Lead time is critical in a hardware business

When you make a hardware products, you have to buy the parts before you can sell the product.

If your lead time for a part is one month, you need to pay today for the parts that you will need in one month. This means will need to buy one month’s worth of parts in advance.

At some point last year I decided that I wanted to start selling my e-paper calendar commercially. The cost of parts is a very big component of its final selling price. I am also bootstrapping the business.

For a bootstrapped business like mine, the sales margin, lead time and part costs together put a hard cap on any possible growth.

Consider a fictional product that has part costs of 10 Euro with a lead time of two months and a margin of 1 Euro. After selling a batch of products, they have 11 Euro to buy new parts. This means that growth is limited to 10% within one lead time interval.

Cutting the lead time in half is therefore as good for growth as doubling the margin.

(It is actually a bit better since growing 10% in one month is a higher growth rate than 20% in two months.)

For a VC funded business, that same tradeoff shows up as the death-by-exponential-growth risk: While the company is growing into its market, growth is exponential, and thus the orders for parts grow exponentially too.

Then, growth slows down. The company may still be growing, just not as fast as anticipated.

But the parts have already been ordered - under the assumption that growth would continue on its old pace! Suddenly, the sales fall short of part costs. The longer the lead time is, the wider the gap. And for the company, this can get lethal quickly .

In my calendar, the display is the most expensive component. It costs about $50 if ordered from China, or $65 if ordered in locally. This is a huge difference that costs me significant margin. Still, I often buy locally because it means I can have calendars back in stock the next day.