Who hasn’t heard Henry Ford‘s legendary statement that “any customer can have a car painted any color that he wants as long as it is black”? How much has the world changed since then, from seller’s markets to buyer’s markets? Customers are placing ever higher demands on products. The differentiation(customizing) of numerous industrially manufactured products has increased exponentially, which has sometimes greatly compensated for the great achievements in logistics and supply chain management in terms of cost reduction. But are things that simple? Let’s take a closer look through the eyes of the SC manager.

Complexity costs = cost driver “complexity”?

The high number of variants (variety) of products undoubtedly generates high complexity costs in the relevant supply chain. Procurement, for example, has higher purchasing costs and higher process costs due to additional suppliers, lower order quantities and lower quantity discounts per item. Production has additional costs due to the creation of flexible manufacturing processes (keyword: one-piece flow), longer set-up times per item and therefore higher set-up costs per variant. Logistics, especially intralogistics, for example, is confronted with higher inventories, especially safety stocks, due to the smaller quantities of SKUs (stock keeping units). From a systemic perspective, the supply chain indirectly has to cope with additional costs due to the rapidly increasing number of variants, as the batch sizes per variant are getting smaller and smaller. These complexity costs, some of which are not directly attributable to the product, are referred to as “indirect complexity costs” in the relevant SCM literature. Are there tools to combat the rising complexity costs in the supply chain?

The “use of common parts” tool in SCM – one side of the coin

There is no doubt that there are numerous tools to combat the rising complexity costs resulting from increasing variant diversity, such as postponement, supply chain contracting or the use of common parts. By using common parts – as early as the product development and product design stages – some of these complexity costs can be avoided. Common parts are components that can be used in several variants and can therefore contribute to a reduction in complexity costs(Thonemann). In a nutshell, it can be said that the diversity of the product structure does not increase to the same extent as the diversity of variants if common parts are used specifically to counteract increasing complexity!

The other side of the coin of using common parts

The use of common parts can therefore reduce process costs in numerous sections of the supply chain. On the other hand, however, it should be noted that the use of common parts in research and development can result in additional costs: Common parts are usually more expensive than materials specially adapted to each variant. By definition, common parts have to fulfill a very wide range of functions and meet numerous requirements. From my consulting practice, I am familiar with the phenomenon that managers often only see the additional costs of increasing complexity, but not the additional costs of reducing complexity (Thonemann, Bretzke, Gudehus, Ihde).

Simplicity also costs

So in SCM – what a surprise – we are once again faced with a conflict of objectives. The increased use of common parts as early as the product development stage can reduce process costs in the supply chain. However, the common parts are in turn more expensive than the respective special variant due to the higher and broader requirements for materials and part design. This results in a classic optimization problem: it is therefore necessary to determine the optimum number of identical parts that should be used in a family of product variants (Thonemann).

We can also say: Not only complexity costs, simplicity also costs (E. Kurzmann).

For more information on costs in SCM, see“The cost of unused opportunities in supply chain management“