1. The Complexity Crisis Why too Many Products, Markets and Customers are Crippling Your Company John L. Mariotti Former President of Rubbermaid Office Products and Huffy Bicycles

2. Table of Contents The Complexity Problem Truths About Complexity Calculating the Complexity Factor – A New Measure to Correlate Complexity With Profitability Recognizing Excess Complexity – Motorola Case Study Reducing Complexity – One Step at a Time Sources of Complexity – What to Measure - Where to Assign costs Controlling Complexity – Know Your Competition Topics You Must Understand in Order to Compete The Shape of Value – Creating the Shared Vision Memorable Quotes

3. The Complexity Problem Quest for top-line growth in low/no growth markets What gets measured gets done – but none of today’s accounting or measurement systems identify the costs of excess complexity until it is too late People feel the need to create new products, processes, facilities and systems, but no one is designated to kill of the old and unproductive ones This results in proliferation in products, customers, markets, suppliers, facilities, locations The rate and scope of complexity in the world around us is exceeding our ability to deal with it Just because you can make/sell a product or service doesn’t mean you should Complexity fragments management focus, wastes time and money and ultimately reduces shareholder value

4. Truths About Complexity PP X 2 ≠ FF – Protecting/Preserving the Past and Perfecting the Present does not equal Finding the Future There are only three solutions for wrong forecasts: Carry inventory as a hedge – but it will at least partly the wrong inventory, and it cost money to carry it, and more money to dispose of the wrong stuff Get more lead-time from customers – but sometimes customers can not or will not provide more lead-time, or competitors will provide shorter lead-times Have more, flexible production capacity available – which is clearly the best option of the three if you can afford it and if it isn’t so far away that it takes too long to get the goods where you need them, when you need them There are only two steps to solve any problem: Define the problem Solve the problem The Two-Mile Drive A man must drive two miles and average 60 MPH for the trip. He decides to drive the first mile at 30 MPH. How fast must he drive the second mile to reach his two mile destination and average 60 MPH? If you said this task is impossible, you are correct. When he decided to drive 30 MPH for the first mile, he used two minutes. Since 60 MPH is a mile per minute, the only way to complete the two mile trip at an average of 60 MPH is to complete the trip in two minutes, but he already used two minutes driving the first mile because he decided to go too slowly on the first half of the trip. This is a common error in business. Per Peter Drucker: “Time is the scarcest resource and unless it is managed, nothing else can be managed.” If your business is suffering from complexity, time is precious. Don’t waste it now, because you may not be able to get where you need to go in time, later on. There are only five ways to grow faster than the market is growing: Take share from existing competitors Expand the market with innovative new offerings Change the mix to sell higher-price-value products Enter new markets or an entirely new market (go back to numbers 1-3 above) Create an entirely new product and market (e.g., Fed Ex packaged delivery, or packaged lettuce or eBay on-line auctions)

5. Truths About Complexity (Continued) Complexity is the enemy – Drive down CF, drive up the profitability of the company Framework for thought Purpose Structure Processes Relationships Culture Four formulas for success: Data + Organization = Information Information + Insight = Knowledge Knowledge + Experience = Wisdom Wisdom + Imagination = Genius

6. Calculating the Complexity Factor – A Different Way to Measure Your Business Complexity Factor (CF) = Number of Finished Products (SKUs) X Number of Different Markets Served X Number of Company Legal Entities X Number of Significant Facilities X (Number of Employees + Number of Suppliers + Number of Customers) ÷ Sales Revenues Observations – Preliminary Research : Companies with a CF less than 1.0 have managed to avoid the most common complexity problems Companies with a CF greater than 50 are unnecessarily complex – great opportunities for improvement Companies with a CF between 1 and 50 require a more thorough root-cause analysis to determine if the complexity is warranted

7. Recognizing Excessive Complexity – Motorola Case Study At a portfolio level Too many products Too many high-complexity products Too many low-volume models At a detail level Not enough component reuse Too many non-standard parts Too little use of postponement Too many models Too many parts Too complex subassemblies Used a “Complexity index” comprised of the following to combat Average part count Test time Assembly time Mechanical postponement Software postponement Use of industry standard parts Component reuse

8. Reducing Complexity – One Step at a Time Use the 80-20 Rule Customers: Rank customers in descending sequence by annual sales Rank the same customers in descending sequence by profitability Rank the same customers in descending order of gross margin % Compare all three lists (side by side) Draw a line at the 20% and 80% cumulative points on each of the above – you’ve now identified the most valuable and least valuable customers from a sales and profit contribution standpoint Now, analyze the list of margin % and compare it to the list of margin $’s – a high margin % with little sales and/or $ profits usually indicates unnecessary complexity Suppliers- Conduct the same exercise on total annual purchases Products – Conduct the same exercise (Sales and margin by SKU) Review all of the above at least quarterly, monthly to begin the process Sales per Employee – look at a trailing twelve months trend line to assess if you’re getting better or worse since complexity tends to add staff without corresponding sales

9. Complexity Sources – What to Measure – Where to Assign Costs Transactions – orders, invoices, payments, voucher entries, adjustments Customers – sales calls, unique products, programs, promotions, record keeping/reporting Suppliers – Sales calls, unique components, materials, deals, record keeping/reporting, variability and six sigma Competition – market segments, products, regions, countries and distribution types Obsolescence - raw material, components, finished products, marketing/merchandising materials, closeouts, markdowns, scrap, administration (Which customers, products, dist channels) Forecasting – Variety, similarity/shifting, seasonality, geography, Bill of Materials, planning changes, schedule changes Shipments - destinations, routings, shipping instructions, manifests/paperwork, confusing, similar numbers/models/packages, DC locations Staffing costs, learning curve and training costs Information systems – EDI protocols, size of database, number of programs, memory, processing, documentation, network management, security Currency risks – number of countries buying, selling, doing business, employees Tax returns – number of different states and countries, different tax codes, regulations Incorporation and officer designations – Number of states and countries, governing law Regulations – number of states and countries, local codes, industry related Intellectual property – number of states and countries, patents, trademarks, copyrights

10. Solutions to the Complexity Problem Common platforms – around which product variation can be produced Standard component lists Approved supplier lists Long term agreements Postponement Mass customization Plan global, make local Study how industry leaders have managed complexity Other tools at emcien.com

11. Controlling Complexity – Know Your Competition

12. Topics You Must Understand in Order to Compete The Current Environment Latent over-capacity Global parity The Curse of Complexity Capacity is elastic, demand only exists where there is wealth, needs and wants There is no measurement system Strategic Outsourcing – Boon or Bane? You (and your competitors) can get it in China, subcontract it to India, import it from South America Be careful what you give away – Your supplier could become your biggest competitor The Value Network Supply Chain is a misnomer – it’s about what network creates the most value Partnerships in an Era of Growing Complexity People and partners are key competitive differentiators The best partners, working collaboratively enable winners Leadership – Creating a Path to the Future Creates a clear understanding of and a healthy dissatisfaction with the current reality Builds a shared vision of a new, better reality Creates an environment in which people are motivated to move from the former to the later

13. The Shape of Value – Creating the Shared Vision Attributes of Value Quality Service Speed Cost Innovation The Shape of Value Plot – Shows Why People Buy Illustrative Example Rolex = Quality and Service Timex = Speed and Cost

14. Memorable Quotes “Talent hits a target no one else can hit, genius hits a target no one else can see.” – Arthur Schopenhauer – 19th century German philosopher “Fools ignore complexity. Pragmatists suffer it. Some can avoid it. Geniuses remove it.” Alan Perlis, computer scientist and Yale University professor “A man who carries a cat by the tail, learns something he can learn no other way.” Mark Twain “Most of what we call management consists of making it difficult for people to get their work done.” Peter F. Drucker “Opportunity is missed by most folks because it is dressed in overalls and looks like work.” Thomas A. Edison “Willingness to change is a strength, even if it means plunging part of the company into total confusion for awhile.” Jack Welch “All generalizations are false, including this one.” Mark Twain “Simplicity does not precede complexity, but follows it.” Alan J. Perlis “Everything should be made as simple as possible, but not simpler.” Albert Einstein “Even if you’re on the right track, you’ll get run over if you just sit there.” Will Rogers “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.” Bill Gates “The first step to getting the things you want out of life is this: Decide what you want.” Ben Stein “In theory, there is very little difference between theory and practice; in practice, they are very different.” John Mariotti “Doing business abroad is about 80% = to business in the United States, but you better know what/where the 20% differences are, or they’ll kill you.” John Anderson, International Consultant

15. Appendix

16. Illustrative P&L of an Overly Complex Business – Top Line is Up – Bottom Line is Gone

17. A Five-Step Framework for Thought Purpose Why do you deserve to be in business? What do you do better than competing alternatives? Who do you serve? Why? and How? Structure How are you set-up, organized, configured? Where, how many, how big? What’s done, by whom, why? Processes How does your company do things? Relationships and Culture How do you work together and with others?

18. Thank You Clarkston Consulting is a different kind of management and technology consulting firm. We deliver a unique experience for market leaders within the Consumer Products and Life Sciences industries. Considering professionalism, expertise, and value as prerequisites, we take service a step further through our unyielding commitment to the success of people as individuals, both our clients and our employees. By combining integrity, adaptability, and a whatever-it-takes attitude, we have achieved an extremely high rate of referral and repeat business and a 7-year average client satisfaction rate of 96%. Ron Claude rclaude@clarkstonconsulting.com 1234 Some RoadSuite 123Any Town, NC 12345office: 123-123-1234 mobile: 123-123-1234 www.clarkstonconsulting.com