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 Effective Engineering e-Newsletter – 8/14/2003

This is your bi-weekly e-Newsletter from Effective Engineering Consulting Services (www.effectiveeng.com).  If you would like to receive Effective Engineering e-newsletters as they are published, please send an email to e-newsletter@effectiveeng.com, and we will add you to our distribution list.

eN-030814:

Effective Engineering Quantified!
  By Tom Dennis – President, Effective Engineering [tdennis@effectiveeng.com]


In a number of previous e-Newsletters, I’ve discussed the negative impact of ineffective engineering (see eN-021107 – Ineffective Engineering Costs you Time, Money, and Customers!), of late project deliveries (see eN-021121 – Late Projects Kill Companies!), of poor product quality (see eN-021205 – Poor Quality Products Imply a Poor Quality Company), of adding people to late projects (see eN-021219 – Too Many Cooks Spoil the Broth), of poor focus (see eN-030522 – Keep Your Eyes on THE GOAL!), and more.  These have all discussed the impact of ineffective engineering in primarily qualitative terms, with some broad discussion of the quantitative impact.  This e-Newsletter will provide an example that quantifies more specifically the magnitude of that negative impact. This is still a fairly simplistic example that doesn’t cover the complexities and nuances of a real-world project, but it nonetheless scopes the problem in dollar terms that everyone can understand.

Assumptions:
► Assume that the project is scheduled to be completed in 12 months using 20 people during development, and requires 3 people for ongoing support after release to the field.  Further assume that the loaded salary per development person (that is, salary + benefits + apportioned development expenses) is $150K/year (or $12.5K/month).

► Assume this new product is projected to generate $12M/year in revenues (or $1M/month) in the first year of production, ramping up very quickly after release to the field.   Further assume that the product price is $10K (which means 1,200 customers are projected in the first year).

► Assume that the project actually takes 15 months to be released to the field, 3 months late.  Further assume that 2 months of this delay is due to poor planning and execution, and 1 month of this delay is due to quality problems uncovered during development and test.

► Assume that 4 people get added 6 months into the development effort to try to make up for lost time, and that they are there for the remaining 6 months planned plus the additional 3 months of delay, or for a total of 9 months.

► Assume that 1 additional person must be added for the sustaining engineering and product support efforts due to poor quality, and that that additional person must remain for the foreseeable future, at least through the first year after release to the field.

► Assume that 5% (or 60) of the customers will be lost due to the product release being 3 months late.

► Assume that 10% (or 120) of the customers will be lost due to poor product quality.  The quality problems from the field are what require the added sustaining engineering and product support person.

Impact on revenues:
► In missing the scheduled delivery date, 3 months of revenue is lost forever.  At $1M per month, this amounts to $3M in revenue lost forever.
► The loss of 5%, or 60, of the customers due to late delivery @ $10K/customer amounts to $600K in lost revenue over the first year of production.
► The loss of 10%, or 120, of the customers due to poor quality @ $10K/customer amounts to $1.2M in lost revenue over the first year of production.

The total revenue lost in the first year of production is therefore $4.8M, or a loss of 40% of anticipated revenue!  What company can afford this?  Further, $1.8M of this may be an ongoing loss after the first year of production.  Again, out of anticipated revenue of $12M per year, this is a15% loss in revenue.

Impact on development costs:
► The 2-month delay due to poor planning and execution costs $500K in additional development costs (20 people for 2 months @ $12.5K/person/month).
► The 1-month delay due to quality problems costs $250K in additional development costs (20 people for 1 month @ 12.5K/person/month).
► The 4 people added 6 months into the development effort and kept there for 9 months costs $450K  in additional development costs (4 people for 9 months @ $12.5K/person/month).
► The 1 person added for sustaining engineering /product support due to quality problems costs $150K for the first year of production.

The total development cost impact from the start of the project through the first year of production is therefore $1,350,000!

Total Revenue and Development Cost Impact:
By practicing effective engineering, the project could be completed on time, within budget, and with high quality.  Doing so could increase the company’s top line (revenues) by almost $5M, and reduce expenses, which impacts the bottom line (profits), by over $1M.  

The costs of an Effective Engineering engagement are insignificant compared to the gains that can be achieved.


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