About 10 years ago, very few companies that we talked to knew what Cost of Delay was, much less what their own number was for any of their products. Gradually, more and more companies became aware of this (largely due to the efforts of Don Reinertsen and his books and workshops), and started to calculate it for their products.
Nowadays it seems that most companies have heard of it, but still don’t know the actual number. They usually say something like, “We don’t calculate it for every product, but we know it’s high.”
That’s unfortunate because the benefits of knowing this number are so much greater than the difficulty of calculating it. In other words, there’s an ROI to knowing your Cost of Delay. Not convinced? Here are seven benefits of calculating the Cost of Delay...
Seven benefits of calculating the cost of delay
Know the dollar value of launching late
This one is pretty obvious. Calculating the cost of delay tells everyone the cost of being late to market. If you haven’t calculated this yet, don’t be surprised if your Cost of Delay is between $200K--on the low end--to over $1M on the high end, for each month you’re late to market. And remember, we’re talking profit, not revenue. Break this down by day, and you can easily show just how important it is for teams to have correct priorities for all your projects, every single day for everyone on the team.
Prioritize projects based on profit
When one project has a much higher cost of delay, it’s easier for teams to decide on which project takes priority. But don’t forget to use Weighted Shortest Job First if they have different durations.
Understand when paying for resources to expedite the project makes financial sense
Calculating the cost of delay will let you know when it makes sense (or dollars!) to add resources to your project in order to meet your launch date, or pay for expedited shipping or development from your supply chain. Remember though, you don’t have to rush everything—just the work on the critical path.
Make profit-based project trade-off decisions
Knowing the Cost of Delay is one of the variables needed in the Project Economic Model (PEM) that allows teams make trade-off decisions between schedule, project budget, product cost, and sales performance. For example, does it make economic sense to add a feature that will increase COGS by 1%, increase sales by 2%, but delay launch for three weeks? Decisions like these are being made frequently, and getting it wrong could cost you several hundred thousand dollars each time. Fortunately, if you’ve developed your PEM, team members can easily make these decisions on the fly and everyone knows they chose the correct answer.
Understand the impact on profit of launching earlier
Sharing the good news helps morale and ensures team engagement. Cost of delay is normally used to look at lost profit, but what if you could share how much more profitable your launch was because the team got done early? Now that’s valuable!
Put a dollar value on eliminating queues
Queues are where your work is sitting idle, waiting to be worked on. Most companies know they exist, but can’t always say where they are, or how long the work is being delayed. That’s unfortunate, because they’re most likely costing hundreds of thousands of dollars in Cost of Delay. If you’ve been begging for resources to help with the workload on your department or team, being able to quantify the impact in dollars is a good way to get budget for the help you need.
Prevent decisions from being made based on who has the most political clout
Decisions are often made in favor of the most persuasive person. Instead, Cost of Delay ensures that difficult decisions are made with data that compares the profit impact of the various options. Since Cost of Delay usually has such a large impact to profit, having this number for each product ensures decisions are made around a common and sensible variable.
As you can see, knowing the Cost of Delay has a number of project management benefits. And after you’ve done it once, it’s not that difficult to create subsequent ones. So we’ve created a free template with a detailed video to help you get started (below).
Good luck, and feel free to reach out if you have any questions! Or better yet, share an example with us on how you used Cost of Delay.
Watch the video and download this free excel spreadsheet template for calculating Cost of Delay.