Cost of delay to highlight the cost of queues: fundamental step to introduce the Kanban methodology.

Paul (the quality coordinator of BIT), was able to obtain the sustain of HR to introduce Kanban methodology in BIT. But this was not enough: he needed now the support of Finance.

“Fortune favors the brave”.
Finance asked him to help in proposing a priority methodology for the backlog of Project portfolio management of BIT.

The Story Mapping visual approach was favorably accepted by BIT management.
Employees reveleaded that there convinced that current projects were (finally) alligned with the BIT Strategy but they also believed that there was not enough trasparency on the prioritizion of the backlog (the passage from “Framed” to “To Do” )

Management recognized that the choice of which project should start first was indeed influence by “political” games and asked Finance to propose a “mathematical” technique.Finance, on their part, knew that there was really no true objective tool(s) to prioritize a backlog and decided to involve the sustainer of the Story Mapping visual approach: Paul.
Moreover, the quality coordinator was quite used to work with groups that had to find a way to reach consensus or priorities.

Paul could not believe to this opportunity. He could help Finance and Management to adopt a very accepted prioritization technique and in the same time raise awareness of the cost of queues in the finance team.

Cost of Delay.
Fortunately for Paul, the Cost of Delay is an excellent criteria to prioritize the execution of the backlog of projects.
Every finance team (as well the top management team) is familiar with the concept of ROI.
BIT is not exception (even if they prefer to estimate it in points).
In such a measure, the concept of length of the project is present but it is not placed in the current time line of the Company.
Let us take an example of ROI analysis of 3 projects for a period of 3 years:

Cost of Delay

If we should prioritize the three projects based on the ROI, the project A would be – by far – the least interesting.
Cost of delay is a key metric in lean management that represents the economic impact of a delay in project delivery. If we look at the cost of delay of each project, on the contrary, we arrive at the opposite conclusion: we should start with process A.
In this example, the (average) cost of delay is calculated at semester as BIT uses this period to review its backlog.
It is possible to integrate in the estimation of the cost of delay additional information related to the specific time line. Let us suppose that the project A is strictly related to a fix date of the next semester: for example, if we do not finish the milestone one of the project within the next semester, we will have a liquidate damage of three thousand euro. In this case, the (average) cost of delay for semester will be 4.178 euro (5.678 for the first semester and 2.678 for the second semester, to be precise): one reason more to start Project A as soon as possible.

The cost of queues.
Based on the above example, it was quite easy to convince Finance to adopt the cost of delay as a (first) priority criteria.
Leveraging this accepted cost, Paul wanted to bring Finance to reflect on the cost of the queues.
You do not need to be a Lean guru to understand the concept of the cost of inventory in hardware business process. However, the cost of “inventory” in unmaterial process is not so evident, especially in the finance function. At the end, this unmaterial cost is seldom tracked in standard account systems even in Company that are familiar with project management techniques.

For the finance team, the cost of a backlog of ideas (or any other unfinished unmaterial step) is normally invisible and by consequence, ignored.
But just because this inventory is invisible does not mean it does not exist. Product development inventory is observable through its effects, as clearly described by Donald G. Reinersten in his book “The Principles of Product Development Flow” of which this picture is taken.

Effects of Queues

Quoting Donald G. Reinersten, “By quantifying cost of delay, we can attach a specific financial cost to this queue time. Usually, delay cost rises linearly with queue size.”.
To raise awareness of the cost of queens in the finance team was a fundamental step for Paul to obtain the support of the finance team in the introduction of Kanban methodology (in which the cost of queues plays a fundamental role).

To Know more:

Let’s talk about Kanban with the Business Unit Managers.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.