Pipeline Workshops™: RB Builders: Lessons from the Pipeline©

Posted August 13, 2017 By Fletcher Groves

Any homebuilding team should be able to determine, for themselves, how attuned they are to the critical tasks of thriving on the velocity side of economic return.  To that end, we are willing to make the RB Builders: Lessons from the Pipeline© business case – the same business case used at every Pipeline workshop™ – available at no cost, to any builder that asks for it.

There are only two conditions:  (1) a builder has to state the intent of actually completing it;  (2) if a builder wants our methods and solutions, it has to share its results with us.

For the business case, contact me:  flgroves@saiconsulting.com

In keeping with the essence of Pipeline workshops™, this business case is difficult, but if you are up to the challenge, here is how RB Builders: Lessons from the Pipeline© opens, followed by the nature of the questions the interrelated business case exercises require you to consider:

 

“It is the first quarter of 2017.  RB Builders is aiming – yet again – to extend its reputation as a builder that thrives on both the margin and velocity sides of Return on Assets, by expanding into another new geographical market, via the late-2016 acquisition of a fourth existing homebuilding operation.

“Like previous years’ acquisitions, the newly-acquired division serves segments of the new home market deemed compatible with RB Builders’.  And – like its predecessors – the newly-acquired building division has historically generated lower operating results and business outcomes than what RB Builders considers acceptable;  in fact, this is the worst-performing of all the acquisitions, to-date, from the standpoint of both margin and velocity.

“As with its predecessors, RB Builders believes that it has once again acquired a building operation with satisfactory land/lot positions.

“To date, RB Builders has completed the conversion to the enterprise management technology system and started the conversion of the business and operating processes;  RB Builders is confident that it can continue its track record for unifying, developing, and improving the capabilities of existing teams at acquired divisions, transforming them to ones that reflect the savvy, motivated, and mutually-accountable homebuilding team of the parent operation.

“This road has become a familiar path for RB Builders.

“HISTORY OF RB BUILDERS:  Nine years earlier, at the beginning of 2008, and shortly after the end of the halcyon period known as the Age of Homebuilder Entitlement®, RB Builders had begun its own transformation process, with the objective of extracting itself from what it self-described as “the tar pits of averageness”.

“RB Builders had essentially used four initiatives:  (1) a team-based performance compensation plan directed at achieving targeted results above a baseline related to a single business outcome, paid-out upon the achievement of a series of progressively-weighted milestones;  (2) a method of sharing numbers that produced full operational and financial transparency;  (3) accounting procedures that connected operating performance to business outcomes very effectively, via actionable data;  and (4) a focused process of continuous improvement, consisting of a prioritized series of consecutively-ordered initiatives, all with short durations aimed at achieving targeted, defined, measurable results.

“As a result of this program, RB Builders had made massive strides.

“During the ensuing five-year period (2008-2012), annual Revenue had grown from $50 million to more $121 million, an increase of almost 250%.  During the same period, the number of closings had increased more than 225%, from 200 houses per year to 453 houses per year.  Despite the margin pressure from increasing market share so dramatically, overall Gross Margin had actually increased slightly, from 22% to 24%;  as a result, RB Builders’ Gross Income had grown by more than 250%, from $11 million to almost $30 million.

“During this five-year period, Operating Expense had increased 30% (from $8.5 million to $11 million), far less than the same-period increase in Revenue.  As a result, RB Builder’s Net Income had risen from $2.5 million to $16.5 million, more than six times what it had been before the company began its transformation;  Net Margin had almost tripled, from 5% to 14%.

“In 2008, RB Builder’s cycle time had been 180 days;  by the end of 2012, cycle time had been reduced to 65 days.  In 2008, the average amount of work-in-process had been 100 houses under construction;  by the end of 2012, the company been able to reduce its average work-in-process to 80 houses under construction.  The reductions in cycle time and work-in-process had occurred despite more than doubling the annual number of closings.

“In 2008, RB Builders had targeted an inventory turn of 2.5x, which was actually an improvement from the preceding year;  in 2012, by keeping its work-in-process at 80 houses and closing 453 houses, RB Builders had been able to more than double its physical inventory turn, to 5.7x.

“In 2008, RB Builders turned the value of its assets two times;  in 2012, it turned the value of its assets almost five times.  Because it had managed to maintain margins while improving velocity, RB Builders saw its main barometer of economic return – Return on Invested Assets – increase almost six-fold during the five-year period, from 11% in 2008 to 64% in 2012.

“In 2013, RB Builders had moved all of its raw land holdings and developed lot inventory off of its balance sheet, and into subsidiaries, which would have served to further increase Asset Turn – and ROIA – had those measures been restated to reflect the remaining assets.

“It had been a remarkable transformation.

“The three divisions that RB Builders had previously acquired have now met – or remain solidly on-track towards meeting – their own two-year plans for significantly increasing closings and Revenue without any increase in Operating Expense, while maintaining lower levels of work-in-process and operating under reduced construction lines of credit.

“NEWLY-ACQUIRED DIVISION:  Near the end of 2016, RB Builders acquired this, its fourth homebuilding operation.  In its last year of independent operation, it had closed 48 houses, and generated $12 million in Revenue;  with $9.6 million in Cost of Sales now reflecting only its direct, variable costs, the operation had generated $2.4 million in Gross Income, producing a 20% Gross Margin.

“With its $1.8 million in Operating Expense now reflecting only its indirect, non-variable costs, the newly-acquired operation had produced $600,000 in Net Income, resulting in a 5% Net Margin.

“Since it carried an average work-in-process of 28 houses under construction throughout 2016, the division had a calculated cycle time of 210 days, despite job schedules that were typically 120 days;  48 closings and average work-in-process of 28 houses under construction meant the newly-acquired building operation turned its physical inventory 1.7 times in 2016.

“Adopting the policy of RB Builders, and moving all of its raw land holdings and developed lot inventory off of its balance sheet, and into subsidiaries, the newly-acquired building operation showed a restated average work-in-process of $3.85 million;  Revenue of $12 million gave it an asset turnover ratio of 3.1x.

“With its Net Margin of 5% and its restated asset turn of 3.1x, the new operation had achieved an ROIA of 15.5%.”

Here are the questions the interrelated business case exercises raise:

Q:  How will you address a mandate that your newly-acquired division more than double its annual closings over a two-year period, with less work-in-process, a smaller line of credit, and the same amount of overhead?

Q:  How will you use Building Information Modeling to improve both the margin and velocity sides of economic return – and calculate the ROI on your BIM investment?

Q:  How do you calculate your newly-acquired division’s breakeven points and rates, in both financial and unit (closings) terms, now changing as a result of your improved operating performance and economic outcomes? What accounting practices will calculating the breakeven part of Cost-Volume-Profit require?

Q:  How will you create a savvy, motivated, mutually-accountable homebuilding team? One that understands the business of homebuilding as much as it does the homebuilding business?  One in which every teammate has a significant financial stake in the outcome – in achieving targeted performance above a baseline in a specific business result?

Q:  How will you answer RB Builders’ contention that variation – as evidenced by your 2016 cycle time, and supported by other operating performance measures – is costing your newly-acquired division between $1.3 and $1.8 million in Net Income every year? Bearing in mind, of course, that in 2016, your division only had Net Income of $600,000.

Q:  How will your newly-acquired division adapt Epic Partnering™ (RB Builders’ proven program and process for creating partnering relationships and arrangements of compelling mutually-shared interests) with your suppliers and subcontractors? What are the attributes of the partnering relationship?  What are the components of the partnering program?  What does a transformational partnering process look like?

Q:  How will you address workflow as part of an overall Business Process Improvement initiative intended to remove non-value-adding work and make the remaining value-adding work flow faster, more evenly, more smoothly, with fewer mistakes and rework?

Q:  How will you use Critical Chain Project Management to change the work breakdown structure of your job schedules, in order to reduce cycle time to 96 days (from 120 days), while also assuring more reliable job completion dates?

Go ahead, request the business case;  it gives you every bit of information you need.  When you are finished, grade yourself.  Were you able to answer the questions?  Were you able to solve the problems?  After completing the RB Builders: Lessons from the Pipeline© business case, if you find unacceptable, let’s call it your “degree of attunement”, you should plan to come to this Pipeline workshop™.

 

Come.  Participate.  Learn.

RB Builders: Lessons from the Pipeline© is the underlying business case study used at every Pipeline workshop™.  The next workshop is being held October 18-19, 2017, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

Cost is $875.00;  for team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting and Continuum Advisory Group.  Sponsored by BUILDER and BuilderMT.

Details:  www.buildervelocity.com

 

Be the first to comment
      

If you are attending the 2017 MiTek Builder Technology Summit, September 19-22, 2017, at the Naples Beach and Golf Hotel in Naples, Florida, and you want to learn more about Pipeline workshops™, come to the BuilderVelocity™: Thriving on the Velocity Side of Return on Assets® session in Session Group II on Thursday morning, 10:15 – 11:45 AM.

We plan to cover every aspect of what has become the most intense, demanding, interactive, and challenging homebuilding production management learning experience on the planet – the visual image of homebuilding production, connecting operating performance to business outcomes, production physics, the Pipeline game™, the current RB Builders: Lessons from the Pipeline© business case exercises, the Mental Models, the currently-featured Velocity Accelerators®, everything.

It will give you a very good idea of what a Pipeline workshop™ is all about, and whether it is right for you, and your team.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ is October 18-19, 2017, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  Cost is $875.00;  for team pricing, inquire here (flgroves@saiconsulting.com).

Sponsored by BUILDER and BuilderMT.

Details:  www.buildervelocity.com

 

Be the first to comment
      

Pipeline workshops™ are a size-limited, intense, interactive, comprehensive immersion into the principles and disciplines of homebuilding production.

Over the course of these workshops, we have added the RB Builders: Lessons from the Pipeline© business case and a robust set of problem-solving exercises, mostly dealing with what we call Velocity Accelerators®, but most attendees and observers would still agree that the most compelling part of any Pipeline workshop™ is the Pipeline game™:  teams of geographically-diverse builders that are required to go through a progression of production scenarios that are both a simulation of home building production and a business game.

It is the same Pipeline game™ we have used at Housing Leadership Summits. at CertainTeed Builder Advisory Groups, at Builder 20 groups, at Pipeline workshops™ held privately for large builders, and at Builder Technology Summits.

The objective of the Pipeline game™ is to reinforce the production principles taught in the Pipeline workshop™, including:  (1) the effect of variation on a production system, (2) pull scheduling according to the capacity of a constrained resource, and (3) the importance of connecting decisions made on operating matters (like flow, capacity, duration, and work-in-process) to the critical business outcomes of profitability and return on assets.

With multiple teams playing every game with exactly the same rules and understanding, the results never lie.

Look at the results from a previous workshop.  In every category – from throughput (closings), to work-in-process levels, to inventory turns, to cycle time, to net income, to return on assets – the teams made remarkable progress towards targeted performance, often exceeding expectations.  Look at the results, and you will see something else:  they rarely started out that way.

You have to play the Pipeline game™, see the measures, and calculate the results for yourself, in order to fully understand what the axis values mean;  rather, focus on the performance trends (y-axis), as the games in this workshop progressed (x-axis).

This was Revenue . . .

This was inventory turn . . .

This was cycle time, expressed in days . . .

This was Net Income Margin . . .

This was Return on Assets, a reflection of its co-equal components:  Net Income Margin (margin) and inventory turn (velocity) . . .

After the initial shock of shattered instincts, every metric was in precisely the direction you would want, the direction you would expect, if – if the production principles are true, and if real progress is being made.

Clearly, the builders attending this Pipeline workshop™ learned from their participation.  They learned the principles and disciplines of homebuilding production.

Pipeline games™ teach builders to “see” production;  they simulate the fast-paced, rapidly-changing, uncertain, risk-laden, variation-filled environment in which homebuilding production decisions must be made.  It is learning based on experience and action, not words.  Pipeline games™ compress the learning curve, presenting production situations that are simple, fast, easy to see and understand, that can be modified and rerun, until the principles are understood.

In a Pipeline workshop™, the progression of the games mirrors the progression of the learning.  In the book that gave rise to the workshops (The Pipeline: A Picture of Homebuilding Production, Second Edition©), this is how they were described:

“Change is a necessary condition to any improvement effort, but change is difficult, disruptive, time-consuming, and costly;  the effort can fail to produce the desired – the intended – result.  Learning needs to occur without so much cost, disruption, and risk.  Managing production and improving operating and financial performance becomes intuitive and simple, but there is much to understand.  It is counter to what is taught, therefore, difficult to grasp;  it must be learned, and that is harsh when it occurs at the cost of real operating performance and actual business outcomes.”

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on October 18-19, 2017.  The cost is $875.00 per person;  for team pricing, inquire here (flgroves@saiconsulting.com)

Delivered by SAI Consulting and Continuum Advisory Group.  Sponsored by BUILDER and BuilderMT.

Details:  www.buildervelocity.com

 

Be the first to comment
      

Pipeline Workshops™: Disruptive Learning

Posted July 29, 2017 By Fletcher Groves

“The concept of production building being a ‘pipeline’, along with the simple and straight-forward concepts discussed in this seminar, made this one of the most eye-opening experiences I have ever had when it comes to learning about production building.”  (Patrick Bukszar, Dir. Construction Services, Essex Homes, Lexington, SC)

“The Pipeline workshop™ was an eye opening experience.  I took away invaluable insight on what it takes to operate a profitable homebuilding company.”   (Daniel Hopkins, Director of Purchasing/Estimating, Jeff Benton Homes, Huntsville, AL)

“It was quite intense, challenging, and not for the intellectually lazy”. (Scott Sedam, President, TrueNorth Development, South Lyon, MI)

In relentlessly improving Pipeline workshops™, our intent – simply, plainly – is to open the eyes of the builders that attend, open them wider than they have ever been opened, and to make the learning as disruptive as possible to conventional, long-accepted ways of thinking.

We don’t want to just inform attendees’ thinking, we want to reform it.

Specifically:

♦  Pipeline games™ are a production simulator and a business game; they are what make Pipeline workshops™ so intense, so interactive, so competitive, and so worthwhile.  Already the best production sim in the business, we have made the Pipeline game™ even better over the years, shortening its duration and making the operating statement look exactly like a homebuilding operation.

♦  RB Builders: Lessons from the Pipeline© is the business case that we developed specifically for Pipeline workshops™; it presents a set of problems related to a very realistic homebuilding operation, problems that attendees are required to solve;  it is a test that challenges their knowledge and understanding of production principles.

The use of Pipeline games™ and the business case means that a Pipeline workshop™ – already known for its unique, engaging format – is now even edgier, because that is where almost all of the learning occurs.

Pipeline workshops™:  creating a visual image of homebuilding production;  making the connection between operating decisions and business outcomes they drive;  building a new way of systems-thinking – a paradigm shift – towards solving core problems, managing constrained capacity, dealing with variation and uncertainty, and managing homebuilding production as the type and mix of workflow that it actually is;  emphasizing the actions that accelerate velocity.

 

Come.  Participate.  Learn.

The next Pipeline workshop™ will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on October 18-19, 2017.  The cost is $875.00 per person;  for team pricing, inquire here (flgroves@saiconsulting.com).

Sponsored by BUILDER and BuilderMT.

For more details:  www.buildervelocity.com

 

      

The fundamental understanding that emerges from the DuPont identity regarding Return on Assets is this:  remove the financial leverage (equity multiplier) from the formula, and economic return (i.e., why you are in business) becomes a function of profitability (Return on Sales) and operating efficiency (Asset Turnover).

Economic return is margin x velocity;  it is a co-equal dependency.

Is margin proficiency necessary?  Yes.  Is it sufficient?  No.  Does superior margin hold-forth the possibility of achieving sustainable competitive separation?  Absolutely not.

We’re not alone in this assessment:

“ . . . [asset] turnover is just as important as profit margin.”  Barron’s Accounting Handbook (Siegel, Shim), 1990, 1997, p. 150.

“ . . . [improving] inventory turnover . . . increases asset velocity, one of the most under-appreciated components of making money . . . higher velocity improves productivity and reduces working capital.  It also improves cash flow, the life-blood of any business.”  Execution: The Discipline of Getting Things Done (Bossidy, Charan, 2002, p. 17)

Nevertheless, in the homebuilding industry, action on the velocity side of Return on Assets inexplicably takes a backseat to action on the margin side of ROA.

Pipeline workshops™ are aimed at changing that paradigm, but the motivation to attend a Pipeline workshop™ starts with the willingness to acknowledge and remedy what amounts to a profound lack of knowledge regarding production principles and disciplines.   You heard me right.  In the homebuilding industry, there is a profound absence of knowledge regarding production systems.

Disagree?  Think you already know this stuff?  Really?  Are you certain?  Here’s one good way to find out.  You – and your team – take the test.

  1. If a homebuilding production system is a pipeline, what determines the size, capacity, length, and cost of the pipe?  What controls the flow?
  2. Is even-flow production a mechanism or an outcome?
  3. What is the most operative, useful determination of size for a homebuilding company? a. revenue   b. number of full-time employees  c. houses under construction  d. annual closings
  4. From an operational perspective, there are three activities that describe “what happens to money” in a homebuilding business. The terms for those three activities can be used to express and link the formulas for productivity, cycle time, and inventory turn, to the equations for Net Income, and Return on Assets.  What are the terms?  What do they mean?
  5. What type of workflow is homebuilding? Is it process management, project management, or case management?
  6. True or False: A production system with balanced capacity across the resources that perform the work does a better job of optimizing the utilization of capacity than a production system that does not balance capacity across those resources.
  7. What are the three ways a production system protects itself from variation and uncertainty? It wants more of certain things.  What are they?
  8. Which algorithm for scheduling jobs considers both task dependency and resource contention in the Work Breakdown Structure? Is it Critical Path or Critical Chain?
  9. Calculating the cycle time of a production system requires knowledge of what operational measures? Determining the level of necessary work-in-process requires knowledge of which operational measures?  Estimating the rate of closings requires knowledge of what operational measures?  How are they connected?
  10. True or False: The best way to insure a high percentage of on-time completions is to build reasonable safety into task durations.
  11. Which measure of operating performance is the reciprocal of inventory turn?
  12. Lean Production views homebuilding as a build-to-order process. Which resource does Lean recommend using to set the pace of production?
  13. What is the difference between measured cycle time and calculated cycle time? What are the uses of each?
  14. True or False: CCPM (Critical Chain Project Management) does not adjust the job schedule.
  15. What three human behavioral tendencies consume the time safety built into a schedule?
  16. How does the start matrix in a push release system differ from the start matrix in a pull release system?
  17. As a matter of standard deviation, increasing the probability that a task will finish on-time, from 50% to 95% will cause the anticipated duration of the task to increase by a factor of how much? How many standard deviations does this represent?
  18. Is trade partnering a program or a process?
  19. True or False: The NAHB Chart of Accounts Income Statement enables a builder to calculate both a breakeven point and a breakeven rate.
  20. What is the difference between speed and velocity?

(the answers are at the bottom of the post)

It’s just a quiz.  Like any quiz, the questions represent a very small portion of the production and business knowledge required to effectively manage homebuilding production, increase operating performance, generate higher Net Income, and improve Return on Assets.

Every homebuilding company has to determine how it will manage production within a specific context, within the parameters that comprise its market, its product mix, its choice of an information/management technology system, its financial situation.

But, the ability to manage production starts with an understanding of the underlying principles and disciplines.

It starts with what you learn in a Pipeline workshop™.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on October 18-19, 2017.  The cost is $875.00 per person;  for team pricing, inquire here (flgroves@saiconsulting.com).

Sponsored by BUILDER and BuilderMT.

Details:  www.buildervelocity.com

Answers: 

(1) size is the amount of work-in-process, capacity is the rate of output produced with a planned, finite, and controlled amount of work-in-process, length is cycle time, cost is all of the indirect, non-variable expenses associated with overhead, flow is controlled by the valve that allows starts;  (2) even-low production is an outcome, not a mechanism;  (3) c: houses under construction;  (4) money generated through sales is called Throughput, money invested in whatever will be turned into Throughput is known as Inventory or Investment, and money spent turning Inventory into Throughput is called Operating Expense;  (5) homebuilding is multi-project (project portfolio) management with embedded and supporting processes;  (6) False;  (7) higher work-in-process, longer duration, or more capacity;  (8) Critical Chain;  (9) work-in-process and closings, expressed in units, cycle time expressed in days;  if two are known, the third can be calculated;  (10) False;  (11) cycle time;  (12) the most capacity-constrained resource;  (13) measured cycle time is the average (mean) duration of a series of jobs;  calculated cycle time reflects the relationship between the inventory (work-in-process) a production system carries and the closings (throughput) it produces;  measured cycle time is about forensics, calculated cycle time is about the system;  (14) True;  (15) procrastinate, expand to whatever time is allowed, multi-task;  (16) the start matrix in a push system both the order and rate of starts, whereas in a pull system, the start matrix only determines the order of starts (the rate of starts is governed by the rate of closings;  (17) a factor of 1.64, a reciprocal of .61; four out of every 10 days in the schedule are safety to assure on-time completion;  two standard deviations;  (18) establishing epic relationships with trade partners is both a program and a process;  (19) False;  (20) velocity is a vector measure, i.e., speed in a specific direction, speed with purpose.