If you need to change the processes you are currently following, you might want to consider what the "Cost of Delay" could actually mean for you.
Cost of Delay Defined
The definition of Cost of Delay is, “a way of communicating the impact of time on the outcomes we hope to achieve. More formally, it is the partial derivative of the total expected value with respect to time. Cost of Delay combines an understanding of value with how that value leaks away over time.” However, to simplify it into layman's terms, it means to determine what it will cost you if you decide to delay something or on the opposite end of the spectrum, what it will be of value if you were to get it sooner.
What it does is to combine the urgency of you needing the item with the value of what you will get. The problem with that is that we don't always differentiate between the two. An example of this would be that sometimes we know that something is valuable to us yet we do not look at the urgency of needing the item sooner, rather than later.
Basically, Cost of Delay is a simple equation of the impact of time on value.
How to Quantify the Cost of Delay on a Feature, Project, or Initiative
The following graphic shows how the systems are optimized and the value stream of the system:
You typically will not locate a Process Cycle Efficiency lower than 80% which means that the waiting time dominates the end-to-end cycle. Even if you keep up with your own time spent waiting versus value, you will most likely find the same results.
The High Price of Queues
Given the above example, the Cost of Delay was over $200K each week and when multiplying that example for the 38 weeks that was waited, there was a revenue loss of around $8 million that could have been avoided if a Cost of Delay was worked at prior.
Your organization may not be aware of the queues but you certainly should know what the queue wait is costing your company.
A Need for Speed
Many companies set their sights on the part of the process that involves efficiency, instead of the end-to-end delivery of value. An example is that you will normally find a seamless route to getting approval and funding for the efficiency of the parts of the process that are optimized for those doing the approval basis but this affects the efficiency as well as the speed of the entire system.
This is typically an issue when people do not realize what the delays are costing them. This is why it is so important to understand your Cost of Delay. It not only quantifies the cost of the queues but without knowing the urgency and value, the optimization will be focused on other aspects.
Read More: Be Prepared For Delays
Urgency and Value
There is a valuable reason for knowing your Cost and Delay and this is because you will make more informed and better decisions. For one, you have to know the value in the first place and then realize that over time, that value decreases. That is the only way to fully understand what the queues and waiting are costing you.
The next factor is quantifying the Cost of Delay. While many people may discuss Cost of Delay and even act like they understand it, this is not always the case. Some even use it as a means to prioritize in a different way, but that is strictly one of the reasons to quantify it, not the sole reason.
More Than Prioritization
Cost of Delay understanding has three main components that are relevent to developing new services, products, or improving upon them.
- Making Better Decisions. This is done by economic trade-offs being visible to you. Each of the trade-offs are part of our creative process to find out what works best for the company and what is not working at all. For example, you may try experimenting with a variety of things such as optimizing batch sizes, keeping the length of queues under control, experimenting with WIP limits, or working out capacity utilization at appropriate levels. The bottom line is that Cost of Delay is a key component of how you manage your work flow.
- An Alternate Focus. Instead of focusing on cost and efficiency, it is better to focus on value and speed. Instead of trying to get someone to perform something like giving you a delivery date or estimating a cost without giving them an alternative solution, give a viable solution so that it helps both you and them. When you use Cost of Delay within these terms, you get better results that are satisfactory for everyone.
- Prioritization. In this component, there is an equation to use which is called CD3. This is the Cost of Delay Divided by Duration and gets you a better value. It has to be decided where to start, what order things should be done, and when to move on to something that is more imperative. Cost of Delay gives you a better handle on how to make prioritization easier and more effective.
Getting Started with Cost of Delay
As mentioned, there are numerous benefits to using Cost of Delay in your business. You can always start with something a little easier just in case you are not well-versed enough in this equation. Qualitative assessment is a good place to start by investing in CMMS software early helps to delay large capital expenses, ultimately increasing your return on investment.. It allows you to become more familiar with what you are doing and then how to implement Cost of Delay into your everyday business deals.
Basically, Cost of Delay is a simple equation of the impact of time on value.
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