Market Time (Cost of Delay): TTP’s to measure the time it takes to respond to market opportunities; and to prioritize development decisions by quantifying the impact of time on value creation & value capture.
Overview
Cost of Delay at its core per Donald Reinertsen is the "partial derivative of life cycle profit with respect to a change of the availability date of a product." In other words it is how value creation and value capture are altered based on the time of when the product/service will be available to the market. Cost of delay for product development requires the manager to make economic trade-off's between time and value.
Quantifying the Economic Trade-Off Decisions
Economic Trade-Off's
Lead Time: The time between the initiation and completion of a product, and plays an important role in demand forecasting.
Production Cost: The cost to produce the product to include manufacturing, deployment, and operations.
Value: Is the regard of importance, worth, or usefulness of a product or service from a functional or monetary view. This includes its disruptive or sustaining innovation properties. Value in Cost of Delay helps managers determine where to apply scarce resources to Increase Revenue, Protect Revenue, Reduce Cost, and Avoid Cost.
Development Cost: The cost of time and materials required to get the product or service to the market.
Risk: The uncertainty of how the product or service will fulfill the job to be done of the market at a given date and time.
Urgency Profile (Life Cycle)
Urgency Profiles are the life-cycle of the products measured by dollar benefits (Increase Revenue, Protect Revenue, Reduce Cost, and Avoid Cost) per week, affected by the time of when the product enters the market. There are three types of Life Cycle Peaks (Short-Term Life-Cycle Peak Affected by Delay, Long-Term Life-Cycle Affected by Delay, and Long-Term Life-Cycle Unaffected by Delay).
Short-Term Life-Cycle Peak Affected by Delay
- Benefits are short
- Benefits peak and decline quickly
- Measured in months vs. years
- Market evolves to new advanced products
Long-Term Life-Cycle Peak Affected by Delay
- Products 1st to market have advantage
- Market share hard for late entry products
- Products benefit from customer favor
- Market has small number of major players
Long-Term Life-Cycle Peak Unaffected by Delay
- Life-Cycle benefits are enduring
- Applies to most established organizations
- Improved efficiency, reduced time or cost
- Easiest life-cycle to calculate Cost of Delay
Calculating Cost of Delay (CD3)
"Cost of Delay Divided by Duration (CD3) is a prioritization (scheduling method) that maximizes the value delivered in a given time period, and is particularly useful when resources are fixed or scarce (Black Swan Farm, 2017)." Cost of Delay for this equation is factoring business value of the feature, understanding how value decays over time, and information discovery value (model below) divided by duration (time).
The benefit of CD3 is being able to obtain a measurement that allows a comparison of multiple opportunities with a difference of value, urgency and time.
The steps to calculate CD3 are:
Calculate the product/service expected revenue per week.
Estimate how much time is needed to implement the product/service.
Divide the revenue by the estimated duration (time).
References
1. Reinertsen, D. G. (2009). The Principles of Product Development Flow: Second Generation Lean Product Development. Celeritas Pub.
2. Cost of Delay. (2017). Retrieved from http://blackswanfarming.com/cost-of-delay/
3. Simon P & Charley K. (2016, June 29). Cost-of-Delay: Theory and Practice with Donald Reinertsen. Youtube. https://www.youtube.com/watch?v=OmU5yIu7vRw&t=4401s