The effect of product mix complexity in the FMCG industry, with specific focus on manufacturing

Rohrs, Werner (2007-03)

Thesis (MBA)--Stellenbosch University, 2007.

Thesis

ENGLISH ABSTRACT: Product Mix Complexity is a very real issue in modern companies. As globalisation and competition increase, markets mature and the needs of individual consumers get ever more specific, the trend towards more product variety will grow. Product Mix refers to the full range of products that a company offers to its customers. Product Mix Complexity refers to the effect that this product variety has on organizational performance. Understanding and management of this problem is difficult due to the many organizational elements involved, the complicated relationship between these elements and the fact that the problem crosses functional organization boundaries. A company may choose to differentiate itself in the market by offering a broad product mix. To do this effectively the price that can be asked for an item must offset the additional costs brought on by this complexity. This balance between variety that drives sales, and the costs of the added complexity is at the core of the effective management of Product Mix Complexity. The effect of this complexity in manufacturing relates to the loss of scale efficiencies and the need for flexibility in operations. Due to the difficulty in understanding the complex effects of variety, company portfolios tend to proliferate, resulting in a very skewed spread of product contributions where a small % of products contribute a high proportion of company profits. Management processes that continuously evaluate the total profitability of their portfolios from a ‘cost of complexity’ point of view are needed. Cost accounting systems often do not accurately account for this cost of complexity. The effects of Product Mix Complexity are investigated in Cadbury South Africa. The business displays clear signs of having a classical ‘Pareto’ spread of products where a ‘long tail’ of small volume products add very little profit to the business. The Port Elizabeth factory is an above average complex plant within the Cadbury group. It was found that the cost allocation system employed by Cadbury is not accurately allocating costs to products and is thereby aggravating the proliferation of the Cadbury product portfolio. Potential savings by rationalizing the Cadbury product portfolio are identified. A number of recommendations to better manage the presence of Product Mix Complexity are made, both for the business as a whole and for manufacturing specifically.

AFRIKAANSE OPSOMMING: Produkmengselkompleksiteit is alomteenwoordig in moderne besighede. Die neiging tot meer produkverskeidenheid groei namate globalisering, kompetisie en verbruikers se behoeftes na verskeidenheid toeneem. ‘Produkmengsel’ verwys na die volle reeks produkte wat ’n maatskappy aan die mark bied. ‘Produkmengselkompleksiteit’ verwys na die effek wat produkverskeidenheid het op die doeltreffendheid van ’n besigheid. Die probleem is moeilik om te definieer en te verstaan as gevolg van die baie besigheidselemente wat betrokke is, die komplekse verhoudinge tussen hierdie elemente en die multi-funksionele aard van die probleem. Vir strategiese redes wil ’n maatskappy soms ’n groot verskeidenheid produkte aanbied om hom te onderskei in die mark. Om hierdie strategie winsgewend te maak moet die prys wat behaal word opmaak vir die ekstra kostes wat aangegaan word om die breë verskeidenheid te kan aanbied. Die balans tussen die interne koste van verskeidenheid en die voordeel van die verskeidenheid is baie belangrik in die effektiewe bestuur van produkmengselkompleksiteit. Omdat die effek van verskeidenheid moeilik is om te definieer, neig maatskappye daarna om liewer te veel as te min produkte aan te bied. Die gevolg is dikwels ‘n ongebalanseerde distribusie van produkwinsgewendheid waar ’n klein persentasie produkte verantwoordelik is vir die oorgrote meerderheid van die wins. Bestuursprosesse wat produkportefeuljes vanuit ‘n kompleksiteitskoste oogpunt evalueer ontbreek dikwels. Produkkostemodelle neem ook dikwels nie hierdie koste akkuraat in ag nie. Die effek van produkmengselkompleksiteit in Cadbury Suid-Afrika word in hierdie studie ondersoek. Dit is duidelik dat Cadbury Suid-Afrika ’n klassieke ‘Pareto’ effek vertoon waar ’n lang stert van klein produkte baie min tot besigheidswins-gewendheid bydra. Die Port Elizabeth fabriek vertoon ook bogemiddelde kompleksiteit relatief tot ander Cadbury fabrieke. Kompleksiteitskostes word nie akkuraat toegedeel tot produkkostes nie, met die gevolg dat klein produkte aanhoudend tot die produkmengsel gevoeg word. Die potensiële besparings as gevolg van rasionalisasie van die produkportefeulje is bereken. Aanbevelings vir die beter bestuur van produkmengselkompleksiteit word gemaak vir die besigheid as ’n geheel en vir vervaardiging spesifiek.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/85165
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