a small number of good
people (10% to 25% compared to the so-called
normal systems).
Kelly Johnson
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It is taking longer to develop ever more
Product development time
perishable products
Product lifetime in market
Periodic product
development:
12
Serial product
development:
Parallel, multigenerational
product
development
48
24
48
24
12
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Complexity is stretching the capabilities
of most organizations
PRODUCTS & SERVICES MORE COMPLEX
TECHNOLOGY IS MORE COMPLEX
X
PROCESSES MORE COMPLEX
ORGANIZATIONS MORE COMPLEX
MARKETS MORE COMPLEX
X
REGULATIONS MORE COMPLEX
X
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Many organizations are passing a
complexity threshold
COST
(exponential growth)
An increasing number
of companies are here
VALUE
Many companies
are here
(diminishing returns)
Few companies
are still here
Complexity
Complexity inflates cost structures, reduces process performance, decreases
organizational efficiency, increases operational risk, and impedes execution of strategy
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10
Our world has fundamentally changed!
Pre-Industrial Age
Industrial Age
Post-Industrial Age
Individual productivity
Economies of Scale
Complexity
Cost
Volume
Driven by
variable costs
Volume
Driven by
fixed costs
Complexity
Driven by
complexity costs
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11
Nearly half of companies today experience
diseconomies with scale
S&P Companies Gaining Economies of Scale
(negative % implies dis-economies of scale)
Based on financial statement information from 2005 - 2013, n = 423
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
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12
Complexity is a systemic issue
The
Complexity
Cube:
Non-value add
Value add
Organization
NVA costs are larger than by appear by looking at any one dimension
alone; therefore PRODUCTS must be considered in conjunction with
PROCESS and ORG dimensions
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Complexity costs grow geometrically
#links
10
#Items
10
45
Total
complexity
costs
Complexity
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 complexityits
more like 30 times the complexity.
Lee Coulter, former SVP of Krafts
Global Shared Services Grp
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14
Out of the best of intentions the F-35 JSF
The F-35 Joint Strike Fighter program will cost more than
three single-service programs would have done.
2013 Rand Corporation Report
Source: A Billion HereRand report dismisses joint-program savings, Sweetman, Aviation Week & Space
Technology, Dec 2013 / Jan 2014; Cant Touch This, Gilson, Mother Jones, 2013
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15
There are two ways to grow:
Be
BETTER at
what you do
Do
OR
MORE
things
More Difficult
More Common
This will be a much simpler, much less complex
More Scalable
Less Scalable
company of leading brands that's easier to manage
More
Profitable
Profitable
and operate.
Less will beLess
much
more.
More Sustainable
A.G. Lafley, CEO P&G
Less Sustainable
16
Today, profits beget growth more than the
other way around
INDUSTRIAL AGE:
MORE
More
More
Accelerating
growth
(virtuous cycle)
Volume
Profitable
More
Volume
Less
Profitable
Unsustainable
growth
More
More
Sustainable
growth
AGE OF COMPLEXITY:
MORE
OR
BETTER
Profitable
Volume
17
To get product portfolio management right
in the Age of Complexity, you must:
1.
Develop a clearer view on true product costs & profitability
2.
Include process and organizational implications and
opportunities in product management decisions (and take
concurrent actions)
3.
Assess revenue substitutability and consider incremental
cost and revenue, not just actual revenue, in product
management decisions
4.
Streamline and accelerate your product development
efforts by bringing focus, managing variation, and getting
resource utilization right
18
Most companies dont really know where they
make money
% Total
Profits
Returning
to the
Whale Curve:
Products that
create profit
Products that
lose profit
300%
100%
0%
0%
25%
50%
75%
100%
% Total Products
Significant cross subsidizations mask true cost and profitability
Hides your islands of profits in a sea of costs
How do you get a much clearer picture of true cost & profitability?
1 - Sievanen, Suomala, and Paranko, Activity-Based Costing and Product Profitability (Tampere, Finland: Institute for
Industrial Management, Tampere University of Technology)
www.wilsonperumal.com
19
The fixed-variable cost paradigm is outmoded
Industrial Age
Variable
costs
Fixed
costs
Traditional
cost paradigm
Age of Complexity
Variable
costs
Complexity costs
Fixed
Mistaking complexity costs for
variable costs under-costs small
volume products and activities
Mistaking complexity costs for
fixed costs over-estimates fixed
cost leverage potential
Todays cost
categories
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20
Most complexity costs follow a square root of
volume relationship
Variable Costs
By
Volume
Complexity Costs
Fixed Costs
By
Item
Total
cost
Total
cost
Total
cost
Volume
Volume
Unit
cost
Volume
Unit
cost
Unit
cost
Volume
Volume
Volume
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21
The SQRT relationship provides an attractive
alternative to Activity-Based Costing (ABC)
Traditional allocation
approach example:
Two products: A & B
17K total units sold
$5000 inventory holding costs
Peanut butter allocation:
$0.29/unit
SRC allocation approach example:
Volume
ratio
Inventory
ratio
Inventory Inventory
holding
per unit
cost
ratio
Unit
holding
cost
Product
Unit sales
Product A
16,000
16x
4x
$4000
1x
$0.25
Product B
1,000
1x
1x
$1000
4x
$1.00
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Client Example: Manufacturing Company
Product Costing
750
700
Conversion costs for small
volume products are 36x
higher than standard
Conversion Cost Per Unit
650
600
550
Std. costing
SRC costing
500
450
400
350
300
6x
250
200
150
3x
100
50
0
Products in order of volume
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23
Client example: Beverage Company
Product Segment Profitability
Operating Margin
30%
26%
Typical standard costing
Complexity-adjusted costing
20%
14%
13%
10%
9%
19%
5%
0%
14%
Budget
Segment
C
10%
Below Premium
Segment
B
14%
9%
Premium
Segment
A
Craft
Segment
D
Average
Overall
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Client Example: Industrial Products Company
Profit Scaling
Complexity Adjusted Operating Margin
60%
A
C
E
B
40%
20%
0%
0
-20%
C
F
D
Maintain
Invest
Transform or
eliminate
Sales
($M)
-40%
= Current sales and complexity-adjusted OM%
-60%
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Take concurrent actions to unlock larger
opportunities
TRADITIONAL
APPROACH:
SKU RATIONALIZATION
FOOTPRINT
FOOTPRINT CONSOLIDATION
SUPPLY CHAIN REDESIGN
CONCURRENT
APPROACH:
SUPPLY CHAIN
SKU RANGE
SKU RATIONALIZATION
INTEGRATED
VIEW
COORDINATED
ACTIONS FOR
FOOTPRINT CONSOLIDATION
DEEPER
OPPORTUNITY
SUPPLY CHAIN REDESIGN
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26
Assess substitutability and incrementality
EXAMPLE:
Given two products, where Product A has precedence over Product B
Therefore, assign all of the complexity costs from having two products to Product B
Consider only the revenue that would be lost from removing the Product B
Traditional View
2 Products
A
Revenue
Cost ($)
Cost (%)
Margin ($)
Margin (%)
Incremental View
1 Prod.
2 Products
Total
Total
$70.00
$40.00
$110.00
$100.00
$100.00
$10.00
$110.00
$57.40
$33.20
$90.60
$80.00
$80.00
$10.60
$90.60
82%
83%
82%
80%
80%
106%
82%
$12.60
$6.80
$19.40
$20.00
$20.00
($0.60)
$19.40
18%
17%
18%
20%
20%
(6%)
18%
Waging War on Complexity Costs, McGraw-Hill, 2009
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Client Example: Tool Company
Substitutability
$250,000
Gross
Margin
Red = SKU selected for discontinue*
$200,000
$150,000
$100,000
$50,000
The Tail
$0
0
500
1000
1500
2000
SKUs
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Dont overload project resources!
If we increase resource utilization from 65% to 95% (a 50%
increase), we increase lead time by a factor of 4!
Note: Graph based on Coefficient of Variation of 0.7, common for knowledge work
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Streamlining product development
Key mindsets to break:
Lots of work means lots of progress
If it is worth doing we should be working on it
The more people involved the better the outcome
We should fully utilize our critical resources to get the most done
If things arent getting done, we need more oversight
Key principles to embrace:
Work fewer projects at the same time
Resource projects with fewer, more involved people to better insulate
projects from other projects & work
Load product development resources at much less than 100% (buffer rule)
Lean out overhead
Expect & demand shorter development times (but dont forget the buffer)
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30
Thank you for your time this evening
Andrei Perumal
Managing Partner
Wilson Perumal & Company, Inc.
Mobile: (214) 649-9373
aperumal@wilsonperumal.com
www.wilsonperumal.com
Our Mission:
We believe complexity is the defining issue facing organizations today. We
exist to help companies and other organizations thrive in this Age of
Complexity. We do this by rethinking traditional approaches to strategy
and execution, and by working in close partnership with our clients to
deliver transformative results.
www.wilsonperumal.com
31
Contact Us:
www.wilsonperumal.com
contact@wilsonperumal.com
North America
Europe
Two Galleria Tower
13455 Noel Road, Suite 1000
Dallas, TX 75240
Longcroft House
2/8 Victoria Avenue
London, EC2M 4NS
972-716-3930
+44 (0)203 206 1496
