Why business simplicity is vital

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Say you're an automaker, and think by acting on your customer requests, you'll increase profits. It's a good theory, but would you be profitable if you offered tinted windshields? Bain's Mark Gottfredson and Keith Aspinall explain why it's unwise to offer those tinted windshields, arguing in favor of simplicity:
Look at what happened when one automaker started offering tinted windshields as an option. On the surface, the move looked like a clear winner. The company's marketers calculated that nearly 40% of customers would buy the option for $120, while the supplier would charge just $8 per unit. Moreover, installing tinted glass rather than clear glass seemed to add no labor costs on the assembly line. With new revenue far outstripping direct costs, adding the new option seemed to guarantee a quick profit boost.
Seems good, but was it? Apparently not:
Offering tinted windshields, in combination with many other options, led to a whole range of higher costs that never showed up in the company's analysis. On the factory floor, the automaker had to adjust its work flows, add new quality-control tests, and even change the routes of its forklifts -- all of which increased production costs. Purchasing and material-handling costs went up to accommodate the added part. Assembly-line errors crept up as proliferating options made workers' jobs less predictable. The tinted windshields added complexity to the company's operating and accounting software, which already produced millions of option codes to account for often-minor variations in assembly. Because the systems could no longer "control" for every option, orders now came to the factory floor in random patterns -- for example, three cars in a row might require tinted windshields, followed by five that didn't. Workers' walk and reach time increased because they had to double-check order sheets to determine which windshield to install. The increased customization also caused unexpected peaks in demand, leading to dips in quality as workers rushed to finish tasks. Forecasting became more complex, resulting in cars with options packages no one wanted on dealers' hands. Perhaps most pernicious, when a dealer discounted a car to move it off the lot, the forecasting system would see that sale as true marketplace demand, triggering inaccurate forecasts of orders that were likely to come. All of this led to a ratcheting up of inventories to avoid possible stockouts. The "clear winner" ended up losing the company money, though management didn't make the connection at the time.
Complexity kills your margins. In fact, we challenge you to find one complex aspect of your business that you can simplify. Your bottom line will be that much happier.

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Posted on May 21

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