In the last post we discussed risk aversion. One of the pitfalls of being too risk averse is lost opportunity cost.
In an effort to develop the perfect product with maximum process capability and meeting 100% customer satisfaction the real cost of lost opportunity is often missed.
Consider a product which on release will generate, on average, $100,000 profit a month for 12 months. If the product release is delayed by 1 month the lost opportunity cost can be estimated as $100,000. What should be emphasised is that this amount will NEVER be recovered. If the product lifecycle is estimated as being 12 months depending on the competition then releasing the product 1 month late reduces the lifecycle to 11 months.
If that lost $100,000 was invested at a compound rate of 5% per year over ten years it would be worth $163,000 !
So here are some tips to minimize lost opportunity cost:-
1) Invest in the project at the front end, providing ample resource and support.
2) Fix the product spec before the end of the design phase.
3) 100% perfection is great but 95% is normally good enough for most customers.
4) Make it easy for engineers by setting SMART (Specific, Measurable, Aggressive, Realistic, Timely) targets.
5) Publicise Project Milestone targets.
6) Communicate Lost Opportunity Costs.
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