Technical Decisions Series - Prioritization and Cost of Delay
One of the sources of waste that Lean recognize at any value flow chain is The Waste of Waiting. How often do you spend time waiting for an answer from another department in your organization, or waiting for a delivery from a supplier or an engineer to come and fix a machine? We tend to spend an enormous amount of time waiting for things in our working lives (and personal lives), this is an obvious waste.
In low uncertainty decisions, in order to compare the impact to the delivered flow of value and quantify the Waste of Waiting, we can calculate the cost of delay for each decision– its economic value over a period of time if it was immediately implemented. Described by Don Reinertsen as “the golden key that unlocks many doors“.
Cost of delay allows us to quantify the opportunity cost between a decision being made now now or later, and using money as the unit of measurement transforms stakeholder conversations from cost-cutting to delivering value.
Cost of delay = economic value over time if immediately available
From the book Lean Enterprise:
"To use Cost of Delay, we begin by deciding on the metric we are trying to optimize across our value stream. For organizations engaged in product development, this is typically lifecycle profit…When presented with a decision, we look at all the pieces of work affected by that decision and calculate how to maximize our One Metric That Matters given the various options we have. For this, we have to work out, for each piece of work, what happens to our key metric when we delay that work (hence, “cost of delay”)."
The most usual measure for practical use is the cost of delay divided by duration (CD3) in order to give a weighted measure of opportunity cost
Lets assume that we have 3 different features and we need to decide on the order that we are going to build the new features. By computing the CD3 and prioritize in descending order we achieve the minimum Total Cost Of Delay
it is easily understood if we examine two different scenarios ABC prioritization (which is the optimal) and CBA prioritization. The significantly different results, reveal the importance of this tool.
- ABC prioritization delay costs= 7
- CBA prioritization delay costs= 160
As a conclusion Cost of Delay is a useful tool that help us prioritize decisions that can be quantified