Based on my calculations, it would take Ford Motor Company 132 million years to make one of each possible combination of model, color and options currently offered to the buying public!
While there is no single root cause for Ford’s staggering 3rd quarter ’06 $5.8 billion loss, I believe product line complexity is a major contributing factor. Assuming an assembly line speed of 55 vehicles per hour, it would take Ford 131,888,129 years, Honda 28 years and Kia only 20 hours to make one of each combination of product offered in sales brochures.
With smaller, less complex product offerings, Honda and Kia are profitable while Ford is not. Complexity can be a killer. In the case of Ford, their expansive product offering results in more raw material part numbers, more suppliers, more inventory, more bills of material, more scheduling headaches, more accounting, and more overhead costs but not more profit.
Success is not logical. More is not always better. “Small is the new big because big has gone from a huge advantage to a liability. The ability to change fast is the single best asset for any person or organization.” (1)
To remain big, Ford needs to make its sales catalog of models, colors and options smaller. Here are seven, small action items that will have a big, positive impact for both Ford and your own organization:
Ask Sales & Marketing to create a year-to-date, high-to-low sales dollar listing of all products & services. Call a meeting and announce “Here’s a list of the 80% of our products & services that produced less than 20% of our revenue this year. We’re not leaving this room until we eliminate 50% of the 80%!” Eliminating unnecessary products & services reduces inventory, paperwork, errors, cycle time, changeovers and overhead costs.
Ask your CFO or Controller to do a Customer-ABC report. Subtracting activity costs from Gross Margin, calculate the year-to-date pre-tax profit (PTP) or loss of every customer. (2) “A” customers are the top 10% that result in 100% of PTP. B’s are the 20-40% who results in 150% of PTP. C’s are the balance of customers who destroy 20-40% of PTP. Call a meeting and announce “Here’s a list of our C customers that have no pre-tax profit. We’re not leaving this room until we define process changes that will make them profitable for us next year.”
Ask customers, suppliers and employees “What’s the most complex thing you’ve experienced in our business?” Compile the responses and define action plans to make things simpler for everyone. Complexity kills innovation. “There’s more innovation coming from today’s virus writers than from the big software companies whose core goals are to progress and innovate.” (3)
Ask Human Resources to count the number of layers of management in the company’s organizational chart. If it’s more than three (3) layers, ask HR to work with the CFO or Controller to calculate the impact and financial savings of transitioning to no more than three layers during the next year.
Clean up the general ledger chart of accounts. Adding cost centers and expense codes are misguided attempts to control costs. Call a meeting of each accounting manager and announce “We’re not leaving this room until we reduce the number of balance sheet, cost center and expense codes by 20%.” Eliminating unnecessary account codes reduces errors, account reconciliations, accounts payable coding and simplifies budgeting.
Mandate senior management meet with ten customers and ask “What do you like or dislike about our pricing policy?” Write-up the findings and use it to make ordering processes simpler. I live in Texas, home of the highest electric rates in America. My electric provider has eight different pricing plans for homeowners. Why do I need eight pricing plans for one source of electricity? I don’t!
Ask people you work with “What impact do I have on you and your job?” Are their responses negative, positive or a neutral shrug. In Cure for the Common Life author Max Lucado says, “In a desire to be great, one might cease being any good.(4)” If people’s responses are not positive, take a humble, “small” approach and end every meeting with the question “How can I help?”
Why does Mary Kay Cosmetics give top sales reps each year a pink Cadillac but never a pink Accord, Camry or Amanti? I believe the managment of Honda, Toyota and Kia know something that their counterparts at Ford, GM and Chrysler have ignored for decades… making a pink car results in sales but no profit. Complexity is costly. Complexity kills. Don’t let it kill you and your organization.
(1) Small is the New Big, Seth Godin, Penguin Group, 2006
(2) Most commonly done using Activity Based Costing. Email TomPryor@icms.net for an example.
(3) Complexity Kills Innovations, Kelly Martin, Symantec, March 2005
(4) Cure for the Common Life, Max Lucado, Thomas Nelson Publishing, 2005
