Turnaround and Restructuring – Measuring the Cost of Delay

In continuing the discussion on the high cost of delays in making decisions, an important issue is to understand that delays in decision-making to take action can create opportunity costs. I define this cost as the subjective or objective losses associated with some event not happening. Subjective costs could include the lost competitive advantage, lost market share or high levels of customer service issues. On the objective side, these could be incremental operating costs, lost product margin or loss of top line revenue.

Some examples of these costs are listed below:

  • The late introduction of new product, missing the optimum release window, could markedly affect revenues and length of the life of the product.
  • Not being first to market could limit the overall market share, and its advantages, that a company could attain in its markets.
  • Poor employee or process quality or productivity can drive direct costs up, hurting margins.
  • Excessive operating overhead and transaction costs can decrease profitability.

To drive the point home, let’s analyze two scenarios and the real costs associated with each. In the first scenario, a seasonal product introduction was delayed due to project mismanagement and poor decision-making, making the product release miss the optimum retail window. The result of this delay caused retailers to put competitive products on the shelf and the resulting first year release of the product was only 25% of the planned $6.0M first year revenue. In this case, the opportunity cost was $4.5M in revenue, and at a 50% margin, would equal mean $1.5M in product margin.

In the second scenario, the cost came from not replacing a poor supervisor. This supervise had 20 personnel that had poor quality and productivity performance. The measurable costs that were happening each year included the following:

  1. Rejects and rework costs were double the average, with this incremental cost measuring $120K each year,
  2. Productivity was low, yielding the equivalent of two extra headcount in his department at annual costs of $60K.
  3. Quality costs and lost productivity created shipment delays and subsequent loss of sales revenue of $1.0M in revenue at 50% margins, totaling $334K in lost margin contribution.
  4. The total cost of not replacing this supervisor was $514K each year.

In our business restructuring work, we see that most businesses suffer from the high cost of not being decisive, especially on the tough personnel issues. The fallout of this indecision is real opportunity costs, and as can be seen from the above samples, these can be measured. In tough economic times, a business needs to be proactive in making decisions or it can cease to exist. Of the two options, it is far better to make a decision and have a chance of success than to not make the necessary decision and fail.

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Posted in Blog Post, Restructuring Businesses and Struggling Businesses

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