This chart is a basic representation of a product/service lifecycle.
The yellow line represents an on-schedule introduction.
The blue line represents a delayed product introduction.
The reduced peak between both lines plots an area that can be defined as the Cost of Delay.
It should not be neglected, as its financial impact can be considerably high.
To calculate the Cost of Delay, a company needs to estimate what monthly profit can be achieved with the product/service that needs to be launched. The monthly profit loss due to late entry can be considered as Cost of Delay.
The Cost of Delay divided by the duration of the project, also known as CD3, is an important factor to consider, as it can help prioritizing projects.
CD3 can be calculated as such:
Prioritize: by FIFO (First In, First Out)
Prioritizing the projects by the FIFO technique will result in a considerable profit loss for the company.
Prioritize: by Monthly profit
Prioritizing the projects by the monthly profit they will bring to the company will still result in an overall profit loss.
Prioritize: by CD3
Prioritizing by CD3 is the best method to lower the Cost of Delay, as this will bring the best result to the company.
Combining CD3 with RFI/RFP
As the RFI/RFP process generally takes time, it is essential to know the importance of Cost of Delay and the calculation of CD3. The minimal amount of savings justifying the RFI/RFP procedure should thus also be calculated on basis of the Cost of Delay, in order to cover it.
Don’t forget that this only includes the financial aspect of the process, never underestimate the other variables to take into consideration when selecting a supplier.