How Component Standardization Reduces a Hidden Financial Drag in Deeptech Startups

Beyond Unit Price: The True Cost of Component Variety

For many deeptech startups, the bill of materials (BOM) grows organically. During the research and development phase, engineers select components for one primary reason: to make the prototype work. This often results in a collection of similar, yet distinct, parts chosen for expediency. While this approach is necessary to find product-market fit, it creates a hidden financial drag as you prepare to scale. An unmanaged BOM, with its wide variety of components, directly increases cash consumption and shortens your runway. Addressing this is not premature optimization; it is about building a foundation for sustainable growth and improving gross margins from the very first production run.

We know the price of each part, so where are the other costs coming from? The answer lies in looking past the unit price on an invoice and understanding the total cost of ownership (TCO) for every component. The reality for most pre-seed to Series B startups is more pragmatic: every non-standard part introduces overhead that your small, agile team has to absorb. This is where hidden costs accumulate, impacting everything from engineering time to working capital.

These costs typically fall into three main categories:

• Procurement Overhead: This includes the time your team spends finding suppliers, vetting their quality, and negotiating terms for each unique component. A senior engineer spending hours searching for a specific connector is time not spent on core product innovation. These are the soft costs that do not appear as a line item in QuickBooks or Xero but are a significant drain on resources. Research from the Supply Chain Management Review (2021) shows that "Process costs for sourcing, vetting, and negotiation can add 15-25% to the cost of non-standard components."
• Working Capital Costs: Every unique component, or stock keeping unit (SKU), represents cash tied up in inventory. A proliferation of near-identical parts means more capital is needed to maintain minimum stock levels for each one. According to academic analyses from the W.P. Carey School of Business, "A 10-30% increase in inventory holding costs can be directly attributable to SKU proliferation." This is cash tied up in plastic bins that could otherwise be extending your runway or funding a critical hire. For practical guidance on calculating these inventory impacts, see this resource on inventory and landed cost.
• Quality and Engineering Overhead: Managing more suppliers inherently increases complexity and risk. It means more relationships to handle, more potential points of failure in your supply chain, and more quality control processes to manage. When a unique component goes out of stock or fails a quality check, it can trigger a costly engineering change, forcing a scramble for an alternative and potentially delaying production. This creates coordination gaps and friction between engineering and operations. A focused approach to quality control processes reduces this risk significantly.

How to Model Cost Savings from Standardizing Components in Manufacturing

How can you build a business case to show your team this effort is worthwhile? The key is to quantify the savings in a way that directly addresses the top pain point for founders: understanding how fewer component variants translate into concrete COGS and gross-margin improvements. You do not need a complex ERP system for this analysis. A simple model in Google Sheets or Excel is perfectly sufficient for startups at this stage.

Here is a practical, four-step approach to model the financial impact of part consolidation and achieve significant manufacturing cost reduction.

1. Step 1: BOM Data Dump. Export your current BOM into a spreadsheet. For each component, list the internal part number, a clear description, the supplier, and the unit price from your accounting software (like QuickBooks or Xero). This initial export forms your baseline for analysis.
2. Step 2: Identify Consolidation Candidates. Sort the list by component type and identify families of similar parts. Look for items with the same core function but minor, non-critical differences. Common candidates include M3 screws of varying lengths, different brands of the same-spec capacitor, or slightly different connectors that serve the same purpose. These are your primary targets for part consolidation benefits.
3. Step 3: Calculate the Current Total Cost of Ownership (TCO). Create new columns to estimate the hidden costs. For procurement overhead, you can use the 15-25% figure as a starting proxy based on complexity. For inventory holding costs, apply the 10-30% estimate to the value of the stock you hold for each specific component. Sum the unit price and these overhead costs to get a rough TCO for each part.
4. Step 4: Model the Standardized 'To-Be' State. For a group of consolidation candidates, select one component to be the new standard. In your model, calculate the new, consolidated TCO. This will include a potentially lower unit price due to higher purchase volumes, but more importantly, it eliminates the procurement and excess inventory overhead for all the other components it replaces.

Example: Quantifying the Savings

Consider a deeptech device that uses four different types of M3 screws, where the only difference is the length, varying by a few millimetres. Here’s a simplified breakdown of the potential savings:

Before Standardization:

• Screw A: 10,000 units/yr @ $0.10/unit. TCO = $1,000 (price) + $200 (20% overhead) = $1,200
• Screw B: 5,000 units/yr @ $0.12/unit. TCO = $600 (price) + $120 (20% overhead) = $720
• Screw C: 8,000 units/yr @ $0.11/unit. TCO = $880 (price) + $176 (20% overhead) = $1,056
• Screw D: 2,000 units/yr @ $0.15/unit. TCO = $300 (price) + $60 (20% overhead) = $360
• Total Annual Cost: $3,336

After Standardization:

• Engineering determines one slightly longer screw, Screw S, can replace all four without compromising performance.
• Total volume is now 25,000 units. You negotiate a new, lower price of $0.08/unit.
• New TCO = 25,000 units * $0.08/unit (price) + $200 (10% overhead for one standard part) = $2,000 + $200 = $2,200

In this scenario, the annual savings are $1,136 from standardizing just one type of fastener. The practical consequence tends to be a direct reduction in your Cost of Goods Sold (COGS). If your device sells for $200 and you previously had $50 in COGS, this $1,136 savings spread across 1,000 devices reduces COGS per unit, directly increasing your gross margin. This is the kind of tangible data that gets your entire team aligned.

Making It Stick: A Simple Cross-Functional Playbook

How do we get engineering, procurement, and finance on the same page without creating a bunch of red tape? The goal is intentionality, not bureaucracy. By defining simple roles and creating a lightweight process, you can solve the coordination gaps that lead to costly rework and delays. This is about making smart design choices for scaled manufacturing, not just for the next prototype, which ultimately improves product design efficiency.

The most effective tool for this is a Preferred Parts List (PPL). A 2022 survey from engineering.com found that "74% of companies with formal component management programs use a Preferred Parts List (PPL)." For a startup, this does not need to be a complex database. A shared Google Sheet or Excel file is the perfect starting point. It serves as the single source of truth for components that are vetted and approved for use in new designs.

A simple cross-functional playbook ensures the PPL is used effectively:

• Engineering: Owns the creation and maintenance of the PPL. They are responsible for selecting standard components based on technical specifications, performance, and reliability. Their default behavior should be to design with parts from the PPL. They act as the gatekeepers of what gets added, ensuring technical suitability.
• Procurement / Operations: This role is often filled by a founder or an early operations hire in a startup. They manage the commercial side of the PPL. They focus on building strong relationships with suppliers for standard parts, negotiating volume discounts, and monitoring lead times and stock to ensure availability. Their input is critical for adding new parts, as they can flag potential supply chain risks or better commercial terms.
• Finance: This role, which might be a part-time controller or the CEO, is responsible for tracking the results. They use the data in QuickBooks or Xero to monitor key metrics like inventory turn, COGS, and gross margin. This validates that the PPL initiative is delivering the financial savings projected in the spreadsheet model and provides feedback for future decisions.

To prevent the PPL from becoming a rigid barrier to innovation, you need a Lightweight Exception Process. This is the critical distinction between effective governance and frustrating bureaucracy. If an engineer needs a non-PPL component for a legitimate performance reason, the process is not to fill out a form in triplicate. It is a quick, direct conversation with the operations lead to discuss the TCO implications. It becomes a conscious trade-off, not an accident. The team can then make an informed decision on whether the performance gain justifies the added complexity and cost.

Practical Takeaways for Standard Parts Sourcing

Implementing component standardization is a crucial step in preparing your deeptech startup for scale. It is a powerful lever for improving product design efficiency and achieving supply chain simplification. This is not about creating red tape, but about preserving cash and building a more resilient manufacturing operation. The benefits, from inventory management savings to lower engineering change cost, are tangible and directly impact your runway.

What founders find actually works is starting small and building momentum. Here are four practical steps you can take today:

1. Pick One Category. Do not try to boil the ocean. Start with a single, high-volume component category like fasteners, resistors, or standard connectors. Run the four-step spreadsheet analysis to demonstrate the potential savings. This provides a clear, focused win that builds support for broader efforts.
2. Build the Business Case. Use the output of your analysis to get buy-in from the rest of the team. When you can show the financial impact on COGS and gross margin, the conversation shifts from an abstract idea to a concrete financial strategy. Frame it as a direct path to a longer runway and better unit economics.
3. Create Your Version 1 PPL. Start a shared spreadsheet. List the winning components from your first analysis. Add key information like the internal part number, supplier details, and current price. This simple document becomes your initial source of truth for standard parts sourcing.
4. Define Your Exception Process. Agree as a team on how you will handle requests for non-PPL parts. Make it a simple, conversation-based checkpoint between engineering and operations. The goal is to ensure that every deviation from the standard is a deliberate and informed business decision.

Taking these steps helps shift the team's mindset from a prototype-first mentality to one that is ready for scalable, profitable manufacturing, before it becomes an ingrained habit that is much harder to change.

Frequently Asked Questions

Q: Isn't this premature optimization for an early-stage startup?
A: No, it's foundational planning. Early standardization prevents the accumulation of technical debt in your supply chain. Addressing it before scaling is far cheaper and less disruptive than trying to fix a complex, inefficient BOM when you are under pressure to fulfill large orders.

Q: How do we balance standardization with the need for innovation?
A: The key is a lightweight exception process. A Preferred Parts List (PPL) should guide 80-90% of design choices, not block innovation. When a new, non-standard component is truly needed for a performance breakthrough, a quick, data-driven conversation ensures it's a conscious trade-off, not an oversight.

Q: What is the best tool to manage a Preferred Parts List (PPL)?
A: For most startups, a shared spreadsheet like Google Sheets or Excel is the ideal starting point. It is simple, accessible, and requires no special software. As you scale, you might migrate to a dedicated PLM (Product Lifecycle Management) system, but beginning with a spreadsheet is a practical and effective approach.