Archive for May, 2013

Reactions in a Recovery where Demand exceeds Capacity

Posted May 27, 2013 By Fletcher Groves

“Art Rutenberg wants to know if you ever return your telephone calls.”

It was 1991, and the question came from Bill Kendall, then-EVP at Arthur Rutenberg Corporation and my direct report.  The question stung, because it was a sad truth.  Since then, I have had a policy of returning every telephone call (and replying to every e-mail message) within 24 hours.  Just one of the many lessons I learned from this man.

More than twenty years later, little has changed with him.  So, when I sent him an Escape from Averageness post on a subject matter (architecture) in which I thought he would interested, Art, as usual, responded within a day.  In his reply, Art offered that business was good, that ARH enterprise revenue volume for 2013 was expected to produce a year-over-year increase of more than 40%.  Mark Refosco, an ARH Regional Vice President and one of the ARH franchisees in northeast Florida, gave more or less the same report;  his franchise is about to surpass all of 2012’s revenue, and it’s only May.

They are not alone.  The anecdotal evidence of a housing recovery is wide and plentiful;  check the Q2 earnings reports on companies like Toll Brothers, and you get a similar picture.  However, while the evidence is wide and plentiful, so is the concern, and the reaction to that concern, among homebuilders.  Look no further than the NAHB/Wells Fargo BSI, which fell in May for the second time in five months.

The concern is that current capacity cannot meet current demand, and the reaction is interesting;  a reduction in the rate of starts, an increase in prices, and a search for the resources that will increase capacity.

While it’s somewhat of a welcome problem to now have, an increase in demand puts pressure on current capacity.  Refosco concurred:  “It is a tough problem.  I told my building company president to increase prices, to slow things down.  We are, and have been, adding staff.”

To which I replied:  “In the production thinking of most executives – for certain, most homebuilding executives – there is a tendency to elevate the constraint before exploiting it.  There are a lot of reasons for doing just the opposite – a lot of argument for exploiting the constraint before elevating it, for getting as much as possible out of whatever is limiting throughput before spending additional money to own more of it.”

A better move – a smarter strategic move – would be to increase resource productivity/utilization, before acquiring more resource capacity.  As part of a homebuilding company’s overhead, those under-utilized resources are already being paid for, and they already know the system.  In the majority of homebuilding companies, there is a lot more productivity/utilization to squeeze out of their operations.

More-for-the-same, not more-for-more.

Next:  “There are only two choices.”

 

Discipline, Context, and Perspective

Posted May 19, 2013 By Fletcher Groves

(excerpted from The Pipeline:  A Picture of Homebuilding Production;  available on amazon.com, barnesandnoble.com, the publisher website (virtualbookworm.com), and the author website (thepipelinebook.com)

The intrepid, results-based consultant shut down her notebook, and began to pack her materials.  As she did, she addressed the team.  “I want you to know how impressed – and gratified – I am by your efforts, your attention, your attitudes, your cooperation, and your diligence.  Learning new stuff is hard, and this was a lot of new stuff.

“We have much more to do.

“What lies ahead notwithstanding, you are now bonafide experts, collectively and individually, in the principles and disciplines that govern homebuilding production.  That distinction may not mean much for a while, considering the current state of the housing market and condition of the homebuilding industry.

“At some point, it will surely mean a great deal.

She slung her computer bag over her shoulder.  She paused, and then turned to the team and said, “Let me leave you with some final thoughts.  These sessions have been devoted to production principles and disciplines.  In my view, improving the velocity side of the ROIA equation is the best path – perhaps the only path – to sustainable competitive separation, but there is more to business performance than managing production.”

She returned to the erasable board, and made a short list.

DISCIPLINE

CONTEXT

PERSPECTIVE

“Improving business performance boils down to getting the job done – viewing the issue, sustaining the effort, and getting the results – in three critical dimensions”, she said, completing each item.

DISCIPLINE = NARROW THE FOCUS, DELIVER DISTINCTIVE VALUE

“First, you have to continue to narrow your focus.  You cannot be all things to all people.  You have to make certain that RB Builders’ operating model – its structure, its systems, its processes, who it selects and develops as teammates, what its culture is – delivers exceptional levels of the specific and distinctive value demanded by a narrowly-defined segment of homebuyers.  It is the choice of a specific value proposition over any other, and how you choose to fulfill it.”

CONTEXT = A COMPANY OF BUSINESS PEOPLE

“Second, you have to continue to turn RB Builders into a company of business-people, by teaching teammates the real numbers of the business, giving them the authority – and responsibility – to act on that knowledge, and then giving them a real financial stake in the outcome.  That’s what being a ‘savvy, accountable, motivated homebuilding team’ means.”

PERSPECTIVE = GET HORIZONTAL

“Third, you need to wrap your minds around the natural, horizontal, process-centered manner in which RB Builders performs work and creates value on behalf of its homebuyers and other stakeholders.  It is the most basic, the most universal proposition in all of business:  The reason an enterprise exists, the way it  makes money – is through the value that enterprise delivers to customers and other stakeholders;  that value is only delivered by the work that the enterprise performs;  that work has to be performed in some method of workflow;  and those methods of workflow exist, whether the enterprise is intentional about them or not.

“We once stated the sequence of our proposition underlying business process improvement as value-work-process.  Homebuilding involves both process management and project management, but it’s still about workflow, and about the work performed in either process or project management systems.

“Focus on these three dimensions”, she said.  “Remember them:  Discipline:  Narrow the focus, deliver distinctive value.  Context:  Knowledge, transparency, a stake in the outcome.  Perspective:  Everything in the business model oriented to the requirements of the workflow that creates the value.

“Everything else – the strategies, tactics, policies, scorecards, products, markets, external partners, departments, positions, including everything we have talked about concerning production principles – are the means to an end, the side issues to getting the job done in these three dimensions.”

 

The Pipeline: Why read it?

Posted May 12, 2013 By Fletcher Groves

The Pipeline:  A Picture of Homebuilding Production is a business book.  It is about the principles and disciplines of production management, as they relate to – and as they are applied toward – the specific conditions, requirements, and parameters found in the homebuilding industry.

I am told that the Introductions written for business books typically answer two questions, first-and-foremost:  Why should you purchase this book?  In the case of The Pipeline, I would say it’s because improving performance on the velocity side of the ROA equation is the best path – perhaps the only path – to achieving sustainable competitive separation.

The issue is not whether the margin side of ROA is less important than the velocity side of ROA;  margin is neither unimportant nor less important.  Gross Income derived from increasing how much you make on each house you build (margin) has the same contributory value, dollar-for-dollar, as the Gross Income derived from building more houses with a finite and controlled amount of inventory and capacity (velocity).

Nor is it necessarily a choice.  Sometimes the circumstances favor one or the other, but we don’t necessarily have to choose between efforts to increase Return on Sales and efforts to increase Asset Turn;  margin and velocity are driven by different aspects of the business, and they generally don’t react to, or adversely affect, each other.

It is, simply, that higher margin – while as desirable, beneficial, and important as higher velocity – is not a strategy for creating a lasting competitive advantage;  between higher margin and higher velocity, higher margin is the easier, more common strategy.  The same is even more true of the opposite to higher velocity, which is higher capacity.  Adding production capacity (and the inventory for it to work on) is a “more-for-more” proposition.  It’s the easy, well-traveled road;  anyone can resort to adding production capacity, but don’t expect it to set you apart.

As a business strategy, either or both – higher margin or more capacity – can be co-opted.  True, sustainable, competitive separation comes more from doing what your competition will not – or cannot – do.  Like finding ways to become more productive, to “do more with less”.

Consider the plight of RB Builders, the homebuilding company portrayed in The Pipeline (and chronicled earlier in The Saga of RB Builders), facing the world at the close of 2007, at the end of the halcyon period known as The Age of Homebuilder Entitlement:

In many ways, RB Builders was a product of that age, just another homebuilding company satisfied with occasionally adopting other builders’ “best practices”, content to be good, no-better-but-no-worse than the other builders with whom it competed, a building company with a middle-of-the-road approach to delivering the value its homebuyers demanded.   

The previous 10 years had been good for RB Builders.  But, it was becoming a dangerous approach to business, because – as the saying goes – “the only thing in the middle of the road are yellow lines and dead armadillos”.   

It was becoming a homebuilding no-man’s land. 

Locked into an operating model – into organizational structures, management systems, processes, cultures, and employees – that could not deliver extraordinary levels of distinctive value, the company found itself dumped into a teeming mass of homebuilders that all looked the same, sounded the same, and priced the same.  Indistinguishable from other builders, and unable to create any type of competitive advantage, RB Builders was trapped and sinking – like a modern-day dinosaur – into the tar pits of average-ness. 

The world doesn’t need any more average homebuilding companies;  it has enough of them, plenty of them.

 

(from the Introduction.  The Pipeline:  A Picture of Homebuilding Production, is now available on amazon.com, barnesandnoble.com, the publisher website (virtualbookworm.com), and the author website (thepipelinebook.com).

 

The Pipeline: Foreword by Pascal Dennis

Posted May 5, 2013 By Fletcher Groves

(Pascal and I are, as he says, friends and colleagues;  he graciously wrote this foreword for The Pipeline:  A Picture of Homebuilding Production.  Pascal is a professional engineer, and the president of the international consultancy group Lean Pathways Inc.

He is the author of Lean Production Simplified, Andy & Me, and The Remedy;  he is a four-time winner of the Shingo Prize for Excellence.)

 

“When my friend and colleague Fletcher Groves told me he was writing a book explaining homebuilding production principles and disciplines, I was pleased and supportive.

“Fletcher is a man of energy, enthusiasm, and profound experience who has taught me a ton about this fascinating and essential industry (it’s been my good fortune to work with Fletcher and the great Jack Suarez on the Inland Homebuilding System).

“Fletcher is unique in that he combines a deep knowledge of Lean (also known as the Toyota Production System), Theory of Constraints, Business Process Management, and Finance – a powerful combination.  He thereby avoids the tiresome ‘theological’ debates – Lean vs. TOC vs. Business Process Reengineering vs. Six Sigma and so on – that distract and confuse.  As Ernest Hemingway once observed, in a different context:  ‘It is all true’.  The point is to integrate powerful ideas toward achieving prosperity for our business, team members, and community.

“He is also a man of decency and integrity which comes through in The Pipeline‘s sub-theme of what the ancients called Fortitude – the guts to confront brutal facts without ever losing faith in the ultimate outcome.

“I was lucky enough to grow up professionally at Toyota Motor Manufacturing Canada, and to spend extended periods of time at leading Toyota facilities in North America and Japan.  Our (very patient) Toyota senseis emphasized the concept of a system – an organized set of parts with a clearly defined goal.  Absent a system, at best, we sub-optimize;  at worst, we waste our time.

“And so, Fletcher has done us a great service.  He has produced an engaging and accessible overview of what W. Edwards Deming has called the ‘profound system of knowledge’, as it applies to homebuilding production.  RB Builders, our fictional production homebuilding company, faces the very real challenges, and learns a powerful way of thinking and managing.

“Homebuilding has endured a terrible downturn.  But it will come back, as it always has.  If we can learn and apply the principles explained in The Pipeline, if we can learn to think of homebuilding as a system, as RB Builders does in the story, we can blunt future boom-bust cycles, and thereby reduce human misery and preserve hard-won prosperity.

“We’re early on in this essential journey;  a respected colleague suggested that, apart from a handful of progressive companies, homebuilding is where auto manufacturing was a century ago.

“The Pipeline:  A Picture of Homebuilding Production is an invaluable guide.”