Earlier this year, Clark Ellis (Principal, Continuum Advisory Group) and I had the privilege of leading “HLS Boot Camp: Operations”, one of the four breakout sessions building executives could attend at the 2015 Housing Leadership Summit in Turnberry Isle, Florida.
(there is a connection: the Housing Leadership Summit is a Hanley Wood event; BUILDER and Continuum Advisory Group are Pipeline workshop™ sponsors)
For the second consecutive summit, we had attendees in this breakout session run the Pipeline game™, which is both a simulation of home building production and a business game; played in teams, the Pipeline game™ is a feature at Pipeline workshops™, which teach builders the principles and disciplines of home building production.
In a full workshop, the Pipeline game™ reinforces the lecture, business case studies, and team exercises; the game gives attendees the opportunity to see how the visual image, the connection of operating decisions to business outcomes, the systems-thinking, the changes in perspective incorporated into what we call the mental models, and the velocity accelerators unfold and play-out in the production management world that confronts homebuilding.
Contrast a full Pipeline workshop™ to the HLS breakout session, in which attendees are thrown directly into a production management situation, with little opportunity to develop insight into what the image means, how the connection is made, what the workflow model in home building truly represents, how the thinking and new perspectives work – what it all means, and how it all comes together.
Teams are simply shown what the image and connections are, given the game terminology, provided sufficient capacity, adequate inventory, and acceptable margins, and then told that they have to be profitable and have to generate an acceptable rate of economic return (Return on Assets).
In an HLS breakout session, teams are left to their collective instinct, and to their long-accepted and long-held ways of thinking, to make operating decisions that produce those results.
They start with what they know.
And, this was the result:
To varying degrees, each team – every team – defaulted to a typical mindset of starting their game with higher-than-necessary levels of inventory, in order to protect their ability to generate closings; as the game progressed, they “pushed” additional work-in-process into the system, without regard to the rate at which they were completing work.
They all struggled to operate effectively, in direct proportion to the excessive levels of work-in-process they decided to carry in their production system. They struggled with variation in a production system that was designed to have sufficient and balanced capacity.
The higher the level of work-in-process, the greater the toll that variation and uncertainty exacted on the system, and the longer the cycle times became.
Some teams never adjusted their tactic, continuing to add work-in-process; other teams seemed to realize that excess inventory was not necessarily their friend, and began to pare back their work-in-process.
In the end – and despite the very brief timeframe for the session – every team seemed to begin to understand some of the key concepts, such as: “more work-in-process = more problems”, and “grow revenue through higher productivity, not through higher inventory and more capacity”.
More-for-Less, not More-for-More.
Going in, every team understood and agreed that they were being handed a production system in which there was every expectation they would be able to generate a 3x inventory turn, achieve a 120 day cycle time, produce an 8.3% Net Income Margin, and generate a 25% Return on Assets. These are reasonable results in a homebuilding environment.
Coming out, every team realized just how difficult that production system is to manage, and just how difficult those operating measures and business outcomes are to achieve.
Here is an example, certainly not the worst performance among the teams: instead of a 3x inventory turn, this team managed only a 1.2x turn; cycle time (the reciprocal of inventory turn) was 300 days, instead of the expected 120 days; because they could not produce sufficient closings being burdened with so much inventory, they produced a Net Income Margin of only 2.8%, instead of the projected 8.3%.
As a result, economic return suffered: the 2.8% Return on Sales combined with the 1.2x Asset Turn to produce a Return on Assets of 3.4%, not the expected 25%.
As we say, economic return is margin times velocity.
It should be noted that Housing Leadership Summits typically attract a serious and experienced crowd of homebuilding executives; nevertheless, all of the builders attending this breakout session were initially put off-balance; a number were perplexed; in the end, most were intrigued, excited to learn more.
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.
For more details: www.buildervelocity.com