Why the cost of waiting can be higher than the cost of acting

A major supply chain investment can spend weeks or months being challenged. Capital costs are examined, consultancy fees are questioned, procurement steps are followed, and boards want to understand exactly what is being spent, what it will deliver and whether there is a cheaper way to achieve the same result.

That scrutiny is entirely appropriate. Businesses should challenge significant expenditure, but there is often far less scrutiny of the cost of waiting, reducing the work or making a decision without enough information.

An inefficient network can continue to generate unnecessary transport, labour and inventory costs while a decision is delayed, while reducing detailed design work on a new build to save money can lead to much larger variation costs later.

The visible cost of making a decision often receives more scrutiny than the less visible cost of postponing it or getting it wrong.

Why does this happen?

In our experience, some version of this barrier appears on roughly a third of the projects we work on. That does not mean clients are behaving irrationally. In most cases, the reasons are understandable and reflect the way businesses control expenditure and manage accountability.

Senior teams are under constant budget pressure, and consultancy expenditure is often subject to additional procurement steps and senior sign-off. Many businesses quite reasonably want to control who can bring in external support, and there can also be a natural scepticism about consultancy spend because organisations do not want external resources to become the default answer.

The visibility problem

The result, however, is an important difference in visibility. If a client stakeholder signs an engagement for £100,000, they know that £100,000 will be spent. The decision is visible, attributable to them and easy for others to challenge.

If they defer a decision for two months, the financial consequence is much harder to see and much less likely to be attributed to an individual decision. The cost may appear through delayed savings, higher transport costs, excess inventory, lost capacity or additional management effort, but no single invoice arrives showing the cost of waiting.

The business still pays it, but in a way that is less visible.

A £10 million opportunity changes the economics of waiting

We have recently worked on a network opportunity where a high-level review identified potential annual savings of around £10 million. The next step was detailed data analysis to validate the opportunity and refine the network design, but progress slowed because there was a preference for an internal analyst to complete some of that work and that person would not be available for a couple of months.

Seen narrowly, the decision is understandable. If the business has somebody internally who can do the analysis, why pay for external support to complete it sooner?

The question changes when the scale of the potential benefit is considered alongside that saving. Even allowing for a downside case of around 15%, the opportunity would still be approximately £8.5 million a year, or roughly £700,000 a month.

It would be wrong to suggest that every month of analysis delay automatically means £700,000 is lost. Implementation takes time and the savings would not start the day the analysis is completed, but each unnecessary month added to the decision process pushes the point at which those benefits can begin to be realised further into the future. That potential consequence must sit alongside the visible cost being avoided.

Precision is not the same as certainty

This is another issue we regularly encounter in major investment decisions. Businesses understandably want certainty before committing money, but absolute certainty about the future rarely exists.

There is a difference between knowing the exact answer and having enough confidence in the scale of the answer to make a sensible decision. Using the same example, a high-level assessment might indicate a £10 million opportunity and further analysis may ultimately show that the number is £8.5 million, £9 million or something higher, but those outcomes all point to an opportunity of broadly the same magnitude.

Waiting for greater precision also has a cost. The useful question is not always, “Are we certain this number is exactly right?” It can be, “How confident are we about the scale of the opportunity, and is the additional certainty we are waiting for likely to change the decision?”

Saving project cost can create a much higher cost later

We have seen the same imbalance during the development of new distribution centres. A business starts a programme and then decides to pause some of the design work while it procures the property, often because continuing that work creates an immediate and visible cost while another project stage appears able to move ahead independently.

The problem is that property procurement and operational design are not independent. If the detailed operational and automation requirements have not been developed far enough before the property commitment is made, requirements that could have been included in the base building specification can emerge later as design variations.

At that point, the commercial position has changed. Instead of incorporating requirements into the original design, the business is asking a developer or principal contractor to make changes after commitments have been made. Those variations are no longer exposed to the same competitive tension as the original procurement and can therefore come at a much higher cost.

In one project a few years ago, we stepped away for around a month while the client completed the property procurement. Once the property had been secured, design variations needed to support the operational solution added approximately £3 million to the development cost.

These were not changes associated with an unusually complex automated facility. It was a relatively straightforward manual operation using adjustable pallet racking, and those requirements could have been incorporated into the base design if the operational work had been progressed before the property commitment was made.

The decision being controlled was the visible cost of continuing the design work. The much higher downstream cost was not visible when that decision was taken.

This is not an argument for always spending more

None of this means that every consultancy proposal should be approved, every project should continue or every stage of analysis is automatically worthwhile. Some projects should stop, some external support is not worth the money, and internal capability should be used where it makes sense.

The point is that the alternatives deserve the same level of challenge.

“Do nothing for now”, “use an internal resource in two months” and “secure the property first and complete the operational design later” are all active decisions. Each has a cost, a timing implication and a risk profile, even if those consequences do not appear immediately in a project budget.

If the business scrutinises only the option that produces an immediate purchase order, it is not comparing the economics of the available choices. It is comparing the costs that happen to be most visible.

Put four questions on the same page

For a significant supply chain or logistics decision, we think four questions should be considered together:

1. What will the proposed change cost?

This is usually the easiest number to identify and, rightly, receives close scrutiny.

2. What does the current position cost while it continues?

That may include unnecessary transport, labour, inventory, property, capacity or management effort.

3. What is the financial consequence of waiting?

Delay may be the right decision, but leaders should understand what additional certainty they are buying and what benefits are being pushed further into the future.

4. What could getting the decision, design or implementation wrong cost later?

This will rarely be a precise number. It may need to be expressed as a range or scenario, but that does not make the potential cost zero.

Businesses routinely make investment decisions using assumptions, sensitivities and ranges. The same discipline can be applied to the costs of delay, reduced scope and poor implementation.

The cost of a decision does not end when the decision is made

High-stakes supply chain decisions are rarely isolated events. A decision about a network, a new distribution centre or a major operational change starts a process that moves through detailed design, property, procurement, implementation and eventually into live operation.

One reason we have a strong view on this is that our involvement typically extends beyond the initial decision into those later stages. That means we see how choices made early in a programme manifest themselves months or years later, including costs that were not visible when the original decision was taken.

Sometimes that is a delayed benefit. Sometimes it is a design variation, additional capital expenditure or an operational compromise that has to be managed for years.

By the time the cost becomes visible, the decision that created it may be long out of view.

There will always be uncertainty in high-stakes supply chain decisions. The objective is not to remove it completely, but to understand enough about the scale of the opportunity, the credible alternatives and the consequences of each route to make a proportionate decision.

The question should therefore be bigger than, “Can we reduce the cost of this project?”

It should be: “What is the total cost and consequence of each route available to us, including waiting, reducing the work and getting it wrong?”

Visible expenditure should be challenged. The less visible consequences of the alternatives deserve the same scrutiny.

How Hatmill can help

At Hatmill, we help organisations assess supply chain opportunities, quantify potential benefits and make investment decisions with confidence. If you are evaluating a network change, warehouse investment or wider supply chain transformation, speak to our team about the objectives, options and consequences that need to be considered.