Motorola Reduces Costs $2.6 Billion By Reducing Marketing Complexity
Theresa Metty, former SVP for Motorola's Personal Communications Sector, recognized that marketing had as much or more to do with supply chain complexity than anything. Working with marketing, product design and other functions she launched a series of projects earlier in the decade to reduce complexity in the supply chain which resulted in a $1.4 billion reduction in inventory and a $2.6 billion reduction in supply chain costs. "You can imagine the impact that's had on cash flow," Metty stated in a Supply Chain Management article.
Where Does Over Complexity Originate?
Over-complexity originates in a company's passive attitude toward unfettered proliferation in any functional area. Marketing over-complexity destroys profitability by:
creating product lines or services that cannot be made or delivered profitably;
creating product lines or services that add hidden costs to overhead such as customer service and sales support;
specifying features that industry pricing will not support;
adding non-budgeted marketing costs
In all viable organizations everything is always shifting. When left unchallenged, product lines, services and marketing activities will shift toward unnecessary complexity that quickly erases profits. Worse, the damage is often buried in variances and accounts that have nothing to do with marketing so it's difficult to find and resolve. Outside marketing companies in San Diego and elsewhere rarely understand this dynamic.
The Financial Damage Hides Itself
Marketing must function as the security guards of profitability, at least to the operating margin (Income from Operations, IFO). Marketing must be the clearing house between sales and production, funneling relentless customer requests through a keen filter that weeds out potential profit eroding complexity. To do this, marketing needs to be educated about complexity and assertive about resisting it.
The damaging costs of marketing over-complexity often hide in these accounting buckets. Seldom are they checked to line item level for increases based on marketing decisions.
Variances
Inventory
Overhead
Costs of Distribution
MANUFACTURING VARIANCE
To underscore how this financial damage hides in plain sight, do a search on 'manufacturing variance' and you'll come up with scads of reading that most marketing and sales types have never seen. Why? Marketers, and many sales people, concern themselves with right brain subject matter. Marketers, and many sales people, are right brain thinkers...creative, intuitive, focused on the whole. Manufacturing variance is strictly the province of left brain thinkers...rational, logical, focused on parts.
It is far more important that marketers understand manufacturing variance than vice versa. Manufacturing variance is an accounting bucket where the financial difference between manufacturing costs budgeted vs. manufacturing costs incurred is stored.
How do marketers whipsaw manufacturing variance and erase profitability? Before the beginning of each fiscal year every department turns in a budget. Marketing forecasts products and volumes of each SKU or service. Manufacturing, purchasing and other operations functions use this forecast to build the corporate budget, which helps forecast cost of goods sold (COGS). If the marketing department says it's going to offer 10 different boat anchors to customers next year, the manufacturing team plans its operating costs based on the level of throughputs, JIT inventory, changeovers and hundreds of other variables required to produce various volumes of 10 different boat anchors, each with a specific size, color, shape and features.
But half way through the year Sales goes to Marketing and says New Chain Customer wants two new variations of boat anchor #9 because Big Chain Competitor, whose locations are always on the next street corner, is already selling boat anchor #9 and why should they try to compete selling the same thing at the same price? Because Sales is sooo convincing (and Marketing doesn't understand over-complexity) the product managers specify two new boat anchors which are added to the line and produced for the remainder of the year. As predicted, the company gets new sales revenue from New Chain Customer.
Story finished? Not hardly. By adding two new products to its production schedule, manufacturing has to shift things around a bit in one of its factories. This factory, located in China, is already at capacity so it adds a new line with two changeovers and several new JIT bins plus tweaks dozens of variables that contribute to manufacturing costs. If accounting could isolate costs by product offering (which it can't because of systems issues) it would see that the two new products are delivering operating income in the range of 15%, which is a lot lower than the entire original boat anchors product line of 31%. By the end of the year the entire product line's overall operating income has dropped to 25% on increased volume. Unfortunately the incremental margin from increased volume does not offset the increase in costs. The decrease in forecasted margin is dumped into 'manufacturing variance' and a platoon of accountants starts examining everything from the costs of light bulbs to foreign exchange rates.
INVENTORY
Do we really need to elaborate? Suffice to say that the company will now own new inventories of parts at the factory and new inventories of finished goods at each of four regional warehouses in the U.S.
It will also own the new costs of capital needed to support the new inventory, which CEOs typically regard with a very dim view. And how many CEOs hire marketing consulting firm in San Diego or elsewhere to diagnose inventory challenges? Very few.
COSTS OF DISTRIBUTION
The two new boat anchors will require new packaging, new retailer sales materials, new merchandising, advertising co-op funds and a dozen more expense items. These, in turn, will require new costs for photography, graphic designers, packaging firms, copy writing, merchandising kits, fulfillment houses and others. This doesn't take into account the distraction in the marketing department from fine-tuning details of the next big trade show, the next big marketing campaign, expanding Internet presence, ad infinitum. Even if the new requirements are 'only' variations of existing materials, the costs of creating them will approach the same costs as creating the originals. The paradox is that ad agencies in San Diego and elsewhere are hired to increase complexity, not reduce it.
OVERHEAD
Now is the story finished? Nope. Since customer service was also at capacity it had to add a new rep to help handle any customer inquiries about buying, installing and using the two new boat anchors. In addition, sales assistance also had to add a new body to field calls from 1,200 New Chain Customer locations around the country that have questions about the new product and the merchandising plan, neither of them explained in previously produced customer sales and merchandising materials. This means human resources must wade through hundreds of Internet resumes and begin the arduous process of interviewing maybe a dozen different people to make sure that the right person gets hired. Background checks are conducted, urine samples are analyzed and psychological tests are administered. Someone has to enter the new employees' information in the payroll system and new forms must be filed with Uncle Sam and the governor at a minimum. And so on. We all know where these costs end up...the dreaded and amorphous overhead.
The conclusion is that marketing over-complexity can negatively impact an entire business ecosystem. Since sustained profitability is the only way we know of to retain employment in a business enterprise it is the prudent marketer who understands the profit impacts of all his/her recommendations.
Attacking Over Complexity
Years ago, the supply side started attacking complexity and remarkable results were achieved. Manufacturing adopted JIT. Purchasing consolidated suppliers. Finance and IT tackled systems integration.
But what has the demand side done to analyze and get rid of over complexity on its side of the fence? Here's how many marketing departments hurt their companies' profits:
Short on revenue? Let's add an OEM line or a bottom-feeder brand. Our other customers won't notice.
Retailers or resellers chomping on us too much? Let's create something unique for each and every one of them.
Short on sales leads for the quarter? Let's add a distribution channel.Competition adding a new product or service? Let's add a new line of products and services.
A competitor gaining some press attention? Let's launch or acquire a new brand.
In order to spot damaging over complexity, marketers must know profitability to the operating margin line for each product and service. If you have this, the analysis is a simple matter of a spreadsheet and the Pareto (80/20) Rule. If you don't have the data, work with your IT people to create a report. If you can't get a reliable report, do some modeling on your own. Whatever you do, this step must come first. A great way to ingrain this in a marketing team is to have them forecast IFO in their marketing plan (San Diego technology and other companies greatly benefit from this simple change). Use these categories, and others that make sense, to build a matrix that can forecast IFO.
https://en.wikipedia.org/wiki/Education
"MODEL", "BRAND", "UNIT SALES", "REVENUE", "ASP", "COST", "IFO"
By the way, once you understand the 20% of your offering that's delivering 80% of the profits, your job is just beginning. You can't just go to the sales force and say "we're whacking your product line". You have to come up with a migration plan that replaces the unprofitable offerings with profitable ones that do not create unmanageable channel conflict, and sell it to the rest of the organization and your customers. This is all a lot of work.
In The Complexity Crisis the author does an excellent job of pointing out the hidden costs of over complexity:
"The costs associated with this sort of complexity will be buried in accounting classifications that are non-product-specific. Variances will grow. Inventory levels and obsolescence will increase. Fixed overhead and administrative-staff costs will grow to handle the complexity, but little of this will be attributed to the real causes. And because the information comes in at the end of accounting periods, the cause-and-effect relationships will have become obscured by time. The profits are gone, value destroyed, and the evidence of the crime is circumstantial at best."
If you have an intuition that your products and services have proliferated into over complexity territory, your company may be able to increase its profits simply by addressing the challenge of overly complex marketing. Whether you're in a bricks and mortar or an online business, San Diego and other companies can benefit in many different ways by untangling marketing complexity.
Here are some additional resources:
The Complexity Crisis by John Mariotti
Motorola's Complexity Index - http://scm.ncsu.edu/public/hot/hot040623.html
The Marketers' Consortium - Managing Marketing Complexity http://unicashare.typepad.com/share/managing_marketing_complexity/
Simplicity Marketing: End Brand Complexity, Confusion & Clutter, by Steven M. Cristol and Peter Sealey
Philips Consumer Electronics: A Case Study in Overly Complicated Marketing
Background
A few years back the large screen television segment of the consumer electronics industry was about eight years old and growing fast. The $2 billion U.S. consumer electronics division of one of the largest global CE conglomerates, Philips Electronics, had literally founded the mass market for large screen television but the division had not turned a profit in 7 years, although annual sales exceeded $120 million.
The Company
At the time, Philips was a $30 billion plus global concern manufacturing consumer electronics, semi-conductors, light bulbs, medical equipment and other products. The U.S. consumer electronics division was based in Knoxville, TN and realized about $2 billion in annual revenue from sales mostly in the U.S. The company operated its own manufacturing plants and had upwards of 1,400 employees.
The brands being manufactured and marketed by Philips included Magnavox, Philips and several OEM brands.
The Challenge
Even though Industry CAGR was averaging about 7%, the division's revenue CAGR for the past 3 years was -12%. The division had experienced a quality crisis and retailers had started migrating to competing brands. At that time there were about 20 companies offering large screen TVs and Philips' share had eroded from more than 60% to less than 25%. The company began shifting resources to other opportunities and the CFO strongly recommended that the large screen TV division be shut down. The CEO assigned the task to a newcomer with experience in exit strategies.
Using the modeling technique outlined in this paper, however, the new manager discovered in about four weeks that the root cause of most of the marketing problems was extensive product line complexity which had, in turn, been caused by ceding control of product development to the sales team.
Because of the corporate culture at the time, the sales force was extremely strong and had undue influence on product development. Under their control, the product line had quickly proliferated into a complex smorgasbord that attempted to address every retailer's desire for something unique. Parts commonalities diminished, factory throughput slowed to a crawl and the product and engineering team became unable to keep up with a growing and ever changing stream of requests from sales. Quality plummeted, sales shrank, margins shrank as marketing struggled to keep share, and the division's morale hit bottom.
Strategy
After analyzing the market's growth trends and profitability the manager presented a bold turnaround plan to the CEO and CFO focusing on pruning the product line, creating a single chassis to replace the current three, an all new styling approach, creating consumer incentives and cultivating strong new partnerships with big box retailers. The company's first-ever business team was created and pulled together the division leaders from every functional area. First, the manager explained matter-of-factly the imminent shut-down of the division. Bluntly asking for their support, he promised the demoralized large screen product management, engineering and manufacturing teams (about 200 employees) that if they agreed to this new product line and marketing plan, the product line would freeze for one year and sales would make no changes of any kind.
Next Steps
The new business team became joined at the hip. The leaders from each functional division met weekly. In each meeting the team reviewed the financials first. The remainder of the meeting was devoted to the new product line development and understanding the financial implications of each decision impacting the new line.
The new product line was created quickly, focusing on parts commonalities and differentiation that could be easily appreciated by consumers and retail buyers but did not require unusual changeover times in the factory.
A new marketing plan was created focusing on national TV advertising, retailer merchandising and sales promotions.
The turnaround leader hit the road with the top sales people and helped convince key retailers to give the new product line a try.
Results of This Turnaround
The turnaround took a year to execute and another year to demonstrate sales results. At the end of that second year sales were up, market share was up and the division had turned in a $7 million operating profit, following an operating loss of $5 million the year before. Of all the divisions in the $2 billion company, this division was one of two that turned a profit that year. The team was treated like company heroes and the large screen television division went on to become a significant strategic component of the parent company's global consumer electronics strategy.
Mike Harris
Harris Consulting LLC
Interim Marketing VPs (San Diego and nationwide)
Monthly marketing services packages including content, PR, internet marketing and much more.
mike.harris@harconllc.com
(858) 481-8665
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