Homebuilding is an industry that leverages equity with debt, therefore, some version of Return on Assets is the best measure of a homebuilding enterprise’s economic return.  The most useful version of ROA is the DuPont identity, which expands economic return into two components:

Margin (Return on Sales) and Velocity (Asset Turn).

From an operational perspective, the vast majority of assets on a builder’s balance sheet ought to be houses in some stage of construction, particularly when raw land and developed lot inventory is held off-balance sheet;  which means, when we calculate Return on Invested  Assets, we can reasonably associate Asset Turnover (financial term) with Inventory Turn (operating term).

The point is to thrive in this business, not just survive in it.  To do that, a builder has to do well on both the margin side and the velocity side of ROA.  That understanding fundamentally proposes two questions:  (1) How much can my company make on every house?  (2) How many houses can my company build with a planned, finite, and controlled amount of inventory and production capacity?

As a builder, consider this scenario:  You have a competitor that has exactly the same work-in-process, overhead, working capital requirements, borrowing capacity, and risk profile.

If you generate a Gross Margin of 24% and turn your inventory twice a year, you will be outperformed by this competitor that generates a Gross Margin of only 18%, but turns its inventory four times a year;  you will be outperformed in terms of Revenue, outperformed in terms of closings;  you will be out-performed –better than two-to-one – in terms of Net Income and Return on Assets.

You will struggle to compete;  in fact, you will struggle to survive.

It is the picture of a slow, marginally-productive homebuilding company versus a fast, highly-productive homebuilding company;  your competitor generates 85% higher Revenue and 40% more Gross Income than you do, and does it with the same amount of assets.

It is also a picture of the difference between a 180 day cycle time and a 90 day cycle time, and if that contrast is too stark, then consider this:  your competitor – the one with the 18% Gross Margin and a 4x turn – produces almost the same ROA as you do with a 24% Gross Margin and a 3x turn;  that’s the picture of your competitor’s 90 day cycle time versus your 120 day cycle time.

In the face of clear differences in economic outcomes, remember this:  in this scenario, your competitor is exactly the same size as you, when the real measure of size is the amount of work-in-process you each have to carry.

It’s not a choice forced between either higher margin or higher velocity;  it’s the challenge – and the opportunity – of doing both, of maintaining higher margins at higher velocity.

Yet, despite the obvious advantages, the demands of achieving higher velocity – the demands of generating higher productivity – are so daunting, require so much rigor, so much discipline, so much resolve, that most builders won’t attempt it.

And, therein lies competitive separation.

Pipeline workshops™ are a two-day immersion into the production physics – into the principles and disciplines – that enable homebuilders to thrive on the velocity side of economic return, to thrive on the velocity side of Return on Assets.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on September 26-27, 2018.  The cost is $895.00 per person;  the cost during early registration, open through June 29, 2018, is $750.00;  for team pricing, ask: (flgroves@saiconsulting.com).

Sponsored by BUILDER, BuilderMT, and Specitup.

For more details:  www.buildervelocity.com

 

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Pipeline Workshops™: Finding TrueNorth

Posted June 9, 2018 By Fletcher Groves

Scott Sedam is President of TrueNorth Development, Inc., and is the industry’s foremost Lean Production practitioner.  A well-known, well-respected Lean Building purist, Scott is a Bill Pulte protégé, who’s roots go back to Edwards Deming and TQM.

He is a friend, and longtime fellow consultant.

In 2013, after the first edition of The Pipeline: A Picture of Homebuilding Production© was published, and as I was planning the first Pipeline workshop™, I suggested that Scott attend as SAI’s guest, so that he could see pipeline-thinking for himself.

I wanted his opinion of the workshop, but I also wanted him to share with those first-time-ever attendees his thoughts on applying Lean Thinking beyond the margin side of economic return, towards what we were now terming the velocity side of Return on Assets.

Scott graciously came to the first workshop in March 2014, functioned like any attending builder in the discussions and in the Pipeline games™, and was a panelist (with me) on blending improvement methodologies towards a solution that works best for homebuilding.

Afterwards, this is what Scott wrote in a discussion on the BUILDER group on LinkedIn:

“If you are ready to challenge your brain, get out of your well-sealed ‘Builder Box’ and make a huge leap forward in understanding schedule and its impact, come to this workshop and bring a few of your better thinkers.

“The roots of [this] workshop are in Goldratt’s Theory of Constraints, which is at first-blush exceedingly simple, but you can spend years studying the intricacies.  Fletcher puts it all in builder language and forces you to go deep into the impact of our most common builder practices.

“If all builders learned and followed the principles in [a Pipeline workshop™], our industry would take a huge leap forward.  The winners would not be the builders alone, but also homeowners and especially our suppliers and trade contractors.  Fletcher does not know I am writing this, but I strongly recommend his Pipeline Workshop™ to everyone who has the will to change for the better.”

Come. Participate.  Learn.

 

The next Pipeline workshop™ is September 26-27, 2018, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  The cost is $895.00 per person;  the cost during early registration (through June 29, 2018) is $750.00;  for team pricing, ask (flgroves@saiconsulting.com).

Sponsored by BUILDER, BuilderMT, and Specitup.

For more details:  www.buildervelocity.com

The Pipeline: A Picture of Homebuilding Production, Second Edition© is available on the publisher website (virtualbookworm.com), as well as through the major book sellers (amazon.com, barnesandnoble.com, and booksamillion.com).

      

Pipeline Workshops™: Come. Participate. Learn.

Posted June 2, 2018 By Fletcher Groves

In the weeks leading up to a Pipeline workshop™, we explain to builders what they are about to encounter.  We describe the tools that they will have to learn to use, the facts of the business case they will confront, the knowledge they will take away from it, what they should expect to see.

We explain the challenging, disruptive, competitive nature of the learning – the degree of interaction, the level of intensity – they will experience.

At a Pipeline workshop™, it is learn-by-doing, applying production principles and disciplines to production simulation, and measuring the resulting operating performance and economic return.  We communicate our expectation that builders come prepared to learn that way, that there is no place to hide.  Nevertheless, many attendees tell us afterward they should have studied more, they should have prepared harder, in advance of the workshop.

Clark Ellis and I make no apologies for the extraordinarily demanding nature of a Pipeline workshop™.  It is intended to not just inform your thinking, but also to reform – and to re-form – that thinking.  It is designed to challenge your thinking, to change the way you think.  It is intended to test your understanding of how production systems work and how daily operating decisions drive business outcomes.

We constantly remind builders: there is a big difference – a big difference – between being in the home building business, and being in the business of building homes.

So – you have to come to a Pipeline workshop™ prepared for what is going to be thrown at you.

For example, exploiting the RB Builders: Lessons from the Pipeline© business case, which is revised and used at every Pipeline workshop™, requires the use of financial tools like Breakeven (variable costing, Cost-Volume-Profit Analysis), the DuPont identity (ROA), and the Cost of Variation.  It requires an understanding of production physics, like Little’s Law* (duration, cycle time) and the Law of Variability Buffering.  It requires the application of known improvement methodologies, like the Theory of Constraints, Lean Production, and Six Sigma.

You can read the book.  The Pipeline: A Picture of Homebuilding Production, Second Edition© is carried in stock on amazon.com;  it is also available directly from the publisher’s bookstore (virtualbookworm.com).

But – if you want it all handed to you, don’t bother to attend.  If all you want is binder material you can underline and highlight, and put on your bookshelf, don’t come.  If you aren’t willing to own what you take away from it, a Pipeline workshop™ is not for you.  If you believe improving the margin side of Return on Assets is the only game in town, a Pipeline workshop™ is about a different game.

But, if you are determined to create sustainable competitive separation, by thriving on the velocity side of Return on Assets®, by excelling at a discipline other builders find too difficult, too rigorous, too daunting, then a Pipeline workshop™ is precisely the right place for you to be.

 

Come.  Participate.  Learn.

The next Pipeline workshop™ will be held September 26-27, 2018, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  The cost is $895.00;  the cost during early registration, open through June 29, 2018 is $750.00;  for team pricing, ask (flgroves@saiconsulting.com).

Sponsored by BUILDER, BuilderMT, and Specitup.

For more details:  www.buildervelocity.com

*We will entice you a bit with Little’s Law.  Consider this scenario:  C/T=120 days;  WIP=80;  Closings=240.  Little’s Law says:  CT = (WIP ÷ C) x 360;  WIP = (CT x C) ÷ 360;  C = (WIP ÷ CT) x 360.  Therefore:  CT = (80 ÷ 240) x 360 = 120 days;  WIP = (120 x 240) ÷ 360 = 80 units;  C = (80 ÷ 120) x 360 = 240 closings.

      

Pipeline Workshop™ No. 10: Save the Date

Posted May 28, 2018 By Fletcher Groves

Pipeline Workshop™ No. 10 will be held September 26-27, 2018, at the Ponte Vedra Inn and Club in Ponte Vedra Beach, Florida.  The latest in the series of production management workshops in the open, sponsored Pipeline channel, it is sponsored by BUILDER, BuilderMT, and Specitup.

“The Pipeline workshop™ was really effective in showing how operational decisions affect business outcomes and how risky a ‘more for more’ approach to growing a home building company really is.  The Pipeline games™ were not only fun, but 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.

“At the end of the day, running a successful business is about how much money you make on the amount of money you invest.  The Pipeline workshop™ helped me understand this better than any workshop or seminar I’ve ever attended.

“I highly recommend it.”  (Charles Roberts, VP – Operations, Providence Homes, Jacksonville, Florida)

Welcome to the most intense, demanding, interactive, and challenging homebuilding production management learning experience on the planet.

And – it just keeps getting better.

In recent workshops, we lengthened the schedule, enabling us to do more with the deeper-dive velocity accelerators;  for Pipeline Workshop™ No. 10, the five velocity accelerators are Business Process Improvement, Critical Chain Project Management,  Open Book Management and Team-Based Performance Compensation, Epic Partnering™, and Business Information Modeling – an effective mix of immediately available velocity acceleration, currently possible velocity acceleration, and the future of velocity acceleration.

We continue to refine the scenarios in the Pipeline game™, which is both a production simulator and a business game.  Over the course of all the Pipeline workshops™, we have:  (1) made the game shorter, faster, and easier and quicker to grasp;  (2) switched to an operating statement format that mirrors the attributes of homebuilding operations;  (3) found ways to transfer the learning faster;  and (4) started to examine the effects of a fully-integrated as well as a completely outsourced building model, in order to capture what we see as disruptive innovation in the homebuilding industry.

Pipeline workshops™ are unlike any other homebuilding conference.

The learning split is 70% simulation/business case, 30% lecture;  the format is intense, interactive and competitive;  the Pipeline game™ production simulations and the RB Builders: Lessons from the Pipeline© business case test attendees’ understanding of production management and challenge their ability to solve production problems.

Pipeline workshops™ build an intuitive, instinctive understanding of production principles and disciplines, and they draw the subtle-yet-crucial distinction between being in the homebuilding business, and not just being in the business of building homes.

And – we somehow make it all incredibly fun:  the Ponte Vedra Inn and Club is a terrific AAA Five Diamond oceanfront resort venue;  there is a great reception at the end of the first day;  recommendations on outstanding local dining;  plenty of opportunity for networking.

Creating a visual image of homebuilding production;  establishing the connection between operating decisions and business outcomes;  building a new way of thinking systemically towards solving core problems and managing constraints;  managing limited capacity and resources, doing more with less;  dealing with variation;  managing homebuilding production for what it is – workflow that is multi-project with surrounding, supporting, and embedded processes;  placing the emphasis on the actions that accelerate velocity.

The fundamental proposition of a Pipeline workshop™ is this:  thriving on the velocity side of economic return – thriving on the velocity side of Return on Assets – is the best way to create sustainable competitive separation.

Registration for Pipeline Workshop™ No. 10 opens June 1, 2018.

Come.  Participate.  Learn.

 

Here is the permanent link to the website:  www.buildervelocity.com  As soon as early registration opens, all of the information, including the agenda and schedule, will be updated, along with the event registration and hotel reservation links.

The site also provides information about the workshop, provides reviews from builders who have attended previous workshops, and provides a downloadable Adobe PDF file with detailed information about the venue, agenda, and schedule.

The cost is $895.00 per person;  the cost during early registration (opens June 1, 2018, runs through June 29, 2018) is $750.00;  for team pricing, inquire here (flgroves@saiconsulting.com).

Sponsored by BUILDER, BuilderMT, and Specitup.

 

      

The Road That Lies Ahead . . . and The Road Less Traveled

Posted May 20, 2018 By Fletcher Groves

(initially published on Escape from Averageness® in January 2011;  updated, revised, brought into the present here, to reflect the thinking that came out – the thinking that is still coming out – of the 2018 Housing Leadership Summit, held May 14-16, 2018, in Laguna Nigel, CA)

“Where is the homebuilding industry headed over the next five to ten years on the issues of growth, consolidation, and supply chain management?”

Despite what you are thinking, this is not a current battery of questions.  At the dawn of the current century, these and other questions were posed in a volume of Reference Point™, which was the study of management practices in the homebuilding industry we periodically conducted among the C-Levels of a select group of larger building companies.

Now, almost 20 years later, as we more clearly face what I then termed “the inevitable assertion of power that will herald the Era of Consolidation” – the point at which publicly-held homebuilding companies (and large privately-held building companies, and now investors, from both within and without the industry) got serious about consolidation – I thought it might be worthwhile to look back and summarize some of what builders told us then, and how we observed and commented on the findings at that time:

 

GROWTH STRATEGIES:

“ . . . almost three-fourths (71%) of these executives predicted that their own building operations would become ‘much larger’;  almost everyone else (27%) predicted that the size of their operations would remain about the same . . . these findings were very consistent with the findings from an earlier Reference Point™ study.

“We thought it would be interesting to see how all of this growth was going to materialize.  When we asked these executives what primary strategy they would use to meet their growth projections, 41% identified ‘geographic expansion into new markets’, 39% selected ‘higher market share in current markets and buyer segments’, and the remaining 21% identified ‘new market share in additional buyer segments’;  not a single executive we surveyed identified ‘vertical integration’ – a decision to supply more of the component parts themselves – as a primary strategy.”

 

CONSOLIDATION:

“At separate points in the study, we asked two questions designed to determine the extent to which industry consolidation – some combination of growth, merger, and acquisition – would reduce the number of active building companies in the years ahead.

“We asked them whether, over the long term (10+ years), they could foresee the type of widespread consolidation of operations and market share that has occurred in other industries.  Overall, more than 70% of these executives said they could foresee the circumstances for such a consolidation.

“We then asked these senior managers whether they thought the number of homebuilding operations in their markets would increase or decrease in the next five to seven years.  Overall, almost half (49%) thought there would be fewer building companies, while more than one-third (38%) thought the number of building companies would remain about the same;  about one-in-ten (13%) believed the number of builders would actually increase.

“Their responses differed in significant respects from those expressed in our previous studies . . . at that time, less than one-in-ten (9%) thought there would be a significant decline in the number of builders . . . for those who thought there would be an increase . . . the situation has been reversed.”

So – ponder the implication of this combination of facts:  seven out of ten executives surveyed thought their own companies would be “much larger”, but five out of ten also thought the overall number of homebuilding companies in their markets would increase or remain the same.

 

SUPPLY CHAIN MANAGEMENT:

“We asked two questions related to distribution channels and supply chain management.  We wanted to know whether builders viewed these two issues – closely related to change in many other industries – as something the homebuilding industry would need to address within the next 10 years.

“Asked whether they could foresee . . . changes that could include the circumvention of established delivery systems similar to what has occurred in other industries . . . a slight majority (54%) believed the industry would have to deal with this issue in the next ten years;  the rest did not see this as an important issue.

“On the matter of supply chain management, there was much stronger agreement.  Asked whether they could foresee homebuilding companies taking the lead in collaborating . . . to manage all of the activities in the process of creating the housing product . . . a Pareto-esque majority (80%) expected the industry to move in that direction.”

We then offered the following comments and observations:

 

THE ROAD LESS TRAVELED:

“Even if builders chose to reject the notion of widespread consolidation and outright circumvention of established delivery systems, and dismissed the level of growth projected by such a high percentage of builders as collective boardroom fantasy, the dependence of so many builders on growth strategies aimed at geographic expansion and higher market share in current buyer segments ought to raise a couple of red flags:

“First, assuming that a strategy based on expansion into new geographic markets represented real growth, and not just the transfer of demand through acquisition or merger, then it would have the effect of forcing more competition on the existing level of demand.  The first victims would be the builders that could not compete for the available lots.  But, then what?  How would the builders that survived assert themselves in the market?

“Second, a strategy based on capturing a higher share of the market in current buyer segments asked a more naked version of the same question:  how would builders acquire more business – in the same buyer segment, in the same geographic market?  Could those types of gains be sustained?

“Growth fueled by a strategy of geographic expansion and higher market share in current buyer segments is essentially a strip-mining operation – an attempt to create value out of something a mile wide and an inch deep.  But what choice would builders have?  As an industry, we have outsourced almost every value-added activity in the building process.

 “Moreover, we could talk all day about the need to increase productivity, but (1) that would be a difficult proposition when someone else is doing all the work, and, (2) there would be no real point in improving productivity unless a productive use could be found for the additional capacity.

“And, besides, just where would all that additional production capacity be invested?  In more expansion?  In higher market share?

“When we look at it in these terms, there has to be a better way.”

“. . . There is a clear and simple message in all of this:  The road ahead is difficult and uncertain, but there is opportunity along with the danger.  Do not be complacent.  Do not follow the crowd.  Do not waste your time and effort on things that do not create value.”

 

Fast-forward to 2018.  In the time since this study, consolidation has clearly occurred in the homebuilding industry.  In 2003, the 100 largest builders (by closings) had a 34% market share;  today, the 100 largest builders have a 63% market share.

I concluded with this point, 18 years ago:

 

LIFE ON THE SERENGETI: 

“It seems obvious to us that the demand for housing in the next five to seven years cannot support the aggregate level of anticipated growth, if three-fourths of these builders aim to significantly increase the size of their current operations, even if we factor in a continuation of the current level of acquisition and merger activity and reason that our group of builders might be a particularly aggressive strain.

“On the other hand, we do not see any reason to doubt their intent.  A couple of scenarios come to mind.  One possibility is that some of the demand is transferred by acquisition or merger, but, beyond that, everyone settles for less growth than they would like – too many lions, not enough zebras, everyone still hungry, but no one is starving.

“The other possibility is that some of these builders might actually develop (or acquire) the capabilities that will allow them to redefine operating and financial performance as we know it.  In that case, the current level of industry consolidation begins to pale – and we will be looking at a group of bigger, stronger, faster lions, capable of eating zebras to their hearts’ content . . . “