Pipeline Workshops™: Improvements to the Game

Posted October 10, 2021 By Fletcher Groves

“Pipeline games™ were a brilliant way to demonstrate and drive home the significance of cycle time improvements and improving trade partner efficiencies on ROA and Net Income.”  (Keith Porterfield, COO, Goodall Homes, Gallatin, TN)

“The Pipeline games™ were not only fun, they were super-effective in showing how unbalancing the production system, managing the constraint resource, and managing the right amount of WIP, creates predictable operational results and maximizes financial outcomes.  This workshop was really eye opening!”  (Charles Roberts, Providence Homes)

“Pipeline games™ are a very innovative way to demonstrate the critical nature and relationship between cycle time, inventory turn, margin, and return on assets.”  (Vishaal Gupta, President, Park Square Homes, Orlando, FL)

“[the] Pipeline Game™ truly connected the dots.  A remarkably creative tool.”  (David Nielsen, Cole West Homes)

Simulating production principles is a big part of every Pipeline workshop™.  We hear, repeatedly, that the opportunity to simulate production in a progressive series of scenarios is what enables builders to actually “see” production, to see production principles in action.  Because it is both a production simulator and a business game, Pipeline games™ are what make Pipeline workshops™ so intense, so interactive, and so competitive.

Pipeline games™ have always been a tremendous tool for teaching both production and business principles, but we are never content.  We constantly improve them, introducing significant changes over the past five years that make them even more effective.

One of the earlier changes was to shorten the game, so that we could run more production scenarios in the same amount of time, and so that each operating decision became more consequential.  Another change, designed to make the game more realistic, was to have it depict the completely outsourced nature of homebuilding production, just as it currently exists.

That later change begs a deeper dive.

In the earliest version of the game, the resources that did the work reflected both capacity and the cost of that capacity;  the problem was, that arrangement more reflected a manufacturing operation than a homebuilding operation.  In order to realistically depict the current, outsourced nature of homebuilding production, capacity has to be separated from cost.

Why?  Because, the external resources that determine production capacity are a part of Cost of Sales (making them a direct, variable cost);  Cost of Sales is a measure of product cost, not capacity cost;  Operating Expense (the indirect, non-variable cost of internal resources) is what determines capacity cost.

Using the resources to reflect both capacity and cost required us to essentially disregard Revenue and Cost of Sales, and treat Throughput  (i.e., Gross Income, normally a residual) as Revenue;  again, that’s fine for depicting a manufacturing operation, but it is not a good depiction of a homebuilding operation.  In the improved version of the Pipeline game™, we restored Revenue and Cost of Sales to the equation, making Throughput (i.e., Gross Income) a residual.  In effect, we now account for the margin side of Return on Assets, not just the velocity side.

Because they do the work (not simply manage it), the external resources in a Pipeline game™ now define the production system’s capacity, and the cost of those resources is reflected in Cost of Sales, stipulated as a percentage of Revenue;  as it relates to Revenue, they are a direct, variable cost associated with the construction of a home.  Operating Expense is now an imposed cost, reflecting the budgeted cost of the internal capacity required to manage work-in-process;  that makes Operating Expense an indirect, non-variable cost, as it relates to Revenue (and the completions and closings that produce it).

This represents a significant stride in reconciling Revenue, Cost of Sales, Throughput, and Gross Income, making operating decisions easier to connect to financial outcomes.  The result is a production simulator and business game that is truly reflective of a homebuilding operation, with lessons that are now much easier for builders to understand.

This change continues to pay-off.  But – we don’t ever stop;  the Pipeline game™ keeps getting better and better.

Example?  At a recent Pipeline workshop™, we introduced a scenario that contrasts the current industry- accepted growth and operations strategy (a completely outsourced building model) with a radically different growth and operations strategy (a completely integrated building model), in order to explore the difference between a strategy based on a broader, shallower footprint and one based on a narrower, deeper footprint.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held October 14-15, 2021, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  The cost is $895.00 per person.  Attendance is limited to 30 attendees.  For team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.  Sponsored by Simpson Strong-Tie.

For more details:  www.buildervelocity.com

 

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“The absence of business logic is simply astounding.”

Posted October 2, 2021 By Fletcher Groves

(originally published on EFA® in February 2010 under the same title;  republished in April 2013, as part of our retrospective Above Average: The Best of Escape from Averageness®, 2009-2012;  updated and republished in advance of each Pipeline workshop™)

McKinsey and Company

It is mid-2012.  The intrepid, results-based consultant smiled and shook her head, with equal measures of amusement, incongruence, and disbelief.  It was yet another sobering reminder that RB Builders, early in this process, was capable of coming to bewildering conclusions, the latest of which centered around the company’s intentions for its team-based performance compensation plan.

The Gross Income Participation Pool – the GIPP – had been a prerequisite to her consulting firm agreeing to become involved in a client-consultant partnering arrangement with RB Builders in the first place, one of three stipulations, along with internal financial statements that reflected a variable costing approach, and the subordination of every existing initiative to the company’s new constraint-focused, rapid-results continuous improvement process.

The GIPP was new.  It was purposely designed to replace RB Builders’ longstanding-but-inconsistent practice of paying individual bonuses based on multiple job-related measures.  It consisted of a team-based approach to performance compensation focused on achievement related to a single business outcome;  in RB Builders’ case, that business outcome was Gross Income achieved above a specific baseline.

Under the GIPP, the baseline performance was referred to as the Gross Income Baseline, while the stretch-budgeted performance was dubbed the Gross Income Target.  The difference between the GI Baseline and the GI Target was referred to as the Gross Income Reserve.

The GI Reserve was to be paid out progressively, based on the achievement of a predetermined number of Gross Income goals, so-called Gross Income Milestones.  The aggregate teammate share of the GI Reserve was one-third of the GI Reserve, with the remaining two-thirds allocated evenly between distributions to owners and retained earnings.

Now, however, the GIPP was getting push-back from a recently-hired Regional Vice President, who was saying the plan should be scrapped.

“We might not even achieve these goals, and if we did achieve them, there are more important uses for the funds”, he said.

The intrepid, results-based consultant’s thought to herself, “The Gross Income Participation Pool is an established prerequisite.  This guy’s assertion doesn’t have any merit, but even if it did, it is too late in the planning cycle to consider changing it, let alone canceling and replacing it.”

She was having none of it.

“Where did you get this stupid idea?”, she asked.

“People get paid salaries to do their jobs, and we bonus certain positions”, he replied.  “I need more people, not higher-paid people.”

The intrepid, results-based consultant stared at the CEO, her impassive expression nevertheless clearly communicating her unspoken thought:  “Where did you find this guy?”

She turned her attention back to the Regional VP.

“Let me get this straight.  You are concerned that your division will, what?  Be unable to meet its debt service obligations, or find land, or hire more people, if it rewards performance above its baseline?”, she asked, rhetorically.  “Really?  Where is the money supposed to come from?

“The GIPP will not have paid out anything, unless there is a reserve created by performance that exceeds the baseline.  You do realize that the GIPP is completely self-funding, that it does not cost the division or RB Builders’ owners one-red-cent?

“You do understand that, right?

“For one thing, all of the land and building lots acquired are kept off-balance sheet, so that is not a concern of yours”, she continued.  “And – given that RB Builders places strict limitations and controls on the level of work-in-process, and on any increase in non-variable expenses – is there any imaginable scenario under which additional Gross Income will result in less cash flow?

She stared down the Regional Vice President.  “I didn’t think so.”

“On baseline alone, RB Builders is profitable, operating above breakeven, correct?”, she asked, without waiting for the answer.  “So – is there any imaginable scenario under which every penny of that additional Gross Income will not drop straight to the division bottom-line?  Where it can be utilized for – oh, I don’t know, let’s say – distributed to teammates and owners before it became retained earnings?

“I can understand being prudent with important decisions;  at some point, there will be an economic downturn, and we have to be prepared for it.

“I can understand increased diligence in determining a baseline that reflects current reality.  I can understand having a more progressive structure to the payouts, so that each successive milestone is worth more.  I can understand adjusting the distribution of the reserve between teammates, owners, and retained earnings – slightly – in order to provide more money for other uses.

“I can understand – but not agree with – the choice of a supposedly-safer outcome, like Net Income.

“But, to deny yourselves – you, your teammates, your owners – the opportunity and motivation to do better?  The opportunity to preserve your shared livelihoods?  To secure your collective futures?  That, I do not understand.  That, I will not accept.

“The absence of business logic is simply astounding.”

 

Come.  Participate.  Learn.

Open-Book Management and Team-Based Performance Compensation is one of the three Velocity Accelerators® highlighted (together with Critical Chain Project Management and Business Process Improvement) at the next Pipeline workshop™, October 14-15, 2021, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

The cost is $895.00 per person.  Attendance is limited to only 30 attendees.  For team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.  Sponsored by Simpson Strong-Tie.

For more details:  www.buildervelocity.com

 

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Pipeline workshops™ do not stop at the “what” and the ‘how-to”;  they also address the “why” and the “want-to”.

There has always been an underlying context – an underlying business logic – to everything we expound in a Pipeline workshop™.  Understandably, the focus is on the principles and disciplines of homebuilding production themselves, but we also give that underlying context – the underlying business logic – the attention that it critically deserves.

So – one of the Velocity Accelerators® we do at a Pipeline workshop™ is a deeper-dive into that context and business logic, into two crucial, inseparable disciplines that must work together:  Open-Book Management and Team-Based Performance Compensation.

The efforts of a homebuilding company to improve operating performance and business outcomes will fail, if it does not succeed first in creating a homebuilding team that works toward commonly-held and commonly understood business goals.  This type of team – a team that is savvy, motivated, and mutuallyaccountable – stands in stark contrast to what is simply a collection of individuals working toward their own, separate goals.

With most teams, what you would likely first find missing is the business logic that forms the context necessary for understanding everything else.  Understanding the homebuilding business is necessary, but it is not sufficient.  In order to compete in the business world, everyone on the team also has to learn the business of homebuilding.  They have to understand their individual responsibilities as part of the overall team, and they have to understand what is at stake, individually and collectively.

Instilling savviness to the team is the role of Open-Book Management.

But – not just understand the business outcome that is at stake for the company;  each of them must also have a personal stake in that business outcome;  they must own the outcome, for the company, and for themselves.  They must have a stake . . . in what is at stake.

Instilling motivation and mutual accountability to the team is the role of Team-Based Performance Compensation.

Open Book Management flows from Jack Stack’s work in the 1980s as CEO at Springfield Remanufacturing Corporation to rescue the former International Harvester (Navistar) division from almost certain bankruptcy.  Following a 99% leveraged employee buyout, Stack instilled transparent responsibility, by opening the company’s books and making it everyone’s business to improve performance.

Stack recounted that effort in two books (The Great Game of Business and A Stake in the Outcome);  Inc. Magazine’s John Case expanded on open-book thinking in other industries and companies, in two subsequent books (Open Book Management and The Open Book Experience).

Then, Case described (in Open Book Management) how Steve Wilson developed the basics of OBM-inspired team-based performance compensation at Mid-States Technical Staffing Services (now part of Modis);  Wilson subsequently described this work in a publication, titled The Bucket Bonus Plan.

We take a very specific approach in our application of the principles of Open Book Management and Team-Based Performance Compensation.

We advise our clients to be transparent (open).  We urge them to demonstrate candor (the courage to tell and hear the truth) in the constant internal disclosure of operating and financial data, whether in meetings, or through dashboards and heads-up displays.

We advise our clients to impart business literacy (knowledge and understanding) to teammates, so that those teammates don’t just understand the homebuilding business, they also understand the business of homebuilding, through the teaching of business and production principles.

We advise our clients to adopt a teambased approach to performance compensation, by way of a progressively-weighted milestone plan, centered on achieving targeted performance above a baseline in a specific business outcome, impacted by the actions of every single teammate.

We urge an approach that is simple, easily understandable;  that is visible, transparent, compelling;  that rewards success rapidly and frequently;  an approach that is selffunding, that is paid from income the company would never have otherwise generated, from economic return they would have never otherwise achieved.

In terms of compensation – we urge our clients to make it significant, make it meaningful.  In terms of participation, we urge them to make it allinclusive.

We tell them that a Team-Based Performance Compensation Plan should only provide winners or losers, not winners at the expense of losers.  It should give the right to lead and to demand results;  it should give the desire to be lead, not managed.

Savvy.  Motivated.  Mutually-Accountable.  Team.

 

Come.  Participate.  Learn.

Open-Book Management and Team-Based Performance Compensation is one of three Velocity Accelerators® (along with Critical Chain Project Management and Business Process Improvement) that will be explored in depth at the next Pipeline workshop™, October 14-15, 2021, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

The cost is $895.00 per person.  Attendance is limited to only 30 attendees.  For team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.  Sponsored by Simpson Strong-Tie.

For more details:  www.buildervelocity.com

 

      

One of the areas we highlight for deeper discussion in a Pipeline workshop™ – the areas we call Velocity Accelerators® – deals with the unrealized, under-appreciated benefit that would come from replacing the outmoded current method of scheduling houses under construction.

The nature of the workflow in homebuilding production is project portfolio management;  it is about managing what can be large amounts of work-in-process, about managing what can be a large number of houses under construction.  Yes, for certain, there is workflow performed in processes, but those processes are a different form of workflow, and they are generally embedded in, or enabling and supporting of, the larger, more primary function of managing a project portfolio.

The process of building a home – what we call the Start-to-Completion process – is actually the management of multiple projects that share resources.  It is the structuring and the management of a portfolio of job schedules, with interdependencies and interactions of tasks and resources.

At its core, homebuilding is multi-project management.

The current method of project scheduling is a reference to its algorithm, known as the Critical Path Method (CPM), which evolved from the Program Evaluation and Review Technique (PERT) in the 1950s;  Critical Path has been in existence for almost 70 years;  despite its age, CPM is the algorithm, thus, the method, used in every homebuilding ERP.

PERT and CPM were designed for one-off programs with large, complex structures (i.e., the Polaris weapons system, the Manhattan Project), but the Critical Path Method has become the de facto standard for scheduling all types of projects:  aerospace/defense, software development, product development, research, and – yes – construction.

The problem with CPM is that it was not designed for managing a portfolio of projects, and it was not designed to function in environments where velocity is important, where faster cycle time and higher inventory turns are critical drivers of business outcomes.

Where it must contend with variation and uncertainty, Critical Path offers only a buffer of additional time – individual task durations lengthened to protect the completion date of each task, but not necessarily insuring the completion date of the project.

And – what is the cost of that added safety?  What is the cost of specifying supposedly highly-reliable (95%) probabilities of completion over average (50%) probabilities of completion?

Statistically, this supposed solution lengthens the job schedule by a factor of 1.64 (two standard deviations).  Which is how a 90-day job schedule becomes a 150-day job schedule.  It is a built-in safety that three well-known, yet typically un-checked, types of behavior then conspire to waste.

For the most part, builders are oblivious to the effects of variation on their production system.  Yet, the cost of that variation is apparent and simple to calculate;  it is the Gross Income lost from all of the closings that never occurred, from houses that were never built with the capacity that was purposely made available and paid-for.

For an already profitable builder, it is Gross Income that would have clearly become Net Income, and ultimately, Net Profit.

And, it’s a lot of money.

Moreover, while CPM considers task dependency (the predecessor-successor relationships of tasks) in its work breakdown structure, it does nothing to resolve resource contention;  it does not consider situations in which tasks of different projects/jobs depend on the availability of resources that do not have sufficient capacity to meet the demand being placed upon them.

These two factors – dealing with variation and resolving resource conflict – should be anathema to homebuilders.

Critical Path was never designed to contend with the production environment homebuilding presents.  It is not the problem (the problem is variation and resource conflict), but CPM is benign to the solution.  ProChain Solutions’ Rob Newbold (Project Management in the Fast Lane) told me that he would go further, saying:  “CPM supports values that perpetuate the problems of homebuilders.”

Which brings us to Critical Chain Project Management.

Developed in 1997, Critical Chain addresses both task dependency and resource contention, and it replaces the padded durations intended to protect the completion date of every task with a smaller project buffer that is fully-capable of protecting the completion date of the overall project/job;  in the process, CCPM becomes much more aware of system capacity and constraints.

Understand what this different, changed approach means:  it means that Critical Chain substantially reduces the duration of projects – the cycle time of houses under construction – without impacting the reliability of their completion dates.

Consider these facts taken from one of the exercises in the RB Builders: Lessons from the Pipeline© business case being used in the upcoming Pipeline Workshop™:

“RB Builders’ newly-acquired division has a construction schedule of 120 calendar days, but its calculated cycle time is actually 180 calendar days.  It is widely agreed that the division should be able to build its homes in far-less than the 120 days called for by the schedule, because that duration reflects ‘highly certain’ task durations.

“Switching from CPM to CCPM would immediately reduce the schedule from 120 days to 97 days, cutting the schedule by almost 20% with no diminution of confidence in the completion date;  it would reduce the actual 180 day cycle time by almost half (46%).”

Critical Chain Project Management does more than just reduce the length of construction schedules.  It also specifies a set of rules preventing behaviors that consume (and waste) the safety Critical Path excessively builds into its task durations.  It installs a release mechanism that “pulls” starts into the system and keeps work-in-process at the levels required to produce faster cycle times.

It implements simple, visual tools to manage production.

Builders can put a number of these practices into place without changing the scheduling algorithm from Critical Path to Critical Chain.  They can use add-on applications that convert existing CPM scheduling applications to CCPM.  They can implement standalone CCPM software applications.  However – Critical Chain will not be a fully-complete, integrated solution for the homebuilding industry until its management technology providers wake up and address it.

It all starts with obtaining the knowledge necessary to insist on that change.

Come.  Participate.  Learn.

 

Critical Chain Project Management is one of three Velocity Accelerators® (along with Business Process Improvement, and Open-Book Management and Team-Based Performance Compensation) that will be explored in depth at the next Pipeline workshop™, October 14-15, 2021, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

The cost is $895.00 per person.  Attendance is limited to only 30 attendees.  For team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.  Sponsored by Simpson Strong-Tie.

For more details:  www.buildervelocity.com

      

The majority of SAI Consulting’s work, both in and out of homebuilding, has been about enabling clients to organize and structure themselves around their core-critical business processes;  Business Process Improvement is the area of our practice for which we are most recognized;  we have done more work in this area than any other consulting firm serving the homebuilding industry.

There is a good and simple reason why SAI focuses so much effort on documenting, redesigning, reengineering, improving, and managing business processes:

The most basic, most fundamental premise in business is this:  the existence of a business enterprise depends on its ability to make money;  the way enterprises make money is by delivering extraordinary levels of distinctive value to their customers and other stakeholders;  that value is delivered through the work those enterprises perform;  that work has to be performed in some manner of workflow;  the most common form of that workflow is work performed in processes.

Make money . . . by delivering value . . . through the work you perform . . . in processes.

From a business standpoint, processes are critically, centrally important;  processes exist – processes matter – whether homebuilders are intentional about them or not.

We constantly make the point that Pipeline workshops™ are about thriving on the velocity side of Return on Assets®, but better process workflow pays dividends on both sides of economic return;  it drives both higher margins and higher velocity, drives higher Return on Sales and higher Asset Turns.

Consider:

Start-to-Completion (the sub-process within the Prospect-to-Closing process that is the aorta of workflow in a homebuilding enterprise) is not, at its core, process management;  the workflow in Start-to-Completion is multi-project management;  it is project portfolio management, with embedded, supporting, and surrounding processes;  it is also workflow in which all of the non-supervisory work is performed by external resources (trades and suppliers).

Start-to-Completion is not managed like a process, so we don’t treat it as a process;  we don’t map it like a process;  we don’t document it as a process;  except for its embedded  and supporting processes, we exclude Start-to-Completion from process management.

All of which should make this next point striking, actually startling:  even with the Start-to-Completion workflow excluded, the results from dozens of process mapping engagements SAI has performed, over decades, suggest that 25% of all the process work a homebuilding company performs – the work that consumes a building company’s overhead – is completely non-value-adding.

Ponder that revelation for a moment.

Consider its bottom-line:

If your Operating Expense represents – consumes is more to the point – eight percent (8%) of Revenue, it means you are throwing away $20,000 of every $1,000,000 in Revenue you generate.  And, if your true Gross Margin is 18% and you are operating above breakeven, it also means you are throwing away $20,000 of every $180,000 in Revenue you would actually get to keep.

The most visible element of BPI (and BPM) is the mapping of process workflow, but process mapping involves far more than documenting – and confirming, accepting as-is – the current state of that workflow;  it includes redesigning that workflow in ways that improves it, an effort which invariably reveals other issues – the core, root causes of problems – that affect profitability and economic return.

Which makes understanding and improving workflow the means to a much more important end.

Business Process Improvement is the tip of the spear, the front-end of a continuous improvement methodology in which the activities and elements of workflow that add value are preserved, the activities and elements that add no value are eliminated, and the remaining activities and elements that enable value are refined to make the workflow more clear, more consistent, more streamlined, more connected, more succinct, more fit for its intended, defined purpose.

In the language of a Pipeline workshop™, we want a shorter, straighter pipe.

Because it is so foundational, it is impossible to overstate the importance of understanding and improving the way work is performed, before starting down the long road on other improvement initiatives, before the process of continuous improvement moves anywhere else.

In addition to being the means to a more important end – and the front-end of a process of continuous improvement – BPI ushers in a new perspective.

It shifts the organizational view away from the internal structure of work performed in functions, and towards the flow of work performed in value-adding processes;  BPI shifts the perspective from vertical to horizontal;  it turns a homebuilding enterprise 90 degrees from vertical, lays the enterprise on its side, and aligns its workflow with the value it seeks to create.

Business Process Improvement is about getting horizontal.

The relevance goes beyond the processes themselves.  Processes are the centric element of the business operating model that forms any strategic value discipline that serves to deliver exceptional levels of the specific, distinctive value demanded by a narrowly-defined segment of homebuyers.

Come.  Participate.  Learn.

 

Business Process Improvement is one of three Velocity Accelerators® (along with Critical Chain Project Management, and Open-Book Management and Team-Based Performance Compensation) that will be explored in depth at the next Pipeline workshop™, October 14-15, 2021, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

The cost is $895.00 per person.  Attendance is limited to only 30 attendees.  For team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.  Sponsored by Simpson Strong-Tie.

For more details:  www.buildervelocity.com