Putting a Price on Time with Cost of Delay

Every single company I have worked at always looked at product development through a very simplistic lens – “Fast good, slow bad”. This is a careless and lazy way of evaluating product development. It leads companies to believe that ANYTHING they can do to shorten development time is worthwhile, even when it comes at the cost of other business objectives. As a Product Development Manager, I always wished I had one secret weapon that would cut meetings in half and help me make better decisions. This article attempts to explain that secret weapon – Cost of Delay.

Cost of Delay

Don Reinertson, in his book “Developing Products in Half the Time” explains that companies need to clearly understand that the objective of bringing a product to market is to make money. Speed or Rapid product development is a means to an end, but gaining speed does not necessarily equate to being profitable on the project. Us humans don’t have a great track record at determining the difference between urgency and value. Because there are other business factors that are affected equally by the management decisions that get made during the course of product development. Companies need to understand the impact that their decisions and trade-offs have on all these factors, not just their impact on gaining time.

The key is to understand what your development cycle-time is worth. What is a week or month of development cycle-time worth? How does delay impact the life-cycle profits? So, what is the Cost of Delay? It is the cost or value or impact, that additional cycle-time or delay would have on life-time profits of the product or service.

Let’s look at an example

Let’s consider the example of Funky Drums Inc led by CEO Bob Durman. He is grappling with a trade-off between a design feature and schedule. He is adamant about wanting a sub-component to be easily removeable for cleaning (he had a dream about a 5 yr-old spilling grape juice on the product) and believes this is a must-have for customers. This new late-breaking requirement requires a tooled-up solution versus the permanently attached solution that required no tooling and was in-line with unit cost targets. His development team advises him that they can’t meet the cost target due to being locked in with just one supplier who’s high quote they have to accept if they want to meet the schedule. The higher unit cost reduces the gross margin by 20%. If unit cost target has to be met, then they need to delay the project by 7-8 months in which time a more suitable supplier has to be found, vetted and  on-boarded.

Imagine the crazy meeting that’s going to happen now between the CEO, Engineering and Marketing. The CEO wants his dream feature (literally!) built-in. Engineering wants to keep costs down and launch on time. Marketing also insists on sticking to the original schedule and the importance of being first to market. Who is going to volunteer to tell the CEO the ramifications of including his dream feature?

How can Cost of Delay help?

But let’s just say we come to the meeting armed with the $ impact that each decision will have on the life-cycle profits of the new product? Adding the new feature and decreasing gross margin costs the company $350,000 over the course of a 5 year life-cycle. Delaying the product by 6 months costs the company $1,200,000 in life-cycle profits. Knowing this, what decision do you think Bob will make?

Even if the calculations are crude, it can still have huge positive impact on the development cycle-time, allowing all the stakeholders to evaluate all trade-off’s by looking at it through one common metric – Cost of Delay.

So, if you are looking for one metric that has a huge impact on rapid product development, Cost of Delay would be it.

Citations: [1] Smith, G Preston and Reinertson, Don. Developing Products in Half the Time, John Wiley & Sons, Inc, 1998

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