The Performance Measurement Group, LLC

How Much is Too Much? The Unintended

Consequences of Supply Chain Complexity
PRTM & PMG Investigate Relationships between Supply
W HI T E Chain Complexity and Level 1 SCOR Performance
PAPER Rodger Reis

As today’s global enterprises increase the size, scope, and reach of their supply
chain organizations, a subtle, yet potent force is challenging CXO goals of superior
financial and supply chain performance: complexity.

Intercontinental acquisitions, global sourcing, product differentiation, and

expanding distribution networks are exponentially increasing the complexity
of today’s enterprise supply chain organizations. As supply chain organizations
respond to the strategic demands of the enterprise, the increased complexity that
ensues often carries with it unintended consequences of increased costs, fractured
oversight, diluted priorities, and overextended management.
In response to this trend, PRTM and PMG are pioneering new research into the
nature of supply chain complexity and its relationship to enterprise performance.
Our goal is to uncover key insights that will help our clients expand their busi-
nesses—without sacrificing performance goals.

PMG SUPPLY CHAIN BENCHMARKING

To meet this research challenge, PRTM is leveraging its subsidiary and bench-
marking partner, the Performance Measurement Group, LLC (PMG). Since 2004,
PMG has collected complexity and performance data from hundreds of enterprise
supply chains through its supply chain benchmarking services. In 2008, PRTM
and PMG selected 90 enterprise supply chains from PMG’s proprietary sample
and performed a deep-dive analysis to investigate relationships between specific
complexity factors and performance. The supply chain organizations in the sample
represent a wide range of industries and range in annual revenue from less than
$100 million to over $1 billion (see Figure 1).

LEVERAGING SCOR

At the core of PMG’s supply chain benchmarking services is the Supply-Chain

Operations Reference-model (SCOR). Co-developed by PRTM and the Supply-Chain

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The Performance Measurement Group, LLC

Figure 1: Sample by Revenue

<$100 million,
11%

$1+ billion,
36%

$100 million–
$499 million,
38%

$500 million–
$999 million,
15%
n=90

Source: Performance Measurement Group, LLC 2008

Council, the SCOR model is the industry standard model
for characterizing supply chain performance. PMG lever-
ages the SCOR model in its “Level 1 scorecard” analysis.
This analysis benchmarks client performance across a
number of key performance indicators against a peer
population of comparable supply chains (see Figure 2).
SUPPLY CHAIN COMPLEXITY
As part of PMG’s benchmarking services, we also
survey clients across six categories of supply chain
complexity. These categories include product portfolio
complexity, supplier base complexity, manufacturing
base complexity, customer base complexity, distribution
complexity, and IT systems complexity. A number of
questions related to “how many” (i.e., SKUs, manufac-
turing locations, customers, etc.) comprise each survey
category.
PARTICIPANT OPINIONS ON COMPLEXITY
We asked our survey participants about the complexity
elements that comprise their supply chain and the
specific factors they believe contribute the most to
increased complexity. Over two-thirds of our sample
ranked “Number of SKUs” as the first or second most
significant contributor to supply chain complexity. Over
a third of the sample ranked “Number of Raw Materials/
Components” or “Number of Customers” as the first
or second most significant contributor to supply chain
complexity (see Figure 3). This analysis will explore
the relationships between these perceived drivers of
complexity and actual performance.
COMPLEXITY ASSUMPTIONS
For each complexity factor, PRTM and PMG created a
Level 1 scorecard that comparatively illustrates median

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 Figure 2: The Supply Chain Performance Scorecard

Performance Vs. Comparison Population

Key Key Performance Major Dis- Best-in- Company

Perspectives Indicators Opportunity advanatge Median Advantage Class Performance

On-Time Delivery: Customer 90% 99% 80%

On-Time Delivery: Internal 95% 99% 90%

Customer-
Facing OFLT (Days) 6 Days 2 Days 10 Days

Upside Make Flexibility (Days) 70 Days 20 Days 65 Days

Total Supply Chain

10% 5% 10%
Management Cost (% of Rev)

COGS (% of Rev) 65% 35% 70%

Internal- Inventory Days of Supply 50 Days 20 Days 55 Days

Facing
Cash-to-Cash Cycle Time (days) 60 Days 15 Days 65 Days

Net Asset Turns 2 Turns 5 Turns 1 Turns

EBIT (% of Rev) 15% 35% 10%

Figure 3: Factors Responsible for Supply Chain Complexity

70%
60%
60%

50%

40% 35% 34%

30% 28%

20% 15%
10% 9%
10% 6%

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Level 1 performance between the first quintile (the least
complex supply chains (i.e., those supply chains main-
taining the fewest of a given element)) and the fifth quin-
tile (the most complex supply chains (i.e., those supply
chains maintaining the most of a given element)).
SKU COMPLEXITY
At no time in recent history has SKU proliferation
been as acute as it is today. As companies expand into
emerging markets, acquire legacy brands, and leverage
differentiated products to expand market share and
cement customer loyalty, supply chain managers watch
SKU portfolios expand beyond unimaginable horizons.
Our sample recognizes the influence that SKU prolif-
eration can have on supply chain complexity. However,
what, if any, impact does SKU proliferation have on
performance? We leveraged our sample data to inves-
tigate the relationship between SKU complexity and
Level 1 SCOR performance (see Figure 4). The results
are dramatic.
In our Level 1 scorecard analysis, we compared the
supply chains in the sample that maintain the highest
number of active SKUs within the total sample to the
supply chains in the sample with the fewest number of
active SKUs. In this analysis, we found that first quintile
companies with the fewest SKUs outperform the fifth
quintile companies in all 10 Level 1 metrics (see Figure 4).
The addition of significant numbers of SKUs can compli-
cate plan, source, make, and deliver processes. As the
effects of SKU complexity compound across each sector
of the supply chain, it is not surprising that performance
across a number of key indicators may suffer. To the

Figure 4: Level 1 Scorecard—Number of SKUs

Number of SKUs

Key Key Performance Fewest Quintile Most Quintile

Perspectives Indicators (n=18, Median=55 SKUs) (n=18, Median=9,800)
On-Time Delivery: Customer 98% 80%
On-Time Delivery: Internal 97% 90%
Customer-
Facing OFLT (Days) 3 Days 7 Days
Upside Make Flexibility (Days) 29 Days 105 Days
Total Supply Chain
10% 11%
Management Cost (% of Rev)
COGS (% of Rev) 43% 72%
Internal- Inventory Days of Supply 33 Days 75 Days
Facing
Cash-to-Cash Cycle Time (days) 33 Days 61 Days
Net Asset Turns 3 Turns 1 Turns

EBIT (% of Rev) 18% 8%

Overall Overall Level 1 Advantage

Advantage Disadvantage

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dismay of the C-suite, eroding performance in critical their enterprise and within competencies of their supply
supply chain metrics—such as inventory management, chain organizations.
supply chain management cost, and delivery perfor-
mance—can result in unexpectedly lower profitability. RAW MATERIAL COMPLEXITY

Are today’s supply chain leaders aware of the effect
SKU proliferation can have on enterprise performance?
We suspect that, in some cases, the answer is “Yes”.
Some companies are offering a wider array of SKUs in
order to squeeze out competitors and solidify customer
loyalty, knowingly sacrificing some levels of profitability,
delivery performance, and other Level 1 performance
in the process. However, we suspect that there are just
as many enterprises that are less aware of the relation-
ship between SKU complexity and performance. As a
result, many companies are in dire need of realigning
their product portfolios to fit within the overall goals of
In our second scorecard analysis, we explore the rela-
tionship between raw material/component complexity
and Level 1 performance. In this analysis, the lowest
complexity quintile (fewest raw materials) outperformed
the highest complexity quintile (most raw materials) in
eight of the ten Level 1 metrics we analyzed, including
delivery performance, total supply chain management
cost, working capital, and profitability (see Figure 5).
Narrowing the range of raw materials or components
may be an attractive strategy for many supply chain
organizations. Having fewer raw materials flowing
through the supply chain allows companies to optimize

Figure 5: Level 1 Scorecard—Number of Raw Materials/Components

Number of Raw Material Item Codes

Key Key Performance Fewest Quintile Most Quintile

Perspectives Indicators (n=18, Median=14 Codes) (n=18, Median=8,800 Codes)
On-Time Delivery: Customer 91% 85%
On-Time Delivery: Internal 91% 88%
Customer-
Facing OFLT (Days) 5 Days 8 Days
Upside Make Flexibility (Days) 180 Days 45 Days
Total Supply Chain
9% 10%
Management Cost (% of Rev)
COGS (% of Rev) 76% 59%
Internal- Inventory Days of Supply 37 Days 75 Days
Facing
Cash-to-Cash Cycle Time (days) 48 Days 75 Days
Net Asset Turns 1 Turns 2 Turns

EBIT (% of Rev) 17% 9%

Overall Overall Level 1 Advantage

Advantage Disadvantage

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supply operations, lower raw material inventory levels,
and facilitate lower order fulfillment times.
However, an interesting caveat to this strategy emerges
from the data. The high complexity quintile performed
better in “Upside Make Flexibility” (i.e., the number of
days required to increase output by 20%). Sourcing a
wider range of materials, the high complexity quintile
may benefit in flexibility performance by being able to
substitute alternative materials for components for which
available supply is limited. Despite this advantage, the
lower complexity quintile maintains the overall Level 1
advantage in this example.
CUSTOMER COMPLEXITY
Over a third of our sample identified “Number of
Customers” as the primary or secondary driver of supply
chain complexity. The obvious question follows: “Is it
more advantageous to have more customers or fewer?”
Interestingly, when we review Level 1 performance
between the most complex and least complex quintiles
in the sample (in terms of customer base), the answer to
this question is relatively complex (see Figure 6).
On average, the quintile representing the fewest customers
reported lower total supply chain cost, lower inventory,
and better asset performance when compared to the most
complex quintile. On the other hand, the quintile repre-
senting the most customers reported better OFLT, upside
make flexibility, and EBIT performance. Both samples
reported relatively similar delivery performance.
Given this result, should supply chain managers look
to expand or consolidate their customer bases? Again,
the “right” number of customers depends on the goals

Figure 6: Level 1 Scorecard—Number of Customers

Number of Customers

Key Key Performance Fewest Quintile Most Quintile

Perspectives Indicators (n=18, Median=73 Customers) (n=18, Median=57K Customers)

On-Time Delivery: Customer 97% 96%

On-Time Delivery: Internal 97% 97%
Customer-
Facing OFLT (Days) 14 Days 2 Days

Upside Make Flexibility (Days) 90 Days 60 Days

Total Supply Chain
8% 12%
Management Cost (% of Rev)
COGS (% of Rev) 72% 42%
Internal- Inventory Days of Supply 38 Days 43 Days
Facing
Cash-to-Cash Cycle Time (days) 38 Days 38 Days
Net Asset Turns 3 Turns 1 Turns

EBIT (% of Rev) 12% 31%

Overall Overall Level 1 Advantage

Advantage Disadvantage

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and structure of the enterprise. In recent years, we
have seen many companies consolidate their customer
bases around large buyers that offer significant revenue
opportunities and allow enterprises to lower their supply
chain management costs. We have also watched other
companies expand their customer bases through small
volume dealers and distributors and direct operations,
in an attempt to avoid commoditization and maintain
historical profit margins.
As a result, enterprise and supply chain leaders need to
align their customer strategies around their enterprise
strategies, acknowledging the trade-offs that may result
from pursuing a large or small customer-base strategy.
DISTRIBUTION CENTER COMPLEXITY
In addition to looking at the three factors most influential
to complexity, we also wanted to examine a factor that
few participants ranked highly as a contributor to supply
chain complexity. While we agree with our sample that
SKUs, components, and customers are certainly drivers
of complexity and, in turn, performance, we wondered if
there are less obvious relationships between certain other
complexity factors and performance.
Less than 10% of our sample ranked “Number of Distri-
bution Centers” as a major contributor to supply chain
complexity. However, is there a relationship between
distribution center complexity and performance?
To our surprise, our Level 1 scorecard analysis reveals
that when we examine distribution complexity, it is the
high complexity quintile (i.e., companies maintaining
the highest Number of distribution centers) that has
the advantage. Among the companies in our sample,
the high complexity quintile outperforms the low
complexity quintile in seven of ten metrics, including
delivery performance, OFLT, COGS, working capital,
and profitability (see Figure 7).
Our suspicion is that companies maintaining a large
number of distribution centers have large customer
bases, which, as discussed earlier, has certain advan-
tages. However, high distribution center complexity may
also benefit delivery and working capital performance by
offering increased customer proximity.
In an increasingly customer service-centric business
environment, it may pay to be close to your customers.
While a larger distribution network is certainly more
costly than a smaller distribution network to operate—
as the difference in total supply chain management cost
between our two samples reflects—a larger network of
distribution centers can place your products closer to
your customers. In highly competitive and increasingly
commoditized industries such as chemicals, consumer
goods, and even electronics, customer proximity may
mean the difference between customer loyalty and
customer erosion.
CONCLUSIONS
Although the relationships between supply chain
complexity and performance are not always apparent,
there is no question that managers and C-level execu-
tives need to consider the potential consequences of
supply chain complexity on performance.
In some cases—such as SKU and component complexity
and increased complexity—can burden overall perfor-
mance. However, in other areas— such as customer and
distribution center complexity—the relationship between
complexity and performance may be more positive.
Regardless of the type of complexity in question, C-level
executives designing enterprise strategies must be
willing to ask themselves: “If I increase the complexity
of “X,” how will this affect my supply chain and my
performance?” Executives must make sure to align deci-
sions that impact supply chain complexity with overall
enterprise strategies and the operational realities of their
respective supply chains.
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Figure 7: Level 1 Scorecard—Number of Distribution Centers

Number of Distribution Centers

Fewest Quintile Most Quintile

Key Key Performance
(n=18, (n=18,
Perspectives Indicators
Median=1 Distribution Center) Median=68 Distribution Centers)
On-Time Delivery: Customer 83% 98%
On-Time Delivery: Internal 93% 98%
Customer-
Facing OFLT (Days) 8 Days 2 Days
Upside Make Flexibility (Days) 60 Days 60 Days
Total Supply Chain
9% 14%
Management Cost (% of Rev)
COGS (% of Rev) 76% 51%
Internal- Inventory Days of Supply 58 Days 50 Days
Facing
Cash-to-Cash Cycle Time (days) 65 Days 45 Days
Net Asset Turns 2 Turns 1 Turns

EBIT (% of Rev) 8% 17%

Overall Overall Level 1 Advantage

Advantage Disadvantage

For more information, please contact:

Roger H. Reis, Analyst
rreis@pmgbenchmarking.com, +1 781.434.1470

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