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Getting Product Portfolio Management Right: PDMA Boston Chapter

View our presentation at the PDMA Boston Chapter. “Ever rising levels of complexity have changed the game for product development and management. As product lifecycles continue to decrease, and in many cases development times increase, organizations are finding themselves under extraordinary pressure. Making matters more difficult, many common approaches to product development and portfolio management, by not being fit for the realities of today’s world, exacerbate this situation. The result: growth in product portfolios has not only added tremendous unintended costs to organizations, but has made them less able to serve their customers, less responsive to the market, and overall, less profitable and competitive. Product development today must anchor on focus, simplicity, and speed, avoiding the unintended costs of complexity, missed market opportunities, and growth without profitability. Andrei will present new insights and approaches to help you see the hidden costs of complexity and focus, streamline, and align your product development efforts.”

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Wilson Perumal & Company
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© © All Rights Reserved
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454 views32 pages

Getting Product Portfolio Management Right: PDMA Boston Chapter

View our presentation at the PDMA Boston Chapter. “Ever rising levels of complexity have changed the game for product development and management. As product lifecycles continue to decrease, and in many cases development times increase, organizations are finding themselves under extraordinary pressure. Making matters more difficult, many common approaches to product development and portfolio management, by not being fit for the realities of today’s world, exacerbate this situation. The result: growth in product portfolios has not only added tremendous unintended costs to organizations, but has made them less able to serve their customers, less responsive to the market, and overall, less profitable and competitive. Product development today must anchor on focus, simplicity, and speed, avoiding the unintended costs of complexity, missed market opportunities, and growth without profitability. Andrei will present new insights and approaches to help you see the hidden costs of complexity and focus, streamline, and align your product development efforts.”

Uploaded by

Wilson Perumal & Company
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 32

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)

www.wilsonperumal.com

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

www.wilsonperumal.com

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

www.wilsonperumal.com

Aircraft development times are exploding!


Aircraft Development Duration (years)

SR-71
Blackbird

F-18
Hornet

F-35
Lightning

3 years

6 years

18 years!

www.wilsonperumal.com

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
www.wilsonperumal.com

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

www.wilsonperumal.com

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
www.wilsonperumal.com

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
www.wilsonperumal.com

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

www.wilsonperumal.com

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%

www.wilsonperumal.com

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
www.wilsonperumal.com

13

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
www.wilsonperumal.com

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

www.wilsonperumal.com

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
www.wilsonperumal.com

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
www.wilsonperumal.com

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
www.wilsonperumal.com

22

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


www.wilsonperumal.com

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
www.wilsonperumal.com

24

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%
www.wilsonperumal.com

25

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

www.wilsonperumal.com

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

www.wilsonperumal.com

27

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

www.wilsonperumal.com

28

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

www.wilsonperumal.com

29

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)
www.wilsonperumal.com

30

Thank you for your time this evening


Andrei Perumal
Managing Partner
Wilson Perumal & Company, Inc.
Mobile: (214) 649-9373
[email protected]
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
[email protected]
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

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