Archive for February, 2015

Pipeline Workshops™: Lessons from the Pipeline

Posted February 21, 2015 By Fletcher Groves

(Lessons from the Pipeline© is the business case study being used at the next Pipeline workshop™)

It is the beginning of 2015.  RB Builders aims to extend its reputation as a builder thriving on both the margin and velocity sides of Return on Assets into a new geographical market, through the late-2014 acquisition of an existing homebuilding operation.

Although it serves a similar and compatible segment of the new home market, the newly-acquired division of RB Builders has historically generated much lower operating results and business outcomes.  RB Builders is satisfied with the land/lot positions that came with the acquisition;  it has completed the conversion of the management technology system and started the adoption of new business and operating processes;  it is confident that it can unify, then develop and improve the capabilities of the team that is in-place, to one replicating its own savvy, motivated, and accountable homebuilding team.

RB Builders has been down this road before.

 

RB BUILDERS:  At the beginning of 2008, seven years earlier, shortly after the end of the halcyon period known as the Age of Homebuilder Entitlement®, RB Builders had begun its own transformation process, to extract itself from what it self-described as “the tar pits of averageness”.

RB Builders had used a combination of four main initiatives:  (1) a team-based performance compensation plan directed at achieving targeted results above a baseline to a single business outcome, paid-out upon achievement of a series of progressively-weighted milestones;  a way of sharing the numbers that produced full financial transparency;  an accounting system that connected operating performance to business outcomes more effectively, via actionable data;  and a focused process of continuous improvement, comprised of a prioritized series of consecutively-ordered initiatives, all with short durations aimed at achieving targeted, defined, measurable results.

As a result of this program, RB Builders made massive strides.

During the ensuing five-year period (2008-2012), annual Revenue had grown from $50 million to more $121 million, an increase of almost 250%.  During the same period, the number of closings had increased more than 225%, from 200 houses per year to 453 houses per year.  Despite the margin pressure from increasing market share so dramatically, overall Gross Margin had actually increased slightly, from 22% to 24%;  as a result, RB Builders’ Gross Income had grown by more than 250%, from $11 million $29.5 million.

During the same period, Operating Expense had increased (from $8.5 million to $11 million), but that 30% increase was far less than the same-period increase in Revenue.  As a result, RB Builder’s Net Income had risen from $2.5 million to $16.5 million, more than six times what it had been before the company began its transformation;  Net Margin had almost tripled, from 5% to 14%.

In 2008, RB Builder’s cycle time had been 180 days;  by the end of 2012, cycle time had been reduced to 65 days.  In 2008, the average amount of work-in-process had been 100 houses under construction;  by the end of 2012, average work-in-process had decreased to 80 houses under construction.

RB Builders had targeted an inventory turn of 2.5x in 2008, which was actually an improvement from the preceding year;  in 2012, by keeping its work-in-process at 80 houses and closing 453 houses, RB Builders had been able to more than double its physical inventory turn, to 5.7x.

In 2008, RB Builders had turned the value of its assets twice;  in 2012, it turned the value of its assets 4.7x.  Because it had been able to maintain margins while significantly improving velocity, RB Builders saw its main barometer of economic return – Return on Invested Assets – increase almost six-fold during the five-year period, from a targeted 11% in 2008 to the 64% it achieved in 2012.

In 2013, RB Builders had moved all of its raw land holdings and developed lot inventory off of its balance sheet, and into subsidiaries, which would have served to further increase Asset Turn, and ROIA, had those measures been restated to reflect the remaining assets.

It was a remarkable transformation.

 

THE NEW DIVISION:  In the year just completed (2014), which was also its final year of independent operation, the newly-acquired homebuilding operation had closed 48 houses, and generated $12 million in Revenue.  With its $8.88 million in Cost of Sales now reflecting only its direct, variable costs, the operation generated $3.12 million in Gross Income, a 26% Gross Margin.

With its $2.16 million in Operating Expense now reflecting only its indirect, non-variable costs, the operation had produced $960,000 in Net Income, resulting in an 8% Net Margin.

During 2014, the newly-acquired operation had a calculated cycle time of 255 days, even though its job schedules typically called for 120 days;  in 2014, its average work-in-process was 34 houses under construction.  With 48 houses closed and an average work-in-process of 34 houses under construction, the newly-acquired operation turned its physical inventory 1.4x in 2014.

Adopting the policy of RB Builders, and moving all of its raw land holdings and developed lot inventory off of its balance sheet, and into subsidiaries, the newly-acquired building operation had showed restated work-in-process of $4.46 million;  with $12 million in Revenue, it had reported an asset turnover ratio of 2.7x.

With its Net Margin of 8% and its restated asset turn of 2.7x, the new operation had posted a Return on Invested Assets of 21.6%.

 

Come participate, as RB Builders’ newly-acquired building operation endeavors to replicate the transformation of its parent company.  Lessons from the Pipeline© is the underlying business case study at the next Pipeline workshop™, being held March 11-12, 2015, at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida.  Cost is $795.00.

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

Details:  www.buildervelocity.com

Pipeline Workshops: Improvements to the Game

Posted February 16, 2015 By Fletcher Groves

Simulating production principles is a significant part of a Pipeline workshop™.  We repeatedly hear that the opportunity to simulate production in a progressive series of scenarios enables builders to better “see” production.  Both a production simulator and a business game, the Pipeline game™ is what makes Pipeline workshops™ so intense, so interactive, so competitive, and so worthwhile.

Pipeline Game (staged)

The game is already a tremendous tool for teaching both production and business principles, but we recently made two significant changes to make the game even better.

The first change was to shorten the duration of the game, so that we can run more scenarios in the same amount of time.  Shortening the game had the additional benefit of making every operating decision more consequential, and making the results more realistic, easier to comprehend, therefore, more intuitive.

The second change was to more realistically reflect the outsourced nature of homebuilding production.  Previous versions of the game used the resources to reflect both the capacity of the system, and the cost of that capacity.  That arrangement is realistic for a manufacturing operation or even a project management organization, but a more accurate reflection of homebuilding production is to separate capacity and cost.

In homebuilding, the external resources that determine production capacity are a part of Cost of Sales (which makes them a direct, variable cost);  Cost of Sales is a measure of product cost, not capacity cost;  it is Operating Expense – the indirect, non-variable cost of internal resources associated with overhead – that determines capacity cost.

In earlier versions of the Pipeline game™, using the resources to reflect capacity and cost meant that we disregarded Revenue and Cost of Sales, and focused on Throughput, which is more closely related to residual Gross Margin.  In the newer version of the game, we bring Revenue and Cost of Sales back into the picture;  in effect, we now account for the margin side of Return on Assets.  The external resources in a game now define the production system’s capacity, and their cost is reflected in Cost of Sales, as a percentage of Revenue;  they are now the true, variable costs associated with production.

This represents a significant stride in reconciling Revenue, Cost of Sales, Throughput, and Gross Income, which makes operating decisions easier to connect to financial outcomes.  Operating Expense is now an imposed (budgeted) value, reflecting the cost of the internal capacity required to manage work-in-process;  that makes Operating Expense an indirect, non-variable cost, as it relates to Revenue and the completions that produce it.

The overall effect is now a board game much more reflective of a homebuilding operation, with lessons that are now much easier for builders to understand.

The improved version of the game was played at 2014 Housing Leadership Summit, explained at the 2014 BuilderMT-Sales Simplicity Client Conference, and it was part of the most recent Pipeline workshop™ in October.

 

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

Pipeline workshops™ are open events sponsored by Hanley Wood (Builder/Big Builder) and Continuum Advisory Group.  They are size-limited, intense, interactive, comprehensive immersions into the principles and disciplines of homebuilding production.

For the upcoming workshop, we have added case-based exercises, but most attendees and observers would still agree that the most compelling part of the workshop involves the Pipeline simulations:  teams of geographically-diverse builders that go through a progression of scenarios that are simulations of home building production management as well as business games.

The objective is to reinforce the production principles taught in the workshop, including:  (1) the effect of variation on a production system, (2) pull scheduling according to the capacity of a constrained resource, and (3) the importance of connecting decisions made on operating matters (like flow, capacity, duration, and work-in-process) to the critical business outcomes of profitability and return on assets.

With multiple teams playing every game with exactly the same rules and understanding, the results don’t lie.

Look at the results from a recent workshop.  In every category – from throughput (closings), to work-in-process levels, to inventory turns, to cycle time, to net income, to return on assets – the teams made remarkable progress, often exceeding expectations.

Until you have played the game and seen the measures, you won’t understand the metrics;  focus on the performance trends (y-axis) as the games in this workshop progressed (x-axis).

This was Revenue . . .

Pipeline Revenue (capture)

This was inventory turn . . .

Pipeline Inventory Turn (capture)

This was cycle time, expressed in days . . .

Pipeline Cycle Time (capture)

This was Net Income Margin . . .

Pipeline Net Income (capture)

This was Return on Assets, a reflection of its co-equal components:  Net Income Margin (margin) and inventory turn (velocity) . . .

Pipeline ROA (capture)

After the initial shock of shattered instincts, every metric was in precisely the direction you would expect, if the production principles are true and if progress is being made.  Clearly, builders attending this Pipeline workshop™ learned from their participation.

They learned the principles and disciplines of homebuilding production.

Pipeline simulations are board games that teach builders to “see” production;  they simulate the fast-paced, rapidly-changing, uncertain, risk-laden, variation-filled environment in which home building production decisions must be made.  It is learning based on experience and action, not words;  Pipeline games™ compress the learning curve, presenting production situations that are simple, fast, easy to see and understand, that can be modified and rerun, until the principles are understood.

In a Pipeline workshop™, the progression of the games mirrors the progression of the learning.  In the book that gave rise to the workshops (The Pipeline: A Picture of Homebuilding Production©), the games were described as follows:

“Change is a necessary condition to any improvement effort, but change is difficult, disruptive, time-consuming, and costly;  the effort can fail to produce the result.  Learning needs to occur without so much cost, disruption, and risk.  Managing production and improving operating and financial performance becomes intuitive and simple, but there is much to understand.  It is counter to what is taught, therefore, difficult to grasp;  it must be learned, and that is harsh when it occurs at the cost of real operating performance and actual business outcomes.”

 

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