Archive for June, 2013

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

 

“Without adding one iota of production capacity – from either a resource standpoint or a financial standpoint – productivity would almost double”, she said.  “In today’s real estate market, we don’t know what that means for Gross Income or Net Income, because we don’t know what kind of margins it would take to acquire all of the sales necessary to fully utilize the additional capacity that would be the result of that much increase in productivity.

“What we do know is that – as long as the Gross Income Margins are positive – all of the Gross Income above breakeven would drop straight to RB Builders’ bottom-line.”

“This is not the smart short-term play”, said the CFO.  “Given the current market conditions, we clearly have a situation with excess capacity that we won’t be able to reconcile;  we should be bleeding-off excess capacity and overhead cost, not trying to find ways to become more productive and create even more unusable capacity.

“However, I do agree with the point you made earlier.  Long-term, the gains in productivity that result from fixing the scheduling problems inherent in traditional project management have the potential to far outstrip the gains that might result from anything else we can do to improve operating performance.

“I’m worried about now.”

“We know that”, said the CEO.  “This is about securing the long-term future of the company.  We are working on other rapid-results projects with much faster paybacks.

“This is about creating sustainable competitive separation into the future.”

“I’m not buying it”, said one superintendent.  “180 day cycle time is a fact.  120 day job schedule is also a fact.  But, I don’t see how the 23 days that comes from reducing the duration of tasks from ‘highly certain’ to ‘toss-up’ could possibly reduce overall duration by 83 days.”

“Let me explain it to you, once again”, said the intrepid, results-based consultant.  “It’s due to a combination of things.  The padded duration that we hide in each task is unmanageable.  The tendencies of human behavior conspire to use it all up.  In a system, delays multiply and cascade, due to all of the interdependency.

“The traditional CPM-based method only accounts for task dependency, and has no way of dealing with resource conflict, other than to put float in the schedule;  CPM says, ‘make sure you do A before B, but if you have A doing three things at once, we can’t help you’.  If the templates had float tasks inserted, the float would represent more time, which the tendencies of human behavior still conspire to use up.

“The problems with systems are much more than the sum of the problems of the individual parts.

“The mere fact that everyone in this room acknowledges that RB Builders should be able to build a home in 90 days, its schedules stipulate 120 days, but it takes the company 180 days should tell you this is true.  If the float was actually in the schedule as separate tasks, the schedule would go to somewhere between 120 and 180 days, say 150 days, and I guarantee you the actual cycle time would increase to 220 days, because nothing has changed.”

“It’s supposedly not my forte’”, said the VP of Sales.  “But – if these numbers are right – someone needs to explain why everyone on the production side knowingly tolerated cycle times that were twice as long as they should be.”

 

“Not too shabby.”

Posted June 24, 2013 By Fletcher Groves

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

 

The intrepid, results-based consultant reached across her notebook computer and recovered her programmable HP-12C – the most recent version of the weapon she had long carried – from the superintendent who had been fiddling with it.

“Figure it out yet?”

“It’s an HP-12C”, said the superintendent.  “It uses RPN.  It’s been around for more than 25 years, almost as long as me.  It’s definitely old school;  it might be a coelacanth.”

“Definitely old school, but it’s not a coelacanth”, she said.  “That’s because it still works better than anything else that has come along.  Unlike the algorithms still in use by most scheduling programs.  There is a difference between a classic and a fossil.

“But – to think that I thought you guys only counted on your fingers and toes.  So, where were we?  Ahh, yes.

“As I recall,  RB Builders takes close to 180 days to complete a house, despite a job schedule that is intended to be only 120 days.  Since 120 days reflects the sum of highly-confident task durations, it stands to reason that about half the time, those jobs could be completed in around 74 days.  As you remember, we characterized the 180 day actual cycle time as a picture of all the delays cascading through the overall job schedule.

“What if we reduced the job schedule from 120 days to 74 days – a difference of 46 days – and then extended the new, shorter job schedule to 97 days, by inserting a 23 day project buffer at the end of the job schedule?

“What would happen?”

“It would save 21 days out of the schedule”, said the superintendent.  “Didn’t need a calculator to figure that one.”

The CFO looked at the intrepid, results-based consultant.  “Our actual cycle time is 180 days, not the 120 days called for by the job schedule.  Are we to draw from this that taking half the padded duration out would reduce our actual building time from 180 days to 157 days?”

“I don’t think that’s what she’s saying”, said the senior superintendent.

“What she’s saying”, said the VP of Construction, “is that we can reduce our actual cycle time by an average of 83 days, from 180 days down to 97 days, and in the process, make the schedules far more reliable, by cutting out a lot of the hidden safety that the schedule consumes anyway, because of the human behavioral tendencies we talked about before.  Remember, the only reason we experience 180 day cycle times on jobs with 120 day schedules is variation and uncertainty;  eliminate the negative effect of variation and uncertainty, and you can do exactly what she is saying.”

“Save 21 days on the schedule, cut 83 days out of the actual build time”, said the senior superintendent.  “Not too shabby.”

The intrepid, results-based consultant smiled.

“That’s right”, she said.  “Without doing anything else differently – with the possible exception of making all of your jobs easier – you would cut your cycle time almost in half on every house you build.  Without adding one iota of production capacity – from either a resource standpoint or a financial standpoint – productivity would almost double.  Which means, the rate of physical throughput – the rate of closings – would likewise almost double.

“In today’s real estate market, we don’t know what that means for Gross Income or Net Income, because we don’t know what kind of margins it would take to acquire all of the sales necessary to fully utilize the additional capacity that would be the result of that much increase in productivity.

“What we do know is that – as long as the Gross Income Margins are positive – all of the Gross Income above breakeven would drop straight to RB Builders’ bottom-line.

“Not too shabby.”

 

One Homebuilder’s Stress Test: Why We Map Processes

Posted June 16, 2013 By Fletcher Groves

(originally published on Escape from Averageness in August 2010 under the same title;  re-edged and republished here, as part of our retrospective Above Average:  The Best of Escape from Averageness, 2009-2012)

Business Process Improvement – the documentation, analysis, measurement, design and redesign, improvement, and management of operating and business processes – is the area for which SAI is most recognized.  We have done more pure work with processes – and done it longer – than anyone in the homebuilding industry.

Almost every consulting engagement we have ever accepted has involved structuring an enterprise around its critical business processes.  There is a reason:  The only way an enterprise makes money is by creating value;  the only way it creates value is through the work that it performs;  and the way that it performs most of this work is in processes.

But, that proposition does not do it justice.  Process mapping is far more than documenting, analyzing, measuring, redesigning, and improving workflow;  it serves to connect work to operating performance, and operating performance to business outcomes.

In that sense, process mapping administers something of a stress test;  some pass it, others don’t.

In 2006, we were engaged by a previous winner of the National Housing Quality award to map its business processes;  in order to be awarded this distinction, the company’s processes had been previously vetted and judged as part of the examination.

There were troubling indicators from the start.

As the work unfolded, we pointed out discrepancies between stated operating performance and stated economic returns.  We explained the production physics, and questioned whether the stated performance could have possibly occurred.  We highlighted the declines in operating performance and business outcomes, to which they seemed oblivious.

From a process standpoint, we observed that this company had “a very iterative product design process exposed to an impulsive/compulsive design mentality”, that this was a process with 132 discrete process activities – involving 33 handoffs, 19 reviews, eight approvals, 14 sections of activities where the work of one person or department was subsequently revised.  The project team was unwilling to self-classify a single one of these 132 activities as value-adding, but it classified almost 30% of them as completely non-value-added.  This was a process that took upwards of 12 months to design a new plan.

New Plan Design was the poster-child for poor process design, but it was not a sclerotic aortal mess.  That would be their Start-to-Closing process, where we calculated cycle time at 279 days, and demonstrated that this process could not possibly be achieving the 5.2 x asset turn they asserted.

We stressed the need to establish a set of operating and business measures as the performance requirements for the new process designs, yet they failed to produce a comprehensive, connected set of operating and business outcomes.  The need for (or importance of) performance requirements did not strike a chord with either the executive group or the process teams.  Given the existing level of operating and business performance, we told them that we found “the level of disinterest – the lack of resolve – disturbing”.

This was a builder that had produced an ROA of only 4.7% in 2005;  in the Era of Homebuilder Entitlement, economic return should have been eight-times that level.  Moreover, this was an enterprise that six weeks earlier had been forced to take the gut-wrenching action of releasing 40 teammates.  We pointed out that the real situation was certainly much worse, that the indicated economic return of 4.7% overstated the company’s true performance, because a .9% Net Income Margin was being masked by the impossible-to-achieve 5.2 x asset turn.

We told this homebuilding company that we had worked with builders of all shapes, sizes, rationales, and arguments, and processes like theirs were not just badly-designed processes;  they were the outcome of flawed thinking on how to best understand and satisfy the requirements and expectations of their chosen market segment, and craft a solution that satisfies the requirements of all of their stakeholders.

We told this company that velocity was a lot of what this project was about.  It was about finding ways to design better, more productive processes, in order to increase productivity and reduce cycle time.  We told them that processes were the logical starting point, the first step in the quest toward a “more-for-less” mentality – more output, more revenue, for the same investment in WIP and production capacity.  We told them that – given their distressed condition – this project likely needed to be about both margin and velocity.

We told them “there is a long road ahead . . . the start of an effort that never really ends;  the process of continuous improvement means just that:  a continuous process of improvement”.  We asked them the same questions we ask every other builder with whom we work:  “Does the world really need one more average homebuilding company?  Will ‘average’ performance – operating, business, or otherwise – be sufficient to sustain a homebuilding company in the future?”

We told them that they were not an average homebuilding company in intent or reputation, but they were significantly below-average, in terms of performance.  We told them, as John Kotter says, that their situation required a sense of urgency.  We warned them of the consequences of failing to confront it.

We told them this was only a start.  Whether it was a good start – whether it would be sustained, whether it would produce the results it was intended to produce – was up to them.

That was 2006.  In 2008, they filed Chapter 11.

 

Pipeline Workshops: Sponsorship Opportunities

Posted June 9, 2013 By Fletcher Groves

The Pipeline: A Picture of Homebuilding Production was written from the perspective of SAI’s private client consulting work in the homebuilding industry, including a set of highly-regarded workshops on production management.

SAI is considering the possibility of providing the learning contained in those private client workshops on a more open basis;  workshops with a narrow scope, limited size, promotionally low-key, offered to a targeted executive leadership audience.

In order to make the attendee cost attractive, and also expand the network of shared influence and affiliation, we would prefer to arrange these workshops as sponsored events.

We are content and delivery experts, but we have never arranged sponsors for our events.  Which means, we need help.  So – we are reaching out to sponsorship sources and sponsored event expertise.  The sponsors we seek would be enterprises connected operationally to the industry, with significant networks of customers/clients that are homebuilding companies.

Pipeline workshops are designed to transfer an in-depth knowledge, and an intuitive, instinctive understanding, of production principles and disciplines focused on homebuilding production management.  They are not a lecture series.  The material is comprehensive, the learning is intense, and the format is interactive and competitive.  Pipeline workshops are an immersion in the production physics – the principles and disciplines – that apply to homebuilding production.  Learning is anchored on a series of business games that simulate the production management decision-making that must occur in the variable and uncertain conditions facing every homebuilding production system, and connect the outcome of those decisions to the critical measures of operating performance and economic return.

The objective of these workshops is to transform the mindset of the homebuilding industry on the value and necessity – on the importance – of focusing as intensely on the velocity side of Return on Assets as the margin side of ROA.

While we would be happy to arrange and site workshops to meet specific sponsor requirements, these workshops are expected to be held where SAI is headquartered, in Ponte Vedra Beach on northeast Florida’s beautiful Atlantic coast, where our conference facility-of-choice is usually the Ponte Vedra Inn and Club, a five-star oceanfront golf, tennis, and beach resort.

There will be more information about Pipeline workshops on www.saiconsulting.com later this month.

Anyone interested in discussing this opportunity can contact me:

Fletcher L. Groves, III

Vice President

SAI Consulting, Inc.

 

(904) 273-9840 (office)

flgroves@saiconsulting.com (e-mail)

 

“There are only two choices.”

Posted June 2, 2013 By Fletcher Groves

(excerpted from The Pipeline;  previously published on EFA in February 2012 under the same title;  republished here, with our current thoughts, part of our retrospective Above Average: The Best of Escape from Averageness, 2009-2012)  

 

The intrepid, results-based consultant re-capped the erasable marker and set it down. “Right now – let me ask a different question:  What were your choices for dealing with the issue of capacity utilization?  Before the current downturn in the housing market, what would your alternatives have been for getting throughput up to the designed level?”

“Based on what I’ve learned from this discussion, I would say we probably had two options”, said the VP of Construction.  “We could have added production capacity; technically, that shouldn’t really count as an option for increasing utilization, because it alters the design capacity of the pipe.

“The other option would have been to better utilize the production capacity we already had.”

“Exactly”, she said.  “There are only two choices.  You can either add capacity or become more productive.  It is a decision that cuts to the core of how you view size and growth.  What size is RB Builders?”

“$50 million”, answered the VP of Sales.  “That was our Revenue for 2007.”

“And, that is how most homebuilders would answer that question”, she said.  “The answer to the question of size is usually about the amount of annual Revenue, or the annual number of closings. However, the most relevant measure of the size of a homebuilding company is the amount – and the value – of the work-in-process that it carries.

“Size is about capacity, not output.

“As we have already seen, there is a direct correlation between work-in-process and production capacity, which we prefer to define as the rate of throughput (or output), that can be generated with a planned, finite, controlled level of work-in-process.  There is an equally strong and direct correlation between work-in-process, cycle time, and velocity (or Inventory Turn).  Finally, work-in-process is one of the ways a production system will protect itself – buffer itself – from variation and uncertainty.”

“You mentioned growth along with size”, the CFO reminded her.

“Yes, I did”, she said.  “If size is defined as capacity, rather than Revenue or closings, what is the implication for growth?  How, then, should RB Builders grow?”  Seeing the blank stares all around the room, she continued.  “The answer is, based on that definition, RB Builders should not want to grow.

“By that definition, even when faced with acceptable justification, RB Builders should see growth as a last resort.  RB Builders doesn’t want to add production capacity, it wants to increase its productivity, by increasing the utilization of the production capacity it already owns.  Adding production capacity – getting bigger – is a “more-for-more” proposition”, she continued.  “It’s the easy road.  Anyone can do it.  Anyone can resort to adding production capacity, anyone can resort to spending more money.

“True, sustainable competitive separation comes from doing what your competition will not – or cannot – do.  Like finding ways to become more productive.

“Beyond the competitive aspect, there are other problems that come from simply being big”, she said.  “Big homebuilding companies tend to be slow, clumsy homebuilding companies, unable to respond quickly to changing circumstances, incapable of exploiting opportunities in the marketplace.

“And – there is risk,” she added.  “Adding production capacity means additional work-in-process and additional resources.  Risk increases exponentially with an increase in core size – with higher WIP and Operating Expense.  Once you increase production capacity, it becomes much harder to fully utilize it.  There are fewer options.  It is very difficult to downsize your way out of excess production capacity.

“Size forces you into positions you shouldn’t be in;  size forces you down roads where you shouldn’t go.”

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