Complexity costs – additional expenses in the supply chain

Complexity costs are costs that are difficult to calculate and are generally associated with the continuously increasing complexity of processes, services, customer and supplier relationships as well as diversification, i.e. the variety of products. In order to uncover the mostly non-transparent cost drivers, revenues and costs, both within the company and in the associated supply chain, are documented, systematized and presented in detail.

When assessing complexity costs, the actual drivers (causes) of complexity are localized. Processes or organizational structures, individualization, trends and general market adjustments (larger storage space, modernization of the conveyor landscape, software updates, etc.) must therefore be identified within the mostly individual sphere of influence, evaluated and finally handled with suitable measures (from an economic point of view). Around 80 possible complexity drivers have currently been scientifically identified.

The difficulty in localizing complexity costs

They all continuously generate individual costs, but in principle they always interact. Complexity costs therefore grow exponentially with each individual modification of internal processes and due to their dynamics. When analyzing the costs, however, the required transparency is subsequently created, which can then be used to make well-founded decisions on everyday issues. They are usually unknowingly managed as overheads in companies and are difficult to allocate to a specific product.

Example of complexity costs:

A company has successfully launched a product and now needs to ensure sufficient replenishment. Additional expenses are then required for the necessary replenishment, for a sufficient range, which can even extend to the entire supply chain (production, logistics, sales).

Additional expenses include

  • Additional development
  • Upgrading of production hardware
  • Material costs
  • Increased handling
  • Higher storage and transportation costs
  • Customer service
  • Troubleshooting costs
  • Spare parts
  • Supply chain communication costs
  • Product costs

Conclusion: The needs of customers and their demand lead to a focus on customer satisfaction-oriented corporate management. The customer determines how and what is produced through his demand, his extra wishes. The resulting complexities in design, production and marketing fundamentally affect all areas of the company as well as the supply chain itself. In most cases, however, it is not possible to completely eliminate complexity costs. The company PWC has published a good example of optimization.

Further information can be found under Efficient structures through sustainable cost reduction.