I spend a lot of my time these days speaking with engineers at companies that make things -- whether they are working at the brands doing the design work or at the factories doing the building. I usually open the conversation with an icebreaker: “Have you ever seen a new product get delayed?” Sometimes I get laughs, sometimes solemnity; overwhelmingly the answer is “all the time”.
What’s even more interesting is that most of these engineers acknowledge that these delays are expensive, but that they or their companies aren’t really doing much about it. One of the lead engineers with a recent customer described it this way: “If we keep doing the same thing, and expecting different results, that’s insanity. We need to try something different.” Within hours of deployment of an Instrumental system on their factory line, that team had already found ten different issues that concerned them -- and they were off and running towards improvements.
Part of the problem is that many engineers and even engineering leaders are so consumed in the thick of fire-fighting the issues that they only see a part of the toll that the delay takes on the company: an expensive tooling modification, extra travel, or low employee morale. These unexpected costs are actually the smallest piece in a three-part pie.
Three Components of the Cost of Delay
The three main components in calculating the cost of delay, from most concrete to most difficult to predict, are:
Employee Expense - how much the company spends to sustain R&D efforts for longer than planned before those resources can be allocated to a different project.
Sales Opportunity Loss - how much the company loses by not having a product in market during the time of delay. Essentially, while your product isn’t shipping, your competitor is scooping up market share or catching up behind you, reducing the overall number of units you will sell. Significant delays not only cause a loss of a “peak day of sales”, they can also reduce the height of the peak itself. The canonical consumer electronics example of a delay that would result in significant peak loss would be missing Christmas sales. While this is arguably the most difficult to calculate, even simple and conservative models reveal how big this part of the pie is: ranging from $40,000 to multiple millions for each day of delay, depending on peak volume expectations.
Unexpected Costs - incidental one-time costs of tooling modifications or extra travel -- while often the most visible, this is usually the smallest contribution to the overall cost of delay. For the sake of this calculator, we are assuming these particular unexpected costs are raised by a late-discovered issue (DVT or later) -- the leading cause of schedule delays cited by our engineer interviewees.
In efforts to provide some more insight, we’ve put together a simple cost of delay calculator.
Try some examples in the calculator, and see for yourself:
Employee Expense - 100 full-time engineers, operations, marketing, and other support employees making an average of $110,000 / year: $42,146 / day
Sales Opportunity Loss - A $325 retail price, peak of 1M units sold each month, with 25% margins and three months of peak sales. Assume the delay is short enough that a peak reduction does not occur: $2.67M / day
Unexpected Costs - When I rolled the dice, I got hit with two tooling modifications -- costing me $60,000, but more importantly, 28 days before I can get my schedule back on track.
This setback will cost BigCo $76M. Yes, this is a huge number -- and most of it is due to lost sales opportunity while the team is struggling to fix an issue and roll in two tooling modifications. Having trouble believing it? Rerun the number for some guesses around Apple AirPods, which were announced in September but only shipped in December.
Employee Expense - 30 full-time engineers, operations, marketing, and other support employees making an average of $110,000 / year: $12,644 / day
Sales Opportunity Loss - A $325 retail price, peak of 7500 units sold each month, with 35% margins and a two month peak. Assume the delay is short enough that a peak reduction does not occur: $28K / day
Unexpected Costs - When I rolled the dice, I got hit with needing to build 100 additional units for a DOE, or experiment. This is a pretty light hit -- only $21K for the units and 6 days of delay to kit, build, and test those units.
This setback will cost SmallCo $265K -- let’s hope it’s the only one they have.
Pulling it Together
While the optimist in me wants to believe a perfect new product development cycle is possible (our calculator includes this possibility), if it does happen, it’s very rare.
The Instrumental system is designed to help engineering teams reduce inevitable delays in two ways:
Our technology helps engineers to discover issues earlier in the build process where the delay for tooling, re-spins, and other modifications can be rolled into the normal iteration process between development builds, preventing Sales Opportunity Loss.
Our technology reduces the time between issue discovery and issue root cause by either providing clear evidence of root cause right in the tool, or by quickly eliminating potential root causes that your team should not spend time investigating. This can reduce the need for additional DOEs, travel, and other unexpected costs -- while also keeping your schedule on track.
Given the cost of delay, I scratch my head a bit when a prospective customer tells me: “We love what you’re doing, but we are really cost-conscious.” Since delays are so prevalent and so expensive, a truly cost-conscious company would be looking for ways to reduce these delays to save money and increase the predictability of their bottom lines. The Instrumental system does just that.
What about you? Check out our cost of delay calculator to see how much your company loses for each day of delay.