Archive for July, 2014

Pipeline Workshops: Compressing the Learning Curve

Posted July 27, 2014 By Fletcher Groves

The intrepid, results-based consultant opened the portfolio, removed a set of game boards, leaned them against the conference room wall, and then opened her notebook carryall, removed the zippered pouches containing the poker chips and sets of six-sided dice and placed them on conference room table.

She handed the game boards to a member of each team, and said, “I need you to clear space on your tables for these boards.”

As those tasks were being completed, she explained what was about to happen.

“Change is a necessary condition to any continuous improvement effort.  You can’t expect to get different results by doing the same things the same way.  However, change is difficult, disruptive, time-consuming, and costly;  moreover, the effort can fail to produce the intended result.  We need to be able to figure production management out, without the cost, disruption, and risk of failure associated with doing it in real life.

“What we need to do, is compress the learning curve.

“The new approach that you will use to manage production – and thereby improve operating and financial performance – becomes intuitive and simple in practice, but initially there is a lot to understand.

“It is an approach that is counter to what most of you have been taught”, she said.  “You will need to fight your natural tendencies, challenge your paradigms, begin to think systemically.  It can be hard to initially grasp.

“In short – it must be learned.

“That kind of learning is a harsh teacher when it occurs at the cost of real operating performance and actual business outcomes.

“So – we are going to simulate the environment in which production decisions must be made, and we are going to measure the outcome of those decisions, in terms of both operating performance and economic return.  It’s going to be competitive, the pace is going to be fast, the situation will change rapidly.

“There will be uncertainty, risk, and variation;  you will have to learn how to reduce it, and then, how to manage it.

“The purpose is to create learning based on what you experience and do, not simply what you hear and read.  The objective is to compress the learning curve.  The production situations you are going to encounter in these simulations reflect the circumstances you encounter in the real world of homebuilding, but they will be simple, fast, easy to see and understand.  We will modify them and run them until we learn to see, until we understand how to apply the principles.”

Addressing no one in particular, but having a particular person in mind, the intrepid, results-based consultant added, “You need to shut-up, and quit acting like you already know everything.  Entiendes?”

Satisfied, she continued.

“Here, we have a homebuilding production system,” she explained, gesturing to the game board.  “The board represents the resources and tasks necessary to complete each job, which are your houses.  As you know, a production system manages a portfolio of jobs, not a single job;  the chips represent the system’s work-in-process – the jobs/houses at various stages of completion, as they flow through the system.

“Variation is reflected by the probability in the dice rolls.  The tasks in each resource phase take the same amount of effort on every job, so there isn’t any variation in the amount of work, only in the length of time required to complete it.  We find comfort in the false security of achieving an ‘average duration’, and this game reflects that tendency.

“Each game represents a full year of operations and results;  each round represents a one-month time period in that year.  Before the game ever starts, you have to make some decisions about resources and work-in-process, which will, in turn, enable you to project operating performance – completions, work-in-process, capacity, etc. – and to budget financial performance – Revenue, Cost of Sales, Gross Margin, Operating Expense, Net Income, Return on Assets.

“All that stuff goes on the scorecard, before the game starts.

“As the game progresses, the scorecards also accept all of the data for each round – resource work rate, work-in-process, and completions;  at the end of the game, you have to calculate the actual operating performance – cycle time, productivity, inventory turn;  then you have to calculate the actual business outcome – Return on Invested Assets, and Net Income.”

“Put the money in the bank”, said one of the superintendents, looking toward the Vice President of Sales.  “Start making it rain, Chief.”

The intrepid, results-based consultant smiled.  She had heard it all before.

 

(modified excerpts from ‘The Game’ chapter of The Pipeline)

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

The next Pipeline workshop will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on October 15-16, 2014.  Cost is $795.00.  Early registration, open through August 15, 2014, is $645.00.

Delivered by SAI Consulting.  Sponsored by BuilderMT and Big Builder (Hanley Wood).

For more details:  www.buildervelocity.com

 

Pipeline Workshops: Right for you?

Posted July 20, 2014 By Fletcher Groves

Homebuilding production has to be managed as a system;  without that systems-level understanding, production cannot be managed well, if at all.  Unfortunately, that type of ordered, process-centric, capacity-focused thinking is not the homebuilding industry’s natural tendency;  it clashes with the deal-driven, product-centric, margin-focused mentality that dominates homebuilding.

That understanding is going to be critical, because in the industry that is slowly emerging from the worst recession in three-quarters of a century, it’s not going to be a choice between higher margin or higher velocity;  it’s going to be the necessity of producing higher margins at higher velocities.

Sustainable competitive separation comes from doing both, and doing both of them well.

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, that enable builders to thrive on the velocity side of Return on Assets.  The understanding and expertise delivered in a Pipeline workshop pulls extensively from The Pipeline: A Picture of Homebuilding Production.

Pipeline workshops are designed to transfer in-depth knowledge and create an intuitive, instinctive understanding of production principles and disciplines, focused specifically on homebuilding production management.  Pipeline workshops are not a lecture series;  the material is comprehensive, the learning is intense, and the format is interactive and competitive;  attendance is capped at 40 attendees.

In a Pipeline workshop, the principles and disciplines governing homebuilding production are taught through effective presentation, but they are learned through application.  Pipeline workshops use a progressive series of production scenarios that simulate homebuilding production in the real business world, in an environment of variation and uncertainty, where operating decisions produce economic results – sometimes good, oft-times bad, occasionally meeting or exceeding the budgeted performance, oft-times not.

Those results – good or bad, sufficient or deficient – are diagnosed at the conclusion of each game, so that the connection between operating decisions and business outcomes is clarified, and the principles and disciplines explained in the workshop sessions are reinforced.

What you gain from a Pipeline workshop:

  • a strong, visual image of a homebuilding production system – its purpose, size, cost, and capacity.
  • an elegant understanding of how operating decisions drive business outcomes, and how the measures of operating performance connect to the measures of profitability and economic return.
  • an ordered manner of thinking and reasoning about the relationship and interaction of the dependent parts that comprise a homebuilding production system.
  • a systemic approach to solving production problems and managing finite production capacity.
  • a blended approach to process and project portfolio management that addresses the unique attributes and parameters of homebuilding production.
  • a way of managing homebuilding production that significantly reduces build/cycle times, increases production throughput, and controls construction work-in-process.

Is a Pipeline workshop right for you?  Pipeline workshops are not about job titles, operational scope, or company size.  They are intended for anyone charged with the critical responsibility of managing – or managing the interaction with – homebuilding production as a system at some level of a homebuilding enterprise;  Pipeline workshops are for those who must understand and manage homebuilding production, and drive results, including:

  • C-Level Executives – Presidents, CEOs, CFO’s
  • Divisions and Regional Managers
  • Vice Presidents of Operations and Construction
  • Vice Presidents of Sales
  • Production Managers
  • Construction Managers

 

The next Pipeline workshop will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on October 15-16, 2014.  Cost is $795.00.  Early registration, open through August 15, 2014, is $645.00.

Delivered by SAI Consulting.  Sponsored by BuilderMT and Big Builder (Hanley Wood).

For more details:  www.buildervelocity.com

 

The homebuilding industry that has emerged from the worst recession in three-quarters of a century is a different world.  The traditional focus on how much a builder makes on every house – i.e., the ability to generate a sufficient margin – is no longer enough to assure success;  that success has just as much to do with how many houses a builder can build with a planned, finite, and controlled amount of production capacity.

Consider this:  a homebuilding enterprise that generates a Gross Margin of 24% and turns its inventory twice a year will be outperformed – by a 2:1 margin – by a homebuilding enterprise that generates a Gross Margin of 18% and turns its inventory four times a year;  outperformed in terms of Net Income;  outperformed in terms of Return on Assets.

The former is the picture of a slower, marginally-productive homebuilding company, and the latter is the picture of a fast, highly-productive homebuilding company;  the later generates twice the Revenue and half-again more Contribution.

Does the scenario of 180 day cycle time vs. 90 day cycle time present too stark a contrast?  Then, consider this:  an 18% Gross Margin with a 4x turn is the exact equivalent of a 24% Gross Margin and a 3x turn;  90 days vs. 120 days.

Although these scenarios present clear differences in economic outcomes, all three homebuilding companies are exactly the same size, when the real measure of size is the amount of work-in-process they each have to carry;  same resource overhead, same working capital requirements, same risk profile.

It’s no longer a choice between higher margin or higher velocity;  it’s the necessity of producing higher margin and higher velocity.

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, that enable builders to thrive on the velocity side of Return on Assets.

 

The next Pipeline workshop will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on October 15-16, 2014.  Cost is $795.00.  Early registration, open through August 15, 2014, is $645.00.

Delivered by SAI Consulting.  Sponsored by BuilderMT and Big Builder (Hanley Wood).

For more details:  www.builderevelocity.com

 

Part VIII: “Ex Disastrium, Scientia”

Posted July 6, 2014 By Fletcher Groves

(excerpted from The Pipeline: A Picture of Homebuilding Production, originally posted on Escape from Averageness in July 2010, updated and reposted here)

“Breakeven in our worst case scenario occurs at around 190 closings — about $46 million in Revenue.  Which happens because we are trying to absorb the same amount of overhead with smaller Gross Margins.  It requires more closings, which can become a vicious cycle, with a lot of margin pressure.

“Anyway, in the worst case scenario, the point at which we fully absorb our overhead occurs at a rate of about 16 closings per month;  in spite of the fact that we have the production capacity to start and close 25 houses a month.”

The CFO filled in the missing data for the last two columns.

 

2008 BASE BUDGET

  • CLOSINGS = 200
  • REVENUE = $50,000,000
  • AVG. SP = $250,000
  • GROSS MARGIN = 22%
  • BREAKEVEN = 155 UNITS
  • BREAKEVEN REVENUE = $39,000,000

 

2008 TARGET BUDGET

  • CLOSINGS = 250
  • REVENUE = $60,000,000
  • AVG. SP = $240,000
  • GROSS MARGIN = 21%
  • BREAKEVEN = 170 UNITS
  • BREAKEVEN REVENUE = $40,500,000

 

2008 WORST-CASE

  • CLOSINGS = 140-150
  • REVENUE = $34,500,000
  • AVG. SP = $240,000
  • GROSS MARGIN = 18-19%
  • BREAKEVEN = 190
  • BREAKEVEN REVENUE = $46,000,000

 

2008 FULL CAPACITY UTILIZATION

  • CLOSINGS = 300
  • REVENUE = $69,000,000
  • AVG. SP = $230,000
  • GROSS MARGIN = 15%
  • BREAKEVEN = 246
  • BREAKEVEN REVENUE = $56,600,000

 

“Obviously, at only 140 to 150 closings – 12 closings per month – and $34.5 million in Revenue, we would be below the breakeven point in both closings and Revenue, which means we would be losing money.

“But, if we can somehow find a way to more fully-utilize our production capacity – which we will pay to have anyway, unless we cut our overhead – and somehow find a way to close more homes, albeit at considerably lower margins, we would breakeven at 246 closings and $56.6 million in Revenue.  That occurs at 20-21 closings a month, a rate that is well-below the 25 closings-per-month we have the capacity to produce.

“And, while we are talking about breakeven rates, I hope it reinforces the importance of even-flow production”, said the intrepid, results-based consulting, looking at the VP of Construction and VP of Sales.  “We cannot be all over the map each month with sales, starts, and closings, and with WIP.”

“Is there any kind of housing market in which demand does not respond to lower sales prices?”, asked a sales representative.  “What happens if we reduce the sales price – give more concessions, endure lower margins – and there are insufficient sales?  Is there a limit to how far we can drop prices?  In other words, what happens if we build it, we drop the ticket prices, and they still do not come?”

“There is always that possibility”, said the VP of Sales.  “But – we still have to price to the market;  that is not in our control.  To the extent that we extract value, better margins are the outcome, and, in that regard, we do have some control.  On the other hand, from what I am hearing, the gains from higher productivity are permanent, and the speed/velocity that enables those gains is something we can always control.”

“To answer your question, if the situation gets bad enough, higher productivity becomes moot”, said the intrepid, results-based consultant.  “RB Builders would have excess, probably unusable capacity.  In that case, higher productivity might not seem as urgent, or as attractive.

“If we cannot make some combination of higher margin and higher velocity work for us, we might have to take RB Builders out-of-gear, and glide to some sort of safe landing;  a controlled crash would be a better description.  Sort of like Apollo 13;  forget the lunar landing, just try to get Odyssey and the crew home.”

“Perhaps”, said the CEO.  “But, I am determined that we come out of this situation with a level of sustainable competitive separation.  I refuse to accept the sacrifice of having endured this much pain without having something to show for it.  Higher productivity might not seem as urgent, right now, but it will someday.  I want RB Builders to emerge a much faster and more agile homebuilding company.

“Forget ‘industry best practices’.  We need to do better than that, because we would be foolish to believe that our competition will forever come from who it comes from now.  Someday, the homebuilding industry is going to change, and that change will as likely come from without, as from within.”

“Ex Disastrium, Scientia”, said the intrepid, results-based consultant, smiling.  “Learn from adversity, learn from failure, learn from mistakes.

“You own the outcome.”

 

(The 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, barnesandnoble.com, and booksamillion.com)