Wednesday, October 6, 2010

Calculating Costs of Product Schedule Delays

For our third semester Products and Services class with Dariush Rafinejad, we are reading his book : Innovation, Product Development and Commercialization.  

Chapter 3 covers Marketing Management, arguably the most important aspect of successful product development.  Taking examples from his experience in semiconductor equipment manufacturing, Rafinejad writes about the importance of the whole product.   Successful firms provide an ecosystem of products and services to the customer.  When the customer pays for the purchase, the journey ends for the sales force, but the journey is merely beginning for the customer.  (Rafinejad, 2007) The customer takes tremendous risk in a purchase, thus, lowering that risk is instrumental to closing a sale.   One way to lower that risk is by establishing a whole product offering that includes not just presale and sales support, but a comprehensive post-sale infrastructure including product install, support, performance guarantees and related services.  

In addition to the whole product, product planning is crucial.  Rafinejad comprehensively discussed various components of planning such as marketing research and analysis methods, product adoption curve, pricing theory and product roadmap.   He noted the interesting face that project delays are often more costly than increased development costs.  However, his short example left me wanting more.  Thus, I did further research led by the question “How does one calculate the cost of a schedule delay?”  
The question falls under the category of Project Management, and many books are available to help answer the question.  The Lean Product Development Guidebook suggests three regions of different schedule sensitivity that looks very similar to a product adoption curve.  Region A products enjoy monopoly in the market space, and thus have high schedule sensitivity.  Region B products with many competitors have lower schedule pressure.  And Region C products have the lowest sensitivity.  (Mascitelli, 2006)
 

(Mascitelli, 2006)

Upon deciding on the region of sensitivity, it is time to calculate the NPV of a delayed project.  There are three factors to consider in the calculation.  The first is the higher burn rate.  A delayed project usually comes with added worker time on the project, thus worker salaries and other costs contributing to the burn rate must be included in the NPVdelay calculation.  The second factor is the delay impact on product price in the market.  If the product is trying to capture first move advantage, the cost of delay can be significant.  The penalty is also significant for missing a market milestone such as an important tradeshow, or the buyer’s buying window.  The third factor is lifetime sales volume impact from the delay.  The table below shows typically impact on various product types from schedule delays.

(Mascitelli, 2006)





A schedule delay is usually caused by avoidable risks, and it is useful to map out the hidden risks prior to project initiation.  I find the following graph a useful way to visualize each risk and its impact.

(Kendrick, 2009)   

An important part of product development is product planning.  Performing adequate market assessments and careful risk analysis helps ensure a robust and successful product.

References:
Kendrick, T. (2009). Identifying and Managing Project Risk: Essential Tools for Failure-Proofing Your Project. AMACOM Div American Mgmt Assn.
Mascitelli, R. (2006). The Lean Product Development Guidebook: Everything Your Design Team Needs to Improve Efficiency and Slash Time-to-Market. Technology Perspectives.
Rafinejad, D. (2007). Innovation, Product Development and Commercialization: Case Studies and Key Practices for Market Leadership. J. Ross Publishing.