This is a very important book. The authors’ premise, which would be supported by any Pareto Analysis, is that all businesses have products, services, or customers that do not add any profit to the business. Pareto tells us 20% of the items sold creates 80% of a company’s revenue. At Sixth Floor Consulting Group, we have found this to be true in all businesses we have worked with. So what is the other 80% contributing? For the most part, your “B” items (usually the next 30%) still add profit; however, the “C” items usually lose money.
Why don’t more businesses stop making these items? There are two factors driving why these are not addressed. First, no customer will ever complain about additional functionality/complexity in products. They may not be willing to pay for this complexity, but they won’t stop buying because of it. Second, standard cost accounting, with its overhead absorption calculations, does not give a true picture of a low (or high) volume item’s true profit contribution.
This book uses informative examples from companies who were willing to remove complexity for which the customer was not willing to pay. These companies include Dell, Toyota, Intel, and Wal-Mart. The book also examines the profitability of those companies who were not willing to take that step. It gives quantitative formulas to determine complexity and economic profit. These formulas are not easy to follow, especially for anyone willing to venture beyond the Simplified Complexity Model. Fortunately, most of these can be built in Excel and then applied to a business. While not the easiest business book, it covers an important topic that every business needs to look at closely.