Effective Engineering e-Newsletter – 8/14/2003
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Effective Engineering Quantified!
Tom Dennis – President, Effective Engineering [email@example.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.
► 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
► 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
► 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
► 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
► 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
► 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
► 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
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
► 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
The costs of an Effective
Engineering engagement are insignificant compared to the gains that can be
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