Importance of Speed

Imagine you run a grocery store, and you are deciding which product to stock on your last unit of shelf space; although they are different products, they are exactly the same in almost all respects: they cost the same to purchase wholesale (let’s say $1 each), they are the same size and weight, etc., and they have no interaction with any other products — but you can sell the first product for $5 but the second for only $3. Which do you choose? The first or second?

You’re probably already guessing that you don’t have enough information (or at least I hope you are). But what additional information do you need to make this decision?

You have to know how many turns the product will make. How many times in a year you’ll restock those shelves. The first product has twice the gross margin ($4 vs $2), but the second product may sell three times as fast, and make three times as many turns in a year, leading to higher overall profitability ($4 vs. $6).

Turns are so important that grocery stores don’t care about margin percentages per se, and why they can make fantastically large amounts of money with razor thin margins on fast moving goods, like, say, cereal boxes.

We, too, have limited “shelf space” (people), and doing five $50k projects in a year is better than doing three. While we’re not choosing between products to stock on our shelves (projects to take on), we can still use the lessons of managerial accounting to tell us where we should direct our emphasis.

A “turn” for us, is, equivalently, how quickly we can complete a project. When a project takes 20% less time, it makes the project 25% more valuable, as we can make 25% more turns with projects of that length (1 ÷ (1 - 0.2)). When a project takes 20% longer, it is worth only 83% of the original value. If only 20% longer were the numbers we were working with though! It’s not unusual to see projects take 2x as long (50% the value) or 3x as long (33% the value).

Now, of course this is an oversimplification. The longer projects take, the more the work is spread out, and the more projects that can be done in parallel. To a point. Managing more things at once means more overhead and more dropped balls.

So — the point is this: speed matters. It makes or breaks profitability, for grocery stores and for Gradient.