Why your portfolio is probably the most expensive problem you’re not solving
Ask a manufacturing business to describe its competitive advantage and you will hear, very often, about flexibility.
We can handle a wide range of products. We can accommodate customer-specific configurations. We can respond to bespoke requirements. We are not a commodity manufacturer. Our complexity is a feature.
Sometimes that is true.
More often, it is a story the business tells itself to avoid examining what the complexity is actually costing.
Because complexity has a cost. A specific, calculable, largely unexamined cost. And in most manufacturing businesses, that cost is large enough that if it were visible on the P&L as a single line item, it would be the first thing the board asked about.
It is not visible as a single line item.
It is distributed. Hidden in planning overhead, inventory carrying cost, changeover time, quality escapes, engineering resource, procurement complexity, and the thousand small frictions that a simpler business doesn’t generate.
This post is about making it visible — and about what to do once you can see it.
1. What Complexity Is
Complexity in a manufacturing context has a specific meaning.
It is not the same as difficulty. A technically demanding product made in high volume with a consistent specification is not complex in the operational sense — it is demanding, and demanding can be managed with capability and investment.
Complexity is variety. The number of different things the business has to do, and the degree to which doing each one interferes with doing the others.
Product variety: the number of distinct SKUs, configurations, or specifications the business manufactures.
Process variety: the number of distinct routings, setups, tooling configurations, and process parameters required to produce those products.
Customer variety: the number of distinct lead time commitments, packaging requirements, documentation standards, and service level agreements the business manages.
Supplier variety: the number of distinct supplier relationships, procurement processes, qualification requirements, and incoming inspection protocols the business maintains.
Each dimension of variety multiplies the others. A business with one hundred SKUs, three process routings, twenty customer requirements, and fifty supplier relationships is not managing one hundred products. It is managing the intersection of all of those dimensions — a combinatorial complexity that grows far faster than any individual dimension.
2. How It Accumulates
Product complexity in a manufacturing business almost never decreases naturally.
New products are added when commercial opportunity is identified. Old products are retained because someone is still buying them, or because removing them feels risky, or because the system for retiring products is more cumbersome than the system for adding them, or because nobody has done the analysis that would justify the decision.
The portfolio grows laterally over time. Product families expand. Customer-specific variants accumulate. Regional specifications multiply. The platform that was supposed to reduce variety generates ten variants because commercial teams found ten different market niches that each required something slightly different.
None of these additions are individually wrong. Each one is a rational commercial response to a specific opportunity.
Together, they create an operational system that is trying to do too many different things with a finite amount of capacity, capability, and management attention.
And they accumulate because the cost of adding complexity is borne by operations, while the benefit of the addition is booked by commercial. The decision to add a product variant rarely includes a full accounting of the operational cost it creates.
3. What Complexity Actually Costs
The full cost of a product is almost never visible in the product’s standard cost.
Standard cost captures: material, direct labour, machine time, and a portion of overhead allocated by volume or by hour. It is designed for inventory valuation and margin calculation. It is not designed to capture the true cost of the activities the product generates across its lifecycle.
The true cost of a product includes.
Planning cost. Every SKU requires planning attention — a forecast, a replenishment calculation, a capacity allocation, an inventory position. The planning cost of a product that sells twenty units a month is not materially different from the planning cost of one that sells two thousand. But their standard cost contribution is very different.
Changeover cost. Every different product requires a setup. Changeover time is a direct cost — the machine is not producing during changeover, and the people operating it are doing setup rather than value-adding work. A product that requires a three-hour changeover every time it is produced, and is produced in small batches because its volume doesn’t justify a long run, is consuming changeover capacity at a rate that is almost certainly not captured in its standard cost.
Inventory cost. Low-volume products require safety stock to be held proportionally to their demand variability, not to their volume. A product that sells unpredictably at low volume can require the same inventory investment as one that sells steadily at ten times the volume. The carrying cost — capital tied up, storage space consumed, obsolescence risk — is a real cost that standard costing systematically underallocates to low-volume complexity.
Quality cost. Variety is the enemy of process capability. A process that runs the same product consistently develops capability over time. A process that changes configuration frequently maintains a lower capability level — more variation in the setup, more first-off inspection, more adjustment, more first-piece rejects. The quality cost of variety is real and is almost never attributed to the products that are generating the variety.
Engineering cost. Each product variant that exists must be maintained — the drawing controlled, the BOM managed, the change incorporated when the design evolves. The engineering resource consumed by portfolio maintenance is substantial in most businesses and grows directly with the number of distinct products in the range.
Procurement cost. Each unique component, each unique supplier, each unique specification requires procurement attention — a relationship maintained, a contract managed, a price reviewed, an incoming inspection conducted. The procurement cost of a component used in one product is not materially lower than the procurement cost of a component used in fifty — but the revenue it supports is.
Add these costs together across a full product portfolio and apply them to the lowest-volume, highest-variety portion of the range — and the profitability picture changes significantly.
In most manufacturing businesses, the analysis reveals that somewhere between fifteen and thirty percent of the product range is destroying value once the full complexity cost is attributed correctly. Not breaking even. Actively destroying value — consuming overhead, capacity, and capital at a rate that the revenue it generates does not justify.
4. Why It Persists
If a significant portion of the product portfolio is destroying value, why does it persist?
Three reasons.
It isn’t visible. Standard costing doesn’t show it. The product has a positive gross margin — material cost plus direct labour plus allocated overhead is less than the selling price. The additional complexity cost doesn’t appear in that calculation. The product looks profitable. The business has no reason to question it.
The commercial case for removal is hard to make. Even when the analysis is done and the full cost is attributed, removing a product generates commercial resistance. The customer who buys this product might also buy other, more profitable products. Removing it could damage the relationship. The volume might return if we could just improve the process. There is always a reason to defer.
The process for removing products doesn’t exist. Most businesses have a well-developed process for adding products — market assessment, business case, engineering review, commercial approval. Few have an equally rigorous process for retiring them. Product removal happens reluctantly, inconsistently, and usually in response to a crisis rather than as the output of a systematic portfolio review.
The result is a portfolio that grows in one direction and is never pruned.
5. The Portfolio Review as Improvement Lever
Rationalising the product portfolio is one of the highest-return improvement actions available to most manufacturing businesses.
The returns are not just financial — though they are financial.
When the portfolio is simplified, the planning load reduces. Forecasting becomes more accurate because demand is less fragmented. Inventory reduces because safety stock requirements fall. Changeover frequency drops because fewer different products are being produced. Engineering resource is released from maintenance and redirected to development. Procurement can consolidate supplier relationships and negotiate better terms.
The factory becomes simpler. Simpler to plan, simpler to schedule, simpler to staff, simpler to improve. The capability that was distributed across managing variety becomes concentrated on doing fewer things better.
That is a systemic benefit that extends well beyond the margin improvement of the retired products.
The businesses that manage portfolio complexity actively — that have a regular, rigorous, commercially honest review of what the portfolio should contain and why — consistently outperform those that don’t. Not because they are better at Lean. Because they have made it easier for Lean to work.
6. How to Do the Analysis
The full complexity cost analysis is not a simple exercise. But it is not inaccessible.
The approach has three steps.
Activity-based cost allocation. Take the activities that carry complexity cost — planning, changeover, quality inspection, engineering maintenance, procurement management — and calculate their total cost. Then allocate that cost to products based on the activities each product consumes, not based on volume. How many setups does each product require? How many planning touches? How much engineering time?
This produces a product profitability view that looks very different from the standard cost margin report. Products with high volume and low variety look better. Products with low volume and high variety look significantly worse — sometimes moving from profitable to loss-making when the full complexity cost is attributed.
Revenue-at-risk assessment. Before removing any product, assess the revenue risk. What other products does this customer buy? Would removing this product endanger those relationships? Is this product a strategic entry point for a more profitable range?
Some products justify their complexity cost on strategic grounds. The assessment makes that case explicit, rather than leaving it as an assumed justification for retaining everything.
Rationalisation pathway design. For products identified for retirement, design the pathway — not just the decision. How will the customer be managed? What is the transition timeline? Is there a commercial conversation to be had about migrating the customer to a standard variant? Is there a design-to-value opportunity — simplifying the product specification without losing the customer?
The pathway design is what makes the decision actionable rather than theoretical.
7. The Platform Opportunity
The complexity cost analysis often reveals something beyond the retirement candidates.
It reveals the platform opportunity.
Within the current portfolio of distinct products, there is almost always a set of common architectures, common components, and common process routings that could be made more explicit and more disciplined. The variant that currently requires a unique component could be redesigned to use the standard component with a configuration change. The customer-specific product that requires a unique packaging format could be migrated to a standard format with a label change.
Platform thinking — designing a common base from which variety is efficiently generated — is the structural answer to complexity. It allows the business to maintain commercial variety without operational complexity. The customer gets the product they need. The factory makes something that shares eighty percent of its process with the standard range.
Platform design requires engineering investment and commercial courage. It also generates returns that compound over time — every new product that is built on the platform rather than from scratch adds less complexity than its predecessor.
The businesses that manage complexity most effectively over the long term have invested in platform architecture. They have made the deliberate choice to constrain variety at the structural level in order to enable it commercially without the operational cost.
Final Thought
Complexity is not a commercial strategy.
It is a commercial default — the accumulated result of decisions made one at a time, each rational in isolation, collectively creating a system that is harder and more expensive to run than it needs to be.
The business that examines its portfolio honestly — that attributes the real cost of variety to the products that generate it, that makes conscious decisions about what complexity is worth carrying and what isn’t, that invests in the platform architecture that decouples commercial variety from operational complexity — that business has a structural cost advantage over every competitor that hasn’t done the work.
It is not glamorous work. It requires uncomfortable commercial conversations and technically demanding engineering. It requires a willingness to tell some customers that a product they have been buying is no longer available — and to make that transition gracefully.
But the return is real.
Three questions.
When did you last conduct a full complexity cost analysis — one that attributed planning, changeover, quality, engineering, and procurement costs to individual products rather than absorbing them into overhead?
What percentage of your product range, if you applied that analysis honestly, would move from profitable to value-destroying?
And if you simplified your portfolio by twenty percent — what would your factory be able to do with the capacity, the inventory, and the management attention that complexity is currently consuming?
adam
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