From a mere surface analysis, it is quite obvious that there are lots of benefits to be gotten from a swift product launch. When a product is launched as quickly and as efficiently as possible, it speeds up adoption and maximizes profit.
Most importantly, however, a fast product launch reduces cost of delay. To truly understand just how valuable reducing the cost of delay is, you need to have a solid understanding of its meaning in the first place.
To that end, below we take a look at cost of delay, outlining its meaning, importance, type, calculation, and how you as a product developer can maximize returns by minimizing cost of delay.
What is cost of delay?
Cost of Delay, also known as CoD, is a lean management metric that shows just how much value is lost when the launch of a product is delayed. In essence, cost of delay measures the negative economic impact which occurs when a product fails to make it to market at a specific time.
For most products, value tends to leak away with time, even if this leak seems imperceptible at first. Cost of Delay simply answers the question, "how much does a product tend to lose when the launch is delayed by a specific amount of time?"
Conversely, it also shows how much value is there to be gained when a product launch is sped up. In other words, "how much does a product tend to gain if it can be launched earlier by a specific amount of time?"
Cost of Delay calculations are crucial for product and software development projects, and are also applicable to other industries such as the pharmaceutical industry.
The importance of cost of delay
easier decision making
By understanding the cost of delay of a product, it becomes possible and a lot easier to make sound development decisions, which then goes on to increase chances of product launch success.
Better time allocation for individual processes
CoD analysis helps developers understand how much impact time spent during key processes has on resulting value. For instance, once CoD for a product has been determined, those in charge of key decisions can formulate how much time is needed for activities such as approval, backlog, and logistic testing.
Priority
CoD analysis also helps decision-makers prioritize certain product launches over others. For example, in a situation where two products are to be released at the same time but timing and resources only allow for the launch of one product.
In this hypothetical scenario, the first product has a Cost of Delay of $25,000 for a week, while the second product has a Cost of Delay of $50,000 for the same time period.
In this case, the CoD value makes the decision easier seeing as, naturally, the product with the higher Cost of Delay (the second product) should have priority simply because the company will lose more from its delay than they would from the delay of the first product.
Cost of delay and timeline
Cost of Delay calculations can also be used to optimize different expenses and timelines. For example, when choosing between two projects – project A with a cost of delay of $10,000 and a timeline of 2 weeks, and project B with a cost of delay of $2000 and a timeline of 8 weeks - it always makes more sense to go with the project that has a higher cost of delay and shorter timeline.
Calculating cost of delay
Cost of delay calculation is usually divided into four steps.
Step 1: Project timeline estimation
Before you can successfully calculate the cost of delay, you have to know how long the project will take to complete. You can do this by adding the duration of each stage of a project. The total value reflects how long the entire project will take.
Step 2: Calculate estimated profit
Estimated profit, which in this case is the same as theoretical loss, indicates how much sales the product would have generated had it been launched at the scheduled time. Theoretical loss may also include lost opportunities as time elapses, and cost of delayed production.
Step 3: Multiplying project timeline by lost revenue
Once you know your estimated profit and project timeline, multiplying both values gives you your cost of delay. So, for instance, in a situation where project A requires 4 months for completion and has an estimated profit of $8000 every month, and project B requires 3 months with an estimated profit of $15000 per month, the cost of delay for project A would equal $8000 x 4 = 32,000, while the cost of delay for project B would equal $15000 x 3 = 45000.
Types of cost of delay
There are four different types of cost of delay:
Fixed cost of delay
Standard cost of delay
Intangible cost of delay
Urgent cost of delay
Fixed date cost of delay
Fixed date cost of delay occurs in situations where the delayed product already had a fixed and rigid deadline for a handful of reasons. In this case, the cost of delay tends to start small and then starts to rise. Afterwards, it reduces again until it gets to a moderate but stable value.
Standard cost of delay
Standard cost of delay is the easiest to calculate. It starts small and then continues to grow at a rapid pace with time. A sales website going down, for example, tends to experience standard cost of delay the longer it takes to fix the problem.
Intangible cost of delay
Intangible cost of delay, as the name implies, usually results in less significant loss than others. This usually applies to projects that don't offer a high amount of return in the first place. An example of a project with intangible cost of delay is updating the user interface of a web app.
Urgent cost of delay
In urgent cost of delay, CoD tends to be quite high, which means there is very little margin for errors that may lead to delay.
Minimizing cost of delay
At this point, it is clear that understanding cost of delay is absolutely important and project managers must do everything in their best to minimize it as much as possible.
To do this, steps like prioritizing backlog, implementing shared leadership, making use of appropriate software and optimal role assignments should be considered.
How do we manage cost of delay
LEA provides numerous tools that can help you in your quest to achieve launch excellence. One of these very useful tools is also a cost of delay calculator.
Try it yourself and have your first experience with tools from within LEA.
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