Archive for August, 2014

Epic Partnering: Unifying the Value Stream

Posted August 24, 2014 By Fletcher Groves

One of the important takeaways from the last Pipeline workshop was the conclusion, drawn by a number of building company executives in attendance, that – in order for homebuilding production to be managed as a system – a notoriously fragmented value stream needs to be unified.

In their landmark 1996 book, Lean Thinking, Jim Womack and Dan Jones defined a value stream as “the set of all the specific actions required to bring a specific product (whether a good, a service, or, increasingly, a combination of the two) through the three critical management tasks of any business.”  They went on to describe a set of processes (that they termed tasks):  a problem-solving task, an information management task, and a physical transformation task.

By definition, a value stream does not belong to an industry;  a value stream is enterprise-specific;  each value stream belongs to its enterprise.

That fact notwithstanding, it would be a challenge to cite another industry, in which the sequence of tasks in the most common versions of that industry’s core-critical process (start-to-completion, aka, the physical transformation task) is performed by so many separate entities, as is commonly seen – and accepted – in the homebuilding industry.  Look at the value stream of any homebuilding enterprise, and you will find a myriad combination of independent, separately-owned, non-proprietary, non-exclusive, unaffiliated businesses with different goals.

In some of her final comments to the team at RB Builders (The Pipeline: A Picture of Homebuilding Production), the intrepid, results-based consultant reviews the components of RB Builders’ production management system, the RB-IPS, and has this to say about the final component:

“It is a production management system that specifies the means by which RB Builders fosters epic relationships of mutual interest with its building partners and supply partners.  The RB-IPS provides both the process and the program for progressively transforming subcontractors and suppliers into true partners, into trusted allies, joined by shared, mutual interests.”

Repeatedly, builders attending the last Pipeline workshop stated – emphasized – the need for greater partnering, better coordination, more cohesiveness, a more unified approach in managing their production.  These builders understood that they could not perform, with their own resources, “the set of all the specific actions” required to bring houses through the start-to-completion process;  they also understood that they could not command that it be done, or create competitive separation by attempting to do so.

They acknowledged the current shortage of skilled construction resources.

Whether or not vertical integration has a strategic role to play going forward in the homebuilding industry (which we explored in “The Road That Lies Ahead: The Giants’ Perspective on Growth Strategies, Consolidation and Other Issues” in the July, 2000 issue of Professional Builder) remains to be seen.  But, even if vertical integration never resonates in the homebuilding industry, success in unifying the effort of the existing value stream has profound ramifications, on both the margin component and the velocity component of Return on Assets;  and success in unifying the value stream has profound implications for creating competitive separation.

It will require Epic Partnering®.

 

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.

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

Details:  www.buildervelocity.com

 

Pipeline Workshops: What’s your Production IQ?

Posted August 17, 2014 By Fletcher Groves

The fundamental understanding that emerges from the DuPont identity:  Remove the financial leverage (equity multiplier) from the equation, and economic return 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 it hold-forth the possibility of ever achieving sustainable competitive separation?  Absolutely not.  We’re not alone on this assessment:  “In fact, [asset] turnover is just as important as profit margin.”  Barron’s Accounting Handbook (Siegel, Shim), 1990, 1997, p. 150.

In the homebuilding industry, action on the velocity side of Return on Assets inexplicably takes a backseat to action on the margin side.  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 is a profound lack of knowledge regarding production principles and disciplines.

Think you know this stuff?  There’s one way to find out.  Take the test (answers provided at the bottom).

  1. The best image of a production system is a pipeline. What is the measure of the pipeline’s size? What is the measure of its capacity? What is the measure of its length? What is the measure of its cost?
  2. True or False: Even-flow production is an outcome, not a mechanism.
  3. From an operational perspective, there are only three activities that answer the question: “What happens to money?” The terms for those activities can be used to fully express – and, therefore, link – the equations for productivity, cycle time, and inventory turn, to the equations for Net Income, and Return on Assets. What are those terms?
  4. True or False: A production system with balanced capacity across all resources will do a better job of optimizing the utilization of a system’s capacity than one where capacity is not balanced across all resources.
  5. In what three ways will any production system buffer (protect) itself from variation?
  6. True or False: In job scheduling, the Critical Path Method (CPM) considers task dependency, but not resource contention.
  7. Calculating the duration (cycle time) of any production process requires the knowledge of two operational measures. What are they?
  8. True or False: Task durations (for example, the phases in a job schedule) should have enough safety to insure a high certainty of on-time completion.
  9. Lean Production views homebuilding as a build-to-order process. Which resource does Lean recommend using to set the pace of production?
  10. True or False: CCPM (Critical Chain Project Management) does not adjust the job schedule according to when phases finish, whether early or late.
  11. What three human behavioral tendencies tend to waste the time safety built into a schedule?
  12. As a matter of standard deviation, increasing the probability that a task will finish on-time, from 50% probability to a “highly certain” 95% probability, will cause the anticipated duration of the task to increase by a factor of how much?

Like any quiz, these questions represent but 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.

Ultimately, 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 – it starts – with an understanding of the underlying principles and disciplines.

It starts with what you learn in a Pipeline workshop.

 

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).

Details: www.buildervelocity.com

Answers: (1) size is a reflection of 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; (2) True; (3) 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; (4) False; (5) higher work-in-process, longer duration, or excess capacity; (6) True; (7) work-in-process and throughput, expressed in units; (8) False; (9) the most capacity-constrained resource; (10) True; (11) Student Syndrome (wait to start until too late), Parkinson Law (expand to time allowed), and multi-tasking (dividing work between multiple jobs); (12) factor of 1.64, reciprocal of .61; four out of every 10 days in the schedule are safety to assure on-time completion.

 

Annual new home sales are currently at a level that is 60% below the average of the past 50 years – and there is, nonetheless, a shortage of skilled construction labor.  Over the next several years, annual new home sales are expected to almost double from their current level – and there is, already, a shortage of skilled construction labor.  

It scares the hell out of you, doesn’t it?

There is a valid argument being made for the homebuilding industry taking collective action to solve this problem, by increasing the supply of skilled construction trades.  However, there are vast opportunities for improving this situation that have nothing to do with increasing the supply of skilled construction trades;  as a component of overall production capacity, a significant portion of the existing supply of skilled construction labor is wasted outright, as a result of the industry’s archaic production practices.

Besides, relying on an increase in the availability of skilled construction trades is part and parcel with the larger mindset problem that has plagued this industry for time immemorial:  focus on margin and increase production capacity.

This penchant for relying on the ability to increase production capacity, at will, is not the same as finding the means to increase productivity.  Simply dialing-up more production capacity is a “more-for-more” proposition – the answer to more revenue and more output is more of everything else – more production capacity, more resources, more plans, more steps, more complexity, more reports, more money, more starts, more work-in-process.

We subscribe to a different proposition, a different mental model of what homebuilding production should be:  “more-for-less”.  The answer to more revenue and more output is to find ways to produce that revenue and output with less of everything else – less waste, less rework, fewer non-value-added steps, a simpler operating model, fewer-but-better measures, fewer-but-better resources, a smaller-but-more-intelligent portfolio of plans, less money, less work-in-process, and fewer excuses.

And, there are some areas where we want more;  in addition to more revenue and more output, we would also like more speed, higher velocity, higher quality, more accountability, more focus, more involvement, more partnering.

When I first started making the argument for a focus on velocity, the proposition was “do more with what you already have”;  it was essentially a “more-for-the-same” proposition;  a classic productivity argument;  not as good as “more-for-less”, but considerably better than “more-for-more”.  In the halcyon years known as the Age of Homebuilder Entitlement, a “more-for-the-same” proposition was an acceptable solution.

I think what builders have to confront, right now, is the market and economic reality of having to “do marginally more with significantly less”, slightly more production despite considerably less available capacity;  essentially, it is a “do-the-same-with-less” proposition.

True, sustainable competitive separation is the result of doing what your competition simply will not do, what they cannot do.  Things that are too tough, that require too much rigor, too much discipline, too much resolve.  Margin is important, but it is not the difficult part;  margin is the more natural part, where builders’ inclination lies.

True, sustainable competitive separation requires much more;  it requires doing the difficult part, the part to which builders are less-inclined.  It requires continually and relentlessly finding ways to become more productive, finding ways to do more with less.  It requires being as proficient on the velocity side of Return on Assets as the margin side of ROA.

That’s what a Pipeline workshop is all about.

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.buildervelocity.com

 

“I think it is time to call it a day.”

Posted August 3, 2014 By Fletcher Groves

Saun:  “ . . . at this point we [are] still struggling to understand the info needed.  I think it is time to call it a day.  I don’t want to waste your time or ours.”

Fletcher:  “Saun, I was going to suggest the same.  It’s very simple stuff.”

And, that is the closing e-mail exchange with DSLD’s Saun Sullivan, as he and I mutually agreed not to further waste each other’s time trying to analyze the numbers behind the company’s operating performance.

By all industry accounts, DSLD Homes is an emerging force in homebuilding.  Only in existence since 2008 – a mere six years – the company is lighting it up from a revenue/closings growth perspective.  DSLD is already an NHQ silver award winner, has already been named Builder of the Year by Professional Builder, and is listed at No. 25 in the 2014 Builder 100 (No. 39 in the 2014 PB Housing Giants).

The history of success is actually longer than DSLD’s short existence:  prior to starting DSLD, managing partner Saun Sullivan had started another homebuilding company;  by 2006, he and his partners had sold six year-old PCC Home Builders/Provident Homes to the biggest homebuilding enterprise in the nation, DR Horton.

This was to be, at most, an informal engagement, the start of which consisted of a casual suggestion and an alternative to consider.

In March, on his own initiative, Ryan Nash, DSLD’s Product Development Director, attended the inaugural Pipeline workshop.  Two months later, in May, Saun sat in on the breakout session I led at the Housing Leadership Summit.  At the end of the HLS session, Saun and I had a brief discussion, during which he suggested that I make arrangements to come to Denham Springs, and see whether we could work together.

When I later emailed Saun the PowerPoint presentation and some links to other SAI resources, I proposed a different approach:  “I am certainly interested in what you have in mind.  But, let’s start with something that won’t cost you anything.  Send me your monthly sales, starts, completions, and EOM work-in-process for some meaningful period of time;  I will tell you what I see.  Give me the data for 24 months.”

Saun turned the matter over to Ryan.  Over the course of two months, involving numerous e-mails, telephone calls, and data files, I worked with Ryan to get the data;  I explained what I needed and why I needed it.  The data quest was adjusted to fit the context of what Ryan felt their management technology system could provide, in deference to the Rayco-inspired way that DSLD regards its production process and says it mandates even-flow.

Throughput – the output from the process – did not seem to be a problem, but the historic work-in-process proved impossible to obtain.  I checked my explanation;  it was clear, exactly what we teach at every Pipeline workshop.  Yet, every data point DSLD submitted turned out to be a throughput measure.  Not only was the work-in-process data apparently unavailable, but the data DSLD did submit indicated that they did not understand what periodic work-in-process is, that it is consistently-spaced point-in-time measures that have to be averaged – in some fashion – to produce a periodic measure, a measure over time.

Without those numbers, there was no way to look at the performance of DSLD’s production system.  To be sure, there were DSLD’s assertions of even-flow production, assertions of fast, completely reliable cycle times, but no way to measure any of it.

Without access to those numbers, none of the long-accepted methods for gauging the operating performance of any production process could be used.

Even-flow?  There was evidence that suggested DSLD’s production was not quite as even as was being asserted, but there was no way to determine whether it was or wasn’t.  Every production system in existence will buffer itself from the effects of variation, in one of three ways.  Even if DSLD was attacking variation in its process, there was no way that all of the variation had been eliminated;  and, there was evidence of variation in the data that was provided.

How does DSLD’s production system handle that variation?  Is it being buffered with higher inventory?  Longer durations?  Excess capacity?  Some combination of all three?  I have my theories, but there is no way of knowing the answer, without the data.

When we look at a production system, these are the kinds of questions we want to answer:  How many completions can we produce with a planned, finite, and controlled number of houses under construction?  How many houses do we need to have under construction to achieve our desired rate of completions?  Do we have too much WIP?  Not enough WIP?  What cycle time do our job schedules need to meet in order to produce the desired rate of completions with a planned, finite, and controlled number of houses under construction?

Consider the matter of DSLD’s cycle time.  One of the principles of production physics is Little’s Law.  In manufacturing, it is commonly used to measure the rate of production, expressed as x-number of units per period of time (for example, 1,000 units per hour); less frequently, it is used to measure cycle time, expressed as x-number of periods for each unit (in this case, 3.6 seconds per unit).

When I first learned about Little’s Law, it was in the context of how it was being used at Motorola, and I wondered if the same principle could be used in homebuilding.  As it turned out, the only adjustment was to replace the completion rate with a throughput number, and specify the time period.

Little’s Law results in what we call calculated cycle time, as opposed to measured cycle time, which is the mean (average) duration of a specified range of production units.  Measured cycle time has its forensic value in solving problems, eliminating errors, and removing waste from a production process, but calculated cycle time provides the only true, useful picture of homebuilding production as a system.

The variables in the equation are inventory and throughput, and if any two of the three measures involved are known, Little’s Law can be modified to solve for the third.

I gave DSLD this example of annual (360 day) cycle time:

 

CT = 120 days  WIP = 80 houses  T = 240 homes

 

CT = (WIP ÷ T) x Days

(80 ÷ 240) x 360 = 120 days

 

WIP = (CT x T) ÷ Days

(120 x 240) ÷ 360 = 80 houses under construction

 

T = (WIP ÷ CT) x Days

(80 ÷ 120) x 360 = 240 closings

 

The data I was receiving from DSLD was producing shorter cycle times than even DSLD’s job schedules stipulated;  Ryan conceded that those cycle times were not possible, based on DSLD’s “two separate straight-line even-flow schedule models” used for their frame start-to-completion sub-process (narrower scope than a start-to-completion process);  and, he gave me the cycle times of both scheduling models, in terms of work days and calendar days.

I then told Ryan what DSLD’s WIP would have had to be in order to produce that many completions in the period of time we were examining;  DSLD couldn’t say what their work-in-process had been during that period.

I told Ryan that I wanted to see what DSLD’s cycle time was for the frame start-to-completion sub-process, based on the actual data on completions and on the average number of homes in that phase, for the 24 monthly periods we selected.  I told him I was not interested in assertions;  I wanted something I could verify.

I told him that, going forward, we could look at production in any or all of DSLD’s sub-processes, but we should get the numbers on frame start-to-completion done first, because that sub-process was reported to be the most stable, with the least variation.  I said, let’s see what we have, and we can move forward from there.

At that point, I also told Ryan that we had been at this task for almost two months, and I had been clear from the beginning on what I needed.  I reminded him that I had told Saun that my insight would cost DSLD nothing.  I was contributing my time, because I was intrigued with what DSLD said it was able to do.  I told Ryan this was not rocket science, and to please tell me that DSLD’s management technology system knows how many units are at what stage of completion at any point in time.  I told him to stop wasting my time, and get me what I need.

This story is about DSLD Homes, only from the standpoint of the question that it raises:  If this is the situation at a homebuilding enterprise with phenomenal growth and industry recognition, with a management team that benchmarks relentlessly, that has made the effort to enforce even-flow production, what does this mean for anyone else?

No doubt, there would have been valuable insights gained from looking at these numbers;  that has been the case with almost every previous opportunity we have been given to analyze operating performance.  These insights could have validated DSLD’s assertions, or perhaps refuted them;  they could have bolstered DSLD’s convictions, or perhaps convinced them to look further, to push deeper into an understanding of the production principles that drive operating performance and business outcomes.

It didn’t happen.

We should learn from every outcome, whether good or bad.  We don’t learn when we are ambivalent about outcomes.  Given their success, given their achievements, given their reputation, given what they consider to be important, I am betting their inability to provide this data, and the resulting lost opportunity to analyze homebuilding production as a system is making DSLD Homes mad as hell.

 

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).

Details:  www.buildervelocity.com