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Eric Graves

Aerospace and mechanical engineer turned NPD systems engineer, Eric spends his time engineering better product develop systems, using PLAYBOOK as his tool of choice!

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What is Cost of Delay? (Part 2)

Eric Graves- 01/24/17 10:05 PM

This is Part 2 in a series of posts discussing Cost of Delay and making objective new product development project decisions based on economic analysis.

In this post we will define Cost of Delay generally and then talk specifically about its application in product development and see it represented graphically.

What is cost of delay?

So what is the definition of Cost of Delay? Cost of delay is the difference in the value of doing something sooner vs. doing it later. For example, the cost of delay of a new product development project is the amount of additional profit you would make by launching a product at an earlier time 'X' vs. launching at a later time 'Y'. It is the total profit-dollars lost per unit of time of delay, e.g., the total amount of dollars lost, per month, week, or day of delay.

Examining product life-cycle to understand profit

Although there are many different situations and scenarios for different types of projects and products, in most cases it is fairly easy to estimate this important metric. In the images below, the green curve represents the money we expect to make (per month) if we launch ‘on time’. The area under the curve is the total cumulative profit we expect to make over the entire time period.

p2fig1 full

Figure 1: Monthly profit, projected for entire life-cycle

The forecast in the image above predicts sales for a full product life-cycle. However it is unusual to predict sales for a full life-cycle for most hardware products.

As an example, medical device life-cycles are often 5 to 10 years or longer, but revenue and profit goals are more short-term. As such, forecasts are only made for the first several years of the life-cycle. The product life-cycle curve is cut short, as in the graph below where sales rates do not decline.

p2fig2

Figure 2: Monthly profit, projected for partial life-cycle

The numbers needed to build these profit curves are readily available as sales forecasts. They are typically developed early for a new product, and they can be combined with actual monthly sales volumes of similar products in the past.

When combined, these figures give us a monthly forecast of projected profits.

What happens to profit when we are late to market?

Now let’s look at what happens when we are late to market. In the following images, the red or orange curve represents what happens if we are one month late.

p2fig3

Figure 3: Monthly profit, projected for entire life-cycle, on time vs. 1 month late

p2fig4

Figure 4: Monthly profit, projected for partial life-cycle. On Time vs. 1 month late.

As you can see, the total amount of money made is reduced when we are late to market.

The area between each curve is the difference in cumulative profit. For example the difference between the green and the orange curve or the difference between the green and red curve is the difference in cumulative profit. This is the Cost of Delay.

See the next post in this series, where we learn how to quickly estimate the Cost of Delay of a product development project.

Want to learn more about how to calculate cost of delay? Download the eBook, "Profit Driven Development and Cost of Delay: A Guide for Decision Makers."

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    • Part 1, How can the Cost of Delay improve product development velocity and increase profits?

    • In Part 2, What is the definition of Cost of Delay?

    • Part 3: How to quickly estimate the Cost of Delay.

    • Part 4: How to quickly estimate the other terms generally required to create a project economic model.

    • Part 5: Examples of how to calculate the cost of delay and the subsequent ROI of making some common project trade-offs.

    • Part 6: Important factors to consider when implementing a project economic model and how to manage uncertainty of model inputs. 

    • Part 7: How to calculate the economic value of a decision quantitatively.

    • Part 8: How to communicate and account for uncertainty in each decision's impact on launch date, sales volume, and the other Economic Variables.

    • Part 9: How to increase certainty in our economic decisions, in part by increasing the accuracy of our impact estimates.

    • Part 10: Critical success factors for Implementing Project Economic Modeling and Economic Decision Making.

    Related Posts: 

    WSJF and How to Calculate It

    WSJF and Architectural Runway

    Don Reinertsen on cost of delay

    Wikipedia on cost of delay

    Editor's note: This post was originally published in 2015 and has been updated for accuracy and comprehensiveness.