Archive for November, 2012

The Saga of RB Builders, Part IX: 2012: Beyond Current Possibility

Posted November 26, 2012 By Fletcher Groves

The Saga of RB Builders is a nine-part series on Escape from Averageness;  this installment (Part IX) is the final chapter.

 

As I said in the prologue to this series, Saga is the story of a homebuilding company, as it went through a five-year effort to improve operating performance and business outcomes in a changing and challenging housing market.  RB Builders and its characters were fictional, but the context in which they existed was not.  Written, as it were, in 2007 and looking back from a point at the end of 2012, the story, in effect, looks back to the future, and reads like historical fiction.

Obviously, that perspective cannot do justice to the length and depth of this recession, the immense carnage to come, the extraordinary damage to margins and volumes, to Balance Sheets and careers, that would ensue.

Yet, if I were asked, as the author, what aspect with which I am most satisfied, it would be that the story seems unaffected by the passage of period of time – and, thus, the lessons of The Saga of RB Builders remain extraordinarily relevant.

It is a path out, from the abyss.

 

RB Builders’ GI Targets had always reflected a level of performance that was considered beyond its current capability, a level of performance that was possible, but only through extraordinary amounts of urgency, intensity, focus, and motivation.  Far from conducting business-as-usual, the 2012 GI Baseline had not cut the company any slack – it was a stretch, itself, under the anticipated market conditions.

Every year, RB Builders had reached its GI Target.  2012 was a different story (see Table 4, below).  RB Builders went beyond its current capability;  it went beyond what anyone in the company believed was possible.

Table 4 (capture)

The company got serious about increasing productivity and utilizing its production capacity.  It attacked resource constraints, as well as the excessive safety built into schedules to protect phase completion dates.  It relentlessly attacked anything that didn’t add or create value, from the homebuyer’s perspective.  It reallocated personnel – freed by “doing less, but delivering more” – to more productive work, work that generated more Gross Income.

RB Builders continued to refine the ability of its operating model to deliver on its value proposition – it continued to improve the capability of its organizational structure, management and operating systems, business processes, homebuilding team, and culture to deliver extraordinary levels of the distinctive product and service value demanded by the narrowly-defined segment of the new home-buying market the company had purposely chosen to serve.

Its product (its plans, elevations, specifications, finishes, features, options, and communities) became more distinctive and evocative;  its service became more focused, more useful, and more to the point.

During 2012, RB Builders closed 453 homes, 53 more than its target.  With only 80 homes under construction, cycle time dropped to 65 calendar days, 25 days less than its target (90 days).  Acquiring the additional market share in a down housing market resulted in a lower average sales price, but the company had held the line on direct, variable costs, so that it met its Gross Margin Target (24%).

RB Builders’ 2012 GI Target was $25.9 million;  the company generated Gross Income of $29.5 million, $3.6 million above its target.   The company also held the line on indirect, non-variable costs, so that its Net Margin exceeded the target (14% versus 13%), even considering the higher cost of its results-based compensation.  RB Builders had targeted Net Income of $14.1 million;  when all was said and done, the company actually earned $16.5 million, $2.4 million above its target.  The combination of higher Net Income and lower levels of work-in-process pushed Return on Assets to 64%, exactly eight times the economic return the company had earned in 2007.

Not only had RB Builders reached its 2012 GI Target (and achieved all eight GI Milestones), it had exceeded the GI Target to the point of achieving a ninth milestone.

Since its GI Target was the sum of its GI Baseline and (projected) GI Reserve, the milestones that made up RB Builders’ GI Target (milestones 1-8) were always considered to be a blend of the expected and the extraordinary, progressing toward the extraordinary.  However, the achievement of 2012’s GI Milestone 9 was purely extraordinary, in terms of anything the company had accomplished before.

With its annual overhead and the cost of its production capacity fully absorbed in the previous eight milestones — and with its projected GI Reserve more than doubled — the $3,600,000 in additional Gross Income from GI Milestone 9 was distributed in its entirety.

The employee payout went to one-third of the milestone[1], to $1,200,000, more than doubling the payout for the entire year.  The remainder of GI Milestone 9 ($2,400,000) was left in the company as an additional $1,200,000 in Retained Earnings, matched by distributions to owners ($1,200,000).

All of which was completely self-funded from performance above its baseline.

 


 

[1] Remember – by this time, RB Builders was on its own.  The 10% that had gone to RB Builders’ intrepid, results-based consultant was being allocated evenly between additional retained Earnings, Cash Distributions to owners, and employees.

The Saga of RB Builders, Part VIII: "More-for-Less"

Posted November 16, 2012 By Fletcher Groves

(The Saga of RB Builders is being presented as a nine-part series on Escape from Averageness;  editor’s note:  The Saga of RB Builders was actually written in 2007, and looks back from the then-imagined perspective of 2012.)

 

The company was curious about what it would take to get to “more-for-less”.  It was curiosity worth a quick call to the trusted, results-based advisor, who had always left the door open.  When asked, “What does it take to do “more-for-less” – to become a “more-for-less” homebuilder?”, the trusted, results-based advisor smiled, and simply replied, “Less enables more”.

RB Builders began to take a harder look at ways to “do less, but provide more”, at ways to “do less, while providing more”.  The point of separation was always about value, viewed from the homebuyer’s perspective.  They simultaneously looked for ways to eliminate waste, and use the resources and capacity that it freed to provide more value.  The company still applied systems-thinking to the cause-and-effect relationships of every improvement it made, but the day-to-day effort became a broader, more Lean-based approach, in part, because of the widespread nature of the improvement, in part because of RB Builders’ increased implementation capability and capacity, in part because RB Builders’ team now believed in the approach.  Much of the effort was still organized into short duration projects with measurable results, but there were more projects, run concurrent, and the projects were not restricted to constraints.

In its search for ways to “do less, but provide more”, RB Builders revisited areas it had worked on previously.  The company had earlier redesigned its critical processes, but it knew the new process designs had settled for “should-be”;  most of the purely non-value-added work had been eliminated, but much of what was considered only value-enabling work remained.  The new process designs had restructured and reordered the remaining value-enabling and value-added work, but they had never truly ventured toward “could-be”, where the goal would have been to only do value-added work.  So – one of the rapid-results projects[1] in 2012 focused on process workflow.  Another project focused on eliminating all of the “things” – the meetings, reports, and policies, etc. – that RB Builders could just as easily do without, particularly if having them or doing them didn’t add any value.  Complexity of any kind was a target for elimination, to be replaced with clear, simple, effective ways of doing things.

They continued to focus on project management, on removing unmanageable float and resolving resource conflicts, so that jobs finished sooner, but now, the company also turned its attention to the amount of work-in-process.  When RB Builders looked around, and asked, “What’s still the same?  What hasn’t changed?”, the most obvious answer was work-in-process.

RB Builders’ intrepid, results-based consultant/advisor had taught the company to think of its production capacity as the rate of closings it could generate with a planned, finite, and controlled amount of work-in-process, and with a fixed overhead.  As a result, RB Builders had religiously maintained its average work-in-process at 2007-levels (100 homes under construction),  Better scheduling and production management had resulted in more than a 60% increase in the rate of closings, from 200 homes in 2007, to 325 homes in 2010.  Improved flow of sales, starts, and closings had resulted in a more even spread of the work-in-process.

But – it was still 100 homes.

She had shown them how excessive levels of work-in-process reduced the rate of throughput.  It was in the formula she had given them for calculating cycle time.  RB Builders reasoned, what would happen if the level of work-in-process was purposely lowered?

No longer afraid of trying, failing, and learning from new ideas, the company decided to reduce current work-in-process and limit maximum work-in-process to 80 homes in 2012.

 



[1] The term “rapid results” comes from Rapid Results! (Schaffer, Ashkenas, 2005).

The Saga of RB Builders, Part VII: Pre-2012: A Changing Market

Posted November 8, 2012 By Fletcher Groves

(The Saga of RB Builders is being presented as a nine-part series on Escape from Averageness;  editor’s note:  The Saga of RB Builders was actually written in 2007, and looks back from the then-imagined perspective of 2012.)

 

The story did not stop there.

As RB Builders did its now-customary results-based planning and budgeting for 2012, the company found the housing market in mid-cycle, with stronger demand and higher margins than 2007-08, but not as strong a market as 2010-11.  It was a different playing field, in part due to market conditions, and in part, due to the company’s improved operations.

In the time since it had started its Results-Based Consulting arrangement five years ago (the company still used the name, despite its intrepid, results-based consultant having been gone for two years), RB Builders had clearly become a more productive building operation.  The company’s average cycle time had dropped to 112 days (in 2010), and RB Builders now believed it was capable of generating twice as many closings as it had in 2007, with the same level of work-in-process and the same amount of production capacity.  That would put RB Builders’ average cycle time at 90 days, well below the 180+ day average durations it had in 2007.

However, as the company was preparing to enter 2012, concerns about market conditions outweighed the possibility of higher productivity, and brought into question whether – and how – RB Builders could utilize any additional capacity or productivity.  The GI Baseline for 2012 was set at the actual performance from 2010 (with overhead adjusted for inflation), although using 2010’s performance put the 2012 GI Baseline below what the company had achieved in 2011.  Nevertheless, they agreed that the GI Target for 2012 needed to reflect the results that could happen if RB Builders found a way to utilize the additional capacity and productivity under the anticipated market conditions (Table 3, below).

Table 3 (capture)

The housing market had enjoyed a three-year turnaround, following the two-year downturn at the close of “The Age of Homebuilder Entitlement”.  2012 would see lower sales prices, particularly if the company intended to close almost 25% more homes.  If the company achieved its 2012 GI Target, RB Builders would be a larger homebuilding company, but it would not be a more profitable homebuilding company.  The prospect of still another downturn in the housing market turned the company’s attention back to the risks inherent in a market/industry where capacity exceeded demand.

RB Builders knew that it had never really achieved the “more-for-less” proposition its trusted, results-based advisor had helped them envision back in 2007.  The best it had been able to do was “more-for-the-same” – more Revenue, more Gross Income, produced with the same level of work-in-process and a slightly higher level of Operating Expense – an improvement from the “more-for-more” proposition it started with, but nowhere near “more-for-less”.  In the improving housing market of 2009-2011, “more-for-more” had been sufficient;  in a deteriorating housing market, it would no longer be.