Preston Smith's Corner

Calculating the cost of delay

December 1998 Quick Tip

Many managers in industry want to get their new products to market faster. Ironically, when we ask them just how rapid product development will improve their profitability, we tend to get a quite different answer from each manager. Consequently, you can imagine the confusion at the worker level when time to market is mentioned. Some developers actually believe that shorter development cycles means skipping steps of the process.

This confusion needn’t exist. You can easily calculate just how much one week of delay on a project will impact your bottom line. To get this cost of delay — or urgency factor — build a life-cycle profit-and-loss statement for the product, assuming that it is on time. A simple spreadsheet on one page of paper will do. Then build a variation of this spreadsheet reflecting lost sales if the project is delayed by a significant amount, say three months. Calculate the profit lost by delay, and divide by the number of weeks of delay used to give you the cost of delay, in profit lost per week.

In doing this calculation independently for each project, one discovery you will make is that all of your projects are not equally urgent. You are likely to see a variation in the urgency factor of ten-to-one or more among your active projects. Then you and your developers can achieve consensus on time to market, applying it selectively where it will really have an impact on your bottom line.

(c) Copyright 2013 Preston G. Smith. All Rights Reserved.

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