Archive for October, 2015

Margin Is Not Sufficient

Posted October 19, 2015 By Fletcher Groves

Part production simulation and part business game, Pipeline games™ are played in multiple scenarios at every Pipeline workshop™.  The insight delivered by multiple teams discovering the effect of operating decisions on business outcomes never fails to intrigue us.

Case in Point:  In every previous Pipeline workshop™ (as well as the 2014 and 2015 Housing Leadership Summit), we have specified the appropriate levels of work-in-process, what we refer to as Necessary WIP, Maximum WIP, and Minimum WIP.  However, at the most recent workshop, we gave each team far more latitude in determining what level of work-in-process they would carry.

It was a calculated tradeoff, a decision to forgo the enforcement of production principles to allow adverse discovery.  Since a Pipeline game™ has to provide a production scenario with predetermined starting and ending points, we know that builders – to one degree or another – will be tempted to game the system, by loading WIP early and not loading it late.

However, in a real business scenario, production occurs without regard to arbitrary beginning and ending points, and we know that a decision to load work-in-process early in a period and not load it late would have a devastating impact on operating performance and economic return, before and after.

Revenue (capture)

Net Margin (capture)

Take a look at the Revenue, Net Income Margin results in the charts above;  in these games, it was not unusual for a team to exceed budget expectations in those line items.  The production system in a Pipeline game™ purposely induces variation, and the Law of Variability Buffering – one of the laws of production physics – makes it clear that a system will buffer (protect) itself from variation and uncertainty through some combination of longer duration (cycle time), additional inventory (work-in-process), and excess/reserve capacity.

If you look at the results in the Inventory Turn and Cycle Time charts below, that is exactly what occurred.  The production system, to one degree or another, used two of the three buffers (and, if we showed you the progressively higher capacity and predictability of the resources we used in each game, you would see that the system used the third buffer, as well).

Inventory Turn (capture)

Cycle Time (capture)

That is the only explanation for how a production system can generate Revenue sufficient to absorb its Operating Expense, often exceeding its projected Net Income and Net Margin, yet fall miserably short on achieving the expected operating performance measures (inventory turn and cycle time) that drive the velocity side of Return on Assets.

ROIA (capture)

Margin is necessary, but it is not sufficient.  You also need velocity.  The answer to the question of how builders get more – more Revenue, more closings, higher Net Income – cannot be to have more of everything else:  more people, more trades, more plans, more money, more inventory, more time, more capacity.

Anybody – any of your competitors – can do more with more.

You have to do more with what you have.

 

Join the movement.  Join us at a Pipeline workshop™.  Read the book (it’s available from all the bookseller sites).  Join the BuilderVelocity™ group on LinkedIn;  contribute to the discussion.

Come.  Participate.  Learn.

Request to join the group:  https://www.linkedin.com/grp/home?gid=6571634

Register for a workshop:  http://buildervelocity.com/

 

LI BuilderVelocity (capture) 2

In the broadest sense, we want BuilderVelocity™ to be an industry movement.  We want it to be members of the homebuilding supply chain – the concerned, connected members of the new home construction value stream – coming together to unravel traditional industry best practices and challenge conventional industry thinking, in order to create sustainable competitive separation for their homebuilding enterprises.

In embracing BuilderVelocity™, they would be agreeing that sustainable competitive separation is a position reached only by doing what their competition will not do, what they cannot do:  things that are too tough, that require too much rigor, too much discipline, too much resolve.  They would be in agreement that it as a competitive position reached by doing the hard work to achieve operational excellence on the velocity side of Return on Assets, on the productivity side of economic return.

And, what is BuilderVelocity™?  Why is it relevant?  Why is it essential?

First of all, BuilderVelocity™ is a system for managing production.  It expresses the principles and disciplines of production management in terms that reflect the unique characteristics – and the particular requirements and context – of residential construction.  It is an industry-specific application of underlying universal principles and disciplines of production – physics rooted in the laws that govern all production systems.  It is about using the tools that work for homebuilding production, without regard to the consulting religion from which they come.

It creates a visual image of homebuilding production;  it connects operating performance to business outcomes;  BuilderVelocity™ enables builders to “see” production from a different perspective – from the perspective of a “more-for-less” mental model:  more revenue, more closings, in less time, with less work-in-process, and less overhead.

It treats the workflow associated with homebuilding for what it truly is:  project portfolio management with embedded and supporting processes.

BuilderVelocity™ addresses production management as a system, and it aims to increase the productivity of that system, by maximizing the closings and Revenue it generates with a planned, finite, and controlled level of work-in-process and capacity, with less waste and less variation;  it establishes velocity accelerators – a set of actions that increase productivity.

 

BuilderVelocity™ flows from a book.  The Pipeline: A Picture of Homebuilding Production© tells the story of how RB Builders learned the principles of homebuilding production in the turbulent years following the end of the period known as the Age of Homebuilder Entitlement®.  It is a story told in the exchanges of dialog between team members, senior management, and RB Builders’ trusted, results-based advisor/partner.

 

BuilderVelocity™ is also the namesake of the event management website (www.buildervelocity.com) for Pipeline workshops™, the series of public sponsored (and other channeled) workshops on production management developed by SAI Consulting, Inc., jointly produced and facilitated by me, Clark Ellis, and Brandon Hart (both with Continuum Advisory Group), in cooperation with BUILDER and other sponsors.

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.  They are not a lecture series.  They make extensive use of a proprietary business case study and management exercises.  The material is comprehensive, the learning is intense, the format is interactive and competitive.

Pipeline workshops™ use a progressive series of production scenarios, known as Pipeline games™, 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, sometimes meeting or exceeding the budgeted performance, oft-times not.

Pipeline games™ are both a production simulation and a business game;  they are completely unique in the approach they use.

 

And, finally, BuilderVelocity™ is a LinkedIn forum.  It is a group for those charged with the responsibility of managing – or managing the interaction with – production as a system at some level of a homebuilding enterprise and driving results.  It is a group that asks builders to participate, to share knowledge, to challenge ideas, to ask questions, to use their voice.

 

Join the movement.  Join us at a Pipeline workshop™.  Read the book (it’s available from all the bookseller sites).  Join the BuilderVelocity™ group on LinkedIn;  contribute to the discussion.

Come.  Participate.  Learn.

Request to join the group:  https://www.linkedin.com/grp/home?gid=6571634

Register for the workshop:  http://buildervelocity.com/