Archive for January, 2015

Pipeline Workshops™: What’s your Production IQ?

Posted January 31, 2015 By Fletcher Groves

The fundamental understanding that emerges from the DuPont identity:  Remove the financial leverage (equity multiplier) from the formula, 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.

To a homebuilding company, does superior margin 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.

“Build-to-order improves inventory turnover, which increases asset velocity, one of the most under-appreciated components of making money . . . higher velocity improves productivity and reduces working capital.  It also improves cash flow, the life-blood of any business.”  Execution: The Discipline of Getting Things Done (Bossidy, Charan, 2002, p. 17)

In case you missed it, homebuilding is essentially build-to-order.

No matter.  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.  However, the motivation and resolve to attend a Pipeline workshop starts with a willingness to acknowledge and remedy what is generally a profound lack of knowledge regarding production principles and disciplines.

Think you know this stuff?  Really?  There’s one way to find out.

Take the test.

  1. An appropriate image of a homebuilding production system is a pipeline. What are the measures of the pipeline’s size, capacity, length, and cost?
  2. True or False: Even-flow production is an outcome, not a mechanism.
  3. From an operational perspective, there are three activities that describe “what happens to money?” The terms for those activities can be used to fully express – and, therefore, link – the formulas for productivity, cycle time, and inventory turn, to the equations for Net Income, and Return on Assets. What are the terms? What do they mean?
  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 a production system protectively react to variation?
  6. Which method of scheduling jobs considers both task dependency and resource contention, Critical Path or Critical Chain?
  7. Calculating the cycle time of a production process requires the knowledge of two operational measures. What are they?
  8. True or False: The phases in a job schedule should have enough safety built into their durations 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, on-time, or late.
  11. What three human behavioral tendencies consume 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 a 50% probability to a “highly certain” 95% probability, will cause the anticipated duration of the task to increase by a factor of how much?

(the answers are at the bottom of the post)

It’s just a quiz. Like any quiz, the 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 March 11-12, 2015.  Cost is $795.00.

Delivered by SAI Consulting.  Sponsored by Big Builder (Hanley Wood) and Continuum Advisory Group.

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) Critical Chain; (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.

 

 

 

 

 

 

 

(the answers are at the bottom of the post)

(Initially published on EFA® on April 12, 2009, updated and republished here, every year, as the first in a five-part series.  This year’s series follows the recent publication of a version of Part I, in the online version of Big Builder.)

 

The NAHB Chart of Accounts enables builder-to-builder comparisons, complies with GAAP reporting requirements, and allows consultants to give the same presentation every year at IBS.  But, to the extent that its Income Statement presents costs as anything other than a true delineation based on behavior in regard to Revenue, it is – from a management standpoint – utterly useless.

It is useless, because it prevents a builder from understanding how it makes money. The ability to generate cash, make a profit, and produce an economic return depends on an understanding of cost classification.  How costs are classified or associated according to structural hierarchy, cost objects, and behavior.

Does it matter how costs are classified?  All of the costs of building a home and running a building company are accounted for in the calculation of residual Net Income.  As long as the classifications don’t change, they are still comparable.  Right?  Does it matter where they are incurred, what caused them to be incurred, or whether they vary in relationship to anything?

It does matter.  Costs are the most operative part of a home builder’s Income Statement, and an understanding for how costs are allocated and classified provides a basis of operational insight that is otherwise missing.  Understanding where costs are incurred and whether they are incurred directly or indirectly is important, but the distinguishing characteristic of costs is how they behave.

Operative Question:  Does the cost vary with the volume of an activity, or does it not?

Cost behavior presents a builder with the truest picture of what its production capacity costs, where its breakeven point lies, and how it analyzes changes in costs, production levels, and margins.

Not only the truest picture, but the only picture.

Variable Costing is a vital element of managerial accounting.  At its core, is the understanding that costs have attributes, and those costs cannot be managed as if their attributes don’t exist.

Builders need to control their direct, variable costs – the costs that should be “above the line” on their Income Statement;  they need to either reduce the cost, or extract maximum value from having incurred it.  Simultaneously, they need to leverage their indirect, non-variable costs – the costs that should be “below the line” on their Income Statement;  those are costs expected to be incurred regardless of the Revenue the cost generates;  the objective should be to produce as much Contribution as possible, from having incurred the cost in the first place.

Controlling and extracting value from direct, variable costs is how a builder improves margins;  leveraging indirect, non-variable costs is how it increases velocity – how it increases productivity, how it utilizes production capacity.

Economic return is Return on Assets;  ROA is margin x velocity;  it is velocity acting upon margin.

Builders must distinguish between variable and non-variable costs, to have any picture of breakeven, the rate at which it absorbs overhead.  If Cost of Sales contains non-variable costs, and Operating Expense contains variable costs, that understanding of breakeven is destroyed.

Three examples of the problem with the NAHB COA Income Statement:

First of all, it treats Indirect Construction Cost as a cost that is deducted from Revenue to determine Gross Profit; the only difference between Gross Margin and Gross Profit is the inclusion of Indirect Construction Cost. Do Indirect Construction Costs vary according to Revenue? Probably not. For the most part, they are non-variable costs that will be incurred regardless of the Revenue produced.

Secondly, it treats Selling Expenses (including Real Estate Commissions) as an Operating Expense, part of overhead. Anything allocated to Selling Expense should, therefore, be a non-variable cost. Is that the case? No. The bulk of Selling Expense is a variable cost.

Thirdly, it treats Financing Costs as an Operating Expense. However, construction period interest would only be a non-variable cost, if a builder had its construction lines of credit fully-drawn every day of the accounting period, or if the LIP balance on the LOC never varied. Is this typically the case? No. Are loan fees non-variable costs that do not fluctuate with volume? It depends.

Bottom-line:  Report your financial condition and meet your tax reporting obligations, as required.  Compare your company with other builders, if you choose.  But – give yourself cost information that guides your operating decisions.

Next:  Part II:  The Problem with the NAHB Chart of Accounts Income Statement

 

(this issue is addressed at a Pipeline workshop™;  learn more here:  http://buildervelocity.com and http://saiconsulting.com/buildervelocity-pipeline-workshops/)

 

Pipeline Workshops: What Builders Say About It.

Posted January 25, 2015 By Fletcher Groves

In their own words:  comments of builders (and others) who have attended a Pipeline workshop™:

 

“The simulations were a brilliant way to demonstrate and drive home the significance of cycle time improvements and improving trade partner efficiencies on ROA and Net Income.”  (Keith Porterfield, COO, Goodall Homes, Gallatin, TN)

*****

“Pipeline workshops, through hands-on simulations and classroom instruction, provide excellent learning experiences to see WIP turns at different velocities, and the effects on Return on Assets. The principles and disciplines, if applied in the field by you as a builder, will increase your ROA.” (Scott Jagoe, President, Jagoe Homes, Owensboro, KY)

*****

“All of our construction guys came back from the conference with a lot of new info.” (Doug French, Vice President, Stylecraft Builders, Inc., College Station, TX)

*****

“I participated in Fletcher Groves’ first-ever [BuilderVelocity] workshop, spending two days exploring the ins-and-outs of production, inventory, and scheduling. It was quite intense, challenging, and not for the intellectually lazy. We played repeated rounds of a building simulation game, and the students saw clearly that scheduling requires careful thought and planning; otherwise, things quickly spin out of control, and chaos ensues.” (Scott Sedam, President, TrueNorth Development, South Lyon, MI, excerpted from the April, 2014 issue of Professional Builder, “Taming the Chaos”)

*****

“My clients can all benefit from the Pipeline workshop and simulation.  Fletcher Groves makes a powerful case for builders to pay attention not only to how much money they make on each home, but how fast they can turn their inventory.  In today’s market, when pricing power is limited by external forces and construction cost pressure is increasing, velocity is the most reliable lever for driving enterprise value.”  (Clark Ellis, Partner, Continuum Advisory Group, Raleigh, NC)

 *****

“[the] Pipeline workshop was by far the most engaging workshop I have attended to date.  The principles [Fletcher] shared relate to home building companies of all shapes and sizes.  The two day program kept me engaged the entire time with a mix of lecture, open discussions and simulations of practical application.  I have already applied some of what I learned to my business and I’m looking forward to fantastic results.”  (Mark Refosco, President, Marcus Allen Homes, Arthur Rutenberg Homes franchisee, Jacksonville, FL)

*****

“The Pipeline Workshop is an extremely effective insight to production, for homebuilders of all sizes.  Whether your company builds 5, 50, 500 or 5000 units annually, you will leave this event with a deeper understanding of your company’s production capacity, and where you need to focus your attention, to perform at an optimal level.”  (Adam Roller, President/COO, IH First Coast, LLC, St. Augustine, FL;  an Inland Homes® Builder)

*****

“The Pipeline workshop quickly and clearly helped me realize our company’s mismanagement of the amount of work-in-process and job starts.  I believe our new thinking on those principles, along with the techniques we learned, will reduce our cycle times substantially.”  (Bob Anderson, Construction Manager, Stylecraft Homes, College Station, TX)

*****

“The simulations at [the] Pipeline workshop [were] a very innovative way to demonstrate the critical nature and relationship between cycle time, inventory turn, margin, and return on assets.  Both days were filled with learning, engagement, and inquiry that proved to be invaluable.”  (Vishaal Gupta, President, Park Square Homes, Orlando, FL)

*****

“Fletcher Groves’ [Pipeline] workshop is going to help our business refocus on what all of us already know, but lose focus of, in the haste to make money and sell as many homes as possible.  What we have learned will benefit [our] business and margins, if we become disciplined, [and] stick to the principles of the pipeline.”  (Sean Ward, Field Manager, Eagle Construction of Virginia, Richmond, VA)

*****

“Think the same way, and you stay in the same place as everyone else;  challenge yourself with the new theories and strategies, and [you] become more effective in your company[y’s] achievement with your team.  You get to take these theories and teachings and immediately apply them in a simulation of the real world to test your skills against others, and that’s what this business is all about:  finding the right mix of everything to be the best.”  (Justin Parry, President, Parry Custom Homes, Irwin, PA)

*****

“The value of [the] Pipeline [workshop] is you can leave a two-day workshop equipped with the necessary tools and knowledge to have an immediate impact on your company’s profitability, regardless of your role within the organization.”  (Brandon Hart. Senior Consultant, Continuum Advisory Group, Raleigh, NC)

*****

“If [teammates] can utilize this information correctly and make good business decisions, owners are free to consult and finance rather than handhold.  I also thought that the interactive games really showed how everyday decisions can make-or-break your production pipeline.  If a start or a closing is delayed, the whole rhythm of the pipeline is off;  you can’t correct that disruption, since it is a function of time.  A [lost] start can never be made up.”  (Sara Flint, Controller, Homebuilder Solutions, LLC, Tampa, FL)

*****

“ROA is not discussed much in the building industry;  the focus has always been on margins per house.  Through the Pipeline workshop, you will learn that your company ROA is just as important to know as margins per house.”  (Mark Ivey, Owner, Ivey Residential, LLC, Evans, GA)

*****

“I think the concept of ROA or inventory turn can be THE differentiator between success and failure in a production type environment.  It requires thought one level past the “P&L”, but will allow the manager that can recognize [its] impact and implement it, a major competitive advantage.”  (Wade Jurney, Wade Jurney Homes, Greensboro, NC)

 

The next Pipeline workshop™ will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on March 11-12, 2015.  Cost is $795.00.  Early registration, open through January 31, 2015, is $645.00.

Delivered by SAI Consulting.  Sponsored by Big Builder (Hanley Wood) and Continuum Advisory Group.

Details:  www.buildervelocity.com

 

Pipeline Workshops: Disruptive Learning

Posted January 18, 2015 By Fletcher Groves

Our goal is to continuously improve the Pipeline workshop™ experience.

The Pipeline game™ – which is both a production simulator and a business game, and what makes Pipeline workshops™ so intense, so interactive, so competitive, and so worthwhile – was already the best in the business;  this past year, we made it better, by shortening the duration and making the operating statement exactly like a homebuilding operation.  Every operating decision is now more consequential, the results now easier to comprehend.

For 2015, we have added some notable presentation resources:  bringing facilitation heft will be Clark Ellis and Brandon Hart of Continuum Advisory Group;  CAG extends the legacy of FMI Corporation in the residential construction vertical space.

Already known for its unique engagement format, a Pipeline workshop™ is now even edgier in that regard;  almost all of the learning now occurs in production simulations and in business cases that mirror homebuilding operations.  Attendees are required to solve problems that challenge their knowledge and understanding of production principles. They are decidedly disruptive to conventional, long-accepted ways of thinking;  Scott Sedam has described a Pipeline workshop™ as “intense, challenging, and not for the intellectually lazy”.

Creating a visual image of homebuilding production.  Making the connection between operating decisions and business outcomes.  Building a new way of thinking systemically – building a paradigm shift – towards solving core problems, managing limited capacity, dealing with variation, managing homebuilding production as the type of workflow that it truly is.  Placing an emphasis on the actions that accelerate velocity.

Join us.

 

The next Pipeline workshop™ will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on March 11-12, 2015.  Cost is $795.00.  Early registration, open through January 31, 2015, is $645.00.

Delivered by SAI Consulting.  Sponsored by Big Builder (Hanley Wood) and Continuum Advisory Group.

For more details:  www.buildervelocity.com

Pipeline Workshops: Right for you?

Posted January 11, 2015 By Fletcher Groves

Homebuilding production has to be managed as a system;  that system must first be understood, and without that understanding, production cannot be managed well.  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 the industry.

That understanding is going to be critical, because in the industry that has finally emerged from the worst economic and housing 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.

IMG_2417

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©, but it also relies on the depth of knowledge and experience that resides with Continuum Advisory Group and SAI Consulting, Inc.

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 acquire at 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 business outcome measures of profitability and economic return.
  • A set of mental models – an ordered manner of thinking and reasoning – about the relationship and interaction of the dependent parts that comprise a homebuilding production system, providing a systemic approach to solving production problems and managing finite production capacity, and a blended approach to process and project portfolio management that addresses the unique attributes and parameters of homebuilding production.
  • a set of velocity accelerators – the Pipeline tactics, techniques, and practices dealing with Epic Partnering, Critical Chain scheduling, plan portfolio optimization, and the effective management of buyer expectations in a way that significantly produces shorter schedules, 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
  • Division and Regional Managers
  • Vice Presidents of Operations and Construction
  • Vice Presidents of Sales
  • Production Managers
  • Construction Managers

Pipeline workshops™ are also appropriate for the equivalent positions with building trade partners – for the manufacturers, distributors, suppliers, and subcontractors who must interact with builders in the value stream.

 

The next Pipeline workshop™ will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on March 11-12, 2015.  Cost is $795.00.  Early registration, open through January 31, 2015, is $645.00.

Delivered by SAI Consulting.  Sponsored by Big Builder (Hanley Wood) and Continuum Advisory Group.

For more details:  www.buildervelocity.com