Archive for August, 2015

Pipeline Workshops™: Improvements to the Game

Posted August 31, 2015 By Fletcher Groves

“[The Pipeline games™] 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)

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 “see” production more clearly.  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 Pipeline game™ has always been a tremendous tool for teaching both production and business principles, but we constantly improve it, introducing changes that make it even better.

One change was shortening 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.

A change we are introducing in the upcoming Pipeline workshop is to run multiple production scenarios in each Pipeline game.  We sacrifice some of the competitiveness created by multiple teams running the same scenario, but we gain the additional insight from being able to run far more scenarios within a single Pipeline workshop.  There is the additional benefit of having each team discuss/explain the thinking and results of unique scenarios.

The most significant change was made to more realistically reflect the outsourced nature of homebuilding production.  Previous versions of the Pipeline 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 the original version of the Pipeline game™, using the resources to reflect capacity and cost required us to essentially disregard Revenue and Cost of Sales, and focus on Throughput, which is more closely related to residual Gross Margin.

In the improved version of the Pipeline 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 Pipeline game now define the production system’s capacity, and their cost is reflected in Cost of Sales, stipulated 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 and closings that produce it.  These changes also allow us to realistically simulate the effects of two different building models – the traditional completely outsourced model and an integrated model that turns some of the unmarked subcontract labor into employees.

The effect is now a Pipeline board game that is much more reflective of a homebuilding operation, with lessons that are now much easier for builders to understand, with operational possibilities that never existed before, now possible to explore.

The improved version of the Pipeline game™ was played at 2014 and 2015 Housing Leadership Summits;  it was explained at the 2014 BuilderMT-Sales Simplicity Client Conference;  and, it has been used at the two most-recent Pipeline workshops.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on October 14-15, 2015.  Cost is $795.00.

Sponsored by BUILDER and Continuum Advisory Group.

Details:  www.buildervelocity.com

 

Pipeline Workshops™: What’s your Production IQ?

Posted August 23, 2015 By Fletcher Groves

EFA - Production IQ

The fundamental understanding that emerges from the DuPont identity for Return on Assets:  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?  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 capacity, length, and cost?
  2. True or False: Even-flow production is an outcome, not a mechanism.
  3. Which is the best measure of the size of a homebuilding company? revenue   b. number of full-time employees  c. houses under construction  d. annual closings
  4. 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?
  5. 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.
  6. In what three ways will a production system protectively react to variation?
  7. Which method of scheduling jobs considers both task dependency and resource contention, Critical Path or Critical Chain?
  8. Calculating the duration, or lead time, of a production process requires the knowledge of two operational measures. What are they?
  9. 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.
  10. Which measure of operating performance is the reciprocal of inventory turn?
  11. Lean Production views homebuilding as a build-to-order process. Which resource does Lean recommend using to set the pace of production?
  12. 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.
  13. What three human behavioral tendencies consume the time safety built into a schedule?
  14. 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?
  15. In a homebuilding operation, which is more important, speed or velocity?

(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 at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on October 14-15, 2015.  Cost is $795.00.

Sponsored by BUILDER and Continuum Advisory Group.

Details:  www.buildervelocity.com

Answers:  (1) 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) c: houses under construction;  (4) 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;  (5) False;  (6) higher work-in-process, longer duration, or excess capacity;  (7) Critical Chain;  (8) work-in-process and throughput, expressed in units;  (9) False;  (10) cycle time;  (11) the most capacity-constrained resource;  (12) True;  (13) Student Syndrome (wait to start until too late), Parkinson Law (expand to time allowed), and multi-tasking (dividing work between multiple jobs);  (14) factor of 1.64, reciprocal of .61; four out of every 10 days in the schedule are safety to assure on-time completion;  (15) velocity (a vector measure, velocity is speed in a specific direction, speed with a purpose).

 

Pipeline Workshops™: Lessons from the Pipeline©

Posted August 16, 2015 By Fletcher Groves

(excerpted from the Lessons from the Pipeline© business case that will be used in the upcoming Pipeline workshop™)

Three Pipelines to the Horizon

It is the beginning of 2016.  RB Builders aims to extend its reputation as a builder that can thrive on both the margin and velocity sides of Return on Assets, by expanding into yet another, new-for-it geographical market, through the late-2015 acquisition of another existing homebuilding operation.

In the same timeframe, RB Builders has also decided to create a de novo building operation in a different geographical market;  one of the stated objectives in starting this new division is to test different models of building operations.

Like its predecessor, the newly-acquired building division has historically generated much lower operating results and business outcomes than its new parent.

RB Builders is satisfied with the land/lot positions that has come with the acquisition;  it has completed the conversion of the management technology system and started the conversion of the business and operating processes;  RB Builders is confident that it can unify, develop, and improve the capabilities of the team currently in-place, to one replicating its own.

The startup division has no operating history;  it begins life, out-of-the-box, with RB Builders’ management technology, processes, and a new-but-already-savvy, motivated, mutually-accountable homebuilding team.

This road is a now-familiar path for RB Builders.

 

RB BUILDERS:  At the beginning of 2008, eight 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”, by building a sense of urgency towards 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.  During the same period, the number of closings had increased from 200 houses per year to 453 houses per year.  Despite the margin pressure, overall Gross Margin had increased slightly, from 22% to 24%;  as a result, RB Builders’ Gross Income had grown from $11 million $29.5 million.

During this period, Operating Expense had increased (from $8.5 million to $11 million), but that 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;  Net Margin had grown 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.  By keeping work-in-process at 80 houses and closing 453 houses, RB Builders had increased its 2012 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 Return on Invested Assets increase almost six-fold during the five-year period, from 11% in 2008 to 64% 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, serving to further increase both Asset Turn and ROIA, had those measures been restated to reflect the remaining assets.

It had been a remarkable transformation.

The division that RB Builders acquired late in 2014 remained on-track toward meeting its two-year plan to increase its closings and Revenue from 48 homes and $12 million in 2014, to 120 homes and $30 million in the upcoming year (2016), with the level of Operating Expense and work-in-process unchanged from when it was acquired in 2014.

 

THE NEWLY-ACQUIRED DIVISION:  In the year just being completed (2015), RB Builders has acquired its second homebuilding operation.  In its final year of independent operation, this operation had closed 72 houses, and generated $18 million in Revenue.  With its $13.68 million in Cost of Sales now reflecting only its direct, variable costs, the operation generated $4.32 million in Gross Income, a 24% Gross Margin.

With its $2.88 million in Operating Expense now reflecting only its indirect, non-variable costs, the operation had produced $1.44 million in Net Income, resulting in an 8% Net Margin.

During 2015, the newly-acquired operation had a calculated cycle time of 250 days, even though its job schedules specified 120 days;  in 2015, its average work-in-process was 50 houses under construction.  With 72 houses closed and an average work-in-process of 50 houses under construction, the newly-acquired building operation was turning its physical inventory slightly above 1.4x in 2015.

Adopting the policy of RB Builders, and moving all raw land holdings and developed lot inventory off of its balance sheet into subsidiaries, the newly-acquired building operation had shown restated work-in-process of $6.56 million;  with $18 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%.

 

THE DE NOVO DIVISION:  As a startup building operation, the de novo division had no reported operating or financial history in 2015.  Staffed with a combination of RB Builders teammates and new hires, the division was started in the third quarter of 2015, with the first closings expected to occur at the beginning of the first quarter of 2016.

The new operation has a sufficient rolling lot takedown position in a single development;  owned lots are held off of its balance sheet in an RB Builders subsidiary until committed to job budgets.  The de novo division starts life with a $1.2 million construction line of credit that provides an acceptable ratio of inventory and presales starts.

The de novo division has a 2016 proforma operating statement that projects $9 million in Revenue on 36 closings.  Its projected $6.84 million in Cost of Sales, under what RB Builders characterizes as a “traditional fully-outsourced building model”, gives the startup operation a projected $2.16 million in Gross Income and a projected 24% Gross Margin.

Achieving its proforma operating budget during its inaugural year will enable the startup operation to evenly-split its Gross Income between Operating Expense and Net Income;  projected Net Income of $1.08 million produces a 12% Net Margin.

The startup operation is expected to run its production system in a manner that achieves a calculated cycle time of 90 days.  The construction line of credit is sufficient for average work-in-process of nine houses under construction;  with expected closings of 36 houses, the de novo division should turn its physical inventory 4.0x in 2016.

Presuming the new operation (1) manages to produce its $9 million in projected Revenue and (2) manages to consistently be at near a fully-drawn position on its $1.2 million line of construction credit with its work-in-process, it expects to have an asset turnover ratio of 7.5x.

With its Net Margin of 12% and its expected asset turn of 7.5x, the new operation projects a scorching Return on Invested Assets of 90.0%.

 

This is the nature of the series of questions attendees will have to consider and answer at the upcoming Pipeline workshop:

Q:  What happens when the newly-acquired division is required to more than double its closings over a two-year period, and meet that requirement with less work-in-process, a smaller line of credit, and the same amount of overhead?

Q:  How can RB Builders correctly assert that variation in the production system, evidenced by its 2015 cycle times and other operating performance measures, is costing its newly-acquired division between $4.3 and $4.7 million per year in lost Net Income, when the division was only reporting annual Net Income of $1.4 million?

Q:  What does the de novo division’s team conclude when it is asked to determine whether it would be strategically and economically beneficial to immediately transform its brand-new “traditional fully-outsourced building model” into what RB Builders describes as a “vertically-integrated building model”?

Q:  How does price elasticity of supply and demand affect the decisions?

 

Come.  Participate.  Learn.  Lessons from the Pipeline© is the underlying business case study that will be used at the next Pipeline workshop™, being held October 14-15, 2015, at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida.  Cost is $795.00.

Sponsored by BUILDER and Continuum Advisory Group.

Details:  www.buildervelocity.com

 

Pipeline Workshops: Epic Partnering: Unifying the Value Stream

Posted August 2, 2015 By Fletcher Groves

At a Pipeline workshop™, one of the most important takeaways, drawn by many of the building company executives in attendance, is that a notoriously fragmented value stream has to be unified, if production is ever to be managed as a system.

EFA - Epic Partnering (capture)

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 through the three critical management tasks of any business.”  They went on to describe a set of processes, which 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;  it is enterprise-specific;  each value stream belongs to its enterprise.

Nevertheless, 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, i.e., 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 almost any homebuilding enterprise, and you will find a 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.”

Builders attending Pipeline workshops™ have consistently emphasized the need for stronger trade-partnering, better coordination, more cohesiveness, a more unified approach in managing production.  These builders acknowledge the obvious:  they do not have the internal resources necessary to perform “the set of all specific actions” required to bring houses through the start-to-completion process;  they also understand they cannot dictate that it be done, or create competitive separation by attempting to do so.

They acknowledge the current shortage of skilled construction resources.

Whether or not vertical integration has a strategic role to play going forward in the homebuilding industry (a matter 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™.

 

Epic Partnering™ is one of five velocity accelerators (in addition to Critical Chain Project Management, Business Process Improvement, Plan Design, and Managing Buyer Expectations) that will be analyzed during the next Pipeline workshop™, October 14-15, 2015, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida;  the cost is $795.00.

Sponsored by BUILDER and Continuum Advisory Group.

Details:  www.buildervelocity.com