An Illustrative Example

Suppose that we currently are spending $1 million in labor costs a year, and that we assume we can get out our new product at the end of the year with the current team in place. Our management would like to get the product out in 10 months instead of 12. We assume that any new team members we recruit will be only 60 percent productive during the year, and that our organization has a medium drag, with a D of 0.5. The two numbers we need to come up with are the following:

• How many new people do we need to hire?

• What does this do to the cost of developing the product?

To produce in 10 months what would have been produced in 12 means that we need 20 percent more useful hours devoted to the product. (Check: 10 months times 1.2 hours/month equals the equivalent of what would have previously been produced in 12 months.) So H = 1.2, which means that GM = 0.2. But M = P - (1 - P)D = 0.6 - (0.4)(0.5) = 0.6 - 0.2 = 0.4. That means that G must equal 0.2/0.4, or 0.5, which is a 50 percent growth rate.

The labor cost of the product per unit time goes up by 50 percent, because G = 0.5. We do produce it in only (10/12) of the time it would have taken, so the total cost goes up by 25 percent. That is, we are now spending $1.5 million per year in labor, but produce the product in (10/12) of a year, so that its total cost is $1.25 million. Note that this 25 percent increase is exactly what the increased cost graph of Figure 22.4 predicts.

Note from the overall productivity chart of Figure 22.3 with an M of 0.4 and a G of 0.5 we achieve an overall productivity of 80 percent. This agrees with the idea that we are devoting 1.2 useful hours to the product but paying for 1.5 total hours; 1.2 divided by 1.5 is 80 percent. The inverse of 0.8 is 1.25, which squares up with the idea that the cost to produce the product has gone up by 25 percent.

Here's the bottom line: To gain two months on the 12-month schedule, we must grow at 50 percent and increase our product cost by 25 percent. This is a result of having only 60 percent productivity on the part of the new team members, and having a training drag of one hour of current team-member time for each two hours of new team-member training time. Also, we are undertaking substantial increased risk due to the 50-percent growth rate.

We leave it to the reader to compute the implications of a management desire to reduce the time to market from 12 months to 9 months. It is interesting to consider how much additional cost and risk are added to the project in this attempt to gain yet another additional month in the schedule.