Archive for January, 2016

Pipeline Workshops™: Finding TrueNorth

Posted January 31, 2016 By Fletcher Groves

As almost everyone in this industry knows, Scott Sedam is the President of TrueNorth Development, Inc., and is the foremost Lean Production practitioner in the homebuilding industry.  He is a Lean Building purist, with roots that go back to Total Quality Management.  He is a friend, and longtime fellow consultant.

EFA - TrueNorth logo (capture)

In 2013, after The Pipeline: A Picture of Homebuilding Production© was published, and as I was planning the first Pipeline workshop™, I suggested to Scott that he attend as my guest.

I wanted him to see the workshop for himself, I wanted his opinion, but I also wanted him to share his own beliefs with those first-time attendees on applying Lean principles beyond the margin side of economic return, towards what we were now terming the velocity side of economic return.

Scott came to the first workshop in March 2014, functioned like any attending builder in the discussions and in the Pipeline games™, and was a panelist (with me) on blending improvement methodologies towards a homebuilding solution.

Afterwards, in September 2014, this is what Scott wrote in a discussion on the Builder group on LinkedIn:

“If you are ready to challenge your brain, get out of your well-sealed ‘Builder Box’ and make a huge leap forward in understanding schedule and its impact, come to this workshop and bring a few of your better thinkers.

“The roots of [this] workshop are in Goldratt’s Theory of Constraints, which is at first-blush exceedingly simple, but you can spend years studying the intricacies.  Fletcher puts it all in builder language and forces you to go deep into the impact of our most common builder practices.

“If all builders learned and followed the principles in this workshop, our industry would take a huge leap forward.  The winners would not be the builders alone, but also homeowners and especially our suppliers and trade contractors.  Fletcher does not know I am writing this, but I strongly recommend his Pipeline Workshop™ to everyone who has the will to change for the better.”

Come. Participate.  Learn.

 

Join us – Brandon Hart, Clark Ellis, and Fletcher Groves III – at the next Pipeline workshop™, March 16-17, 2016, at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida.

Cost is $850.00.

Sponsored by BUILDER and BuilderMT.

For more details:  www.buildervelocity.com

 

The Pipeline: A Picture of Homebuilding Production© has a just-released second edition, and is available on the publisher website (virtualbookworm.com), as well as through the major book sellers (amazon.com, barnesandnoble.com, and booksamillion.com).

 

Pipeline Workshops™: What’s your Production IQ®?

Posted January 23, 2016 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 achieving sustainable competitive separation?  Never.

We’re not alone in this assessment:

“ . . . [asset] turnover is just as important as profit margin.”  Barron’s Accounting Handbook (Siegel, Shim), 1990, 1997, p. 150.

“ . . . [improving] inventory turnover . . . 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)

Nevertheless, 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, but the motivation to attend a workshop starts with a willingness to acknowledge and remedy what is a profound lack of knowledge regarding production principles and disciplines.

Think you already know this stuff?  There’s one way to find out.  Take the test.

  1. If a homebuilding production system is a pipeline, what determines its size? Its capacity?  Its length?  Its cost?
  2. True or False: Even-flow production is an outcome, not a mechanism.
  3. What determines 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 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 capacity than a production system one where capacity is not balanced across all resources.
  6. In what three ways will a production system protect itself from variation?
  7. Which method of scheduling jobs considers both task dependency and resource contention, Critical Path or Critical Chain?
  8. Calculating the cycle 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 each 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 cycle time?
  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 50% to 95% will cause the anticipated duration of the task to increase by a factor of how much?
  15. What is the difference between speed and velocity?

(the answers are at the bottom of the post)

It’s just a quiz.  Like any quiz, the questions represent 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.

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 with an understanding of the underlying principles and disciplines.

It starts with what you learn in a Pipeline workshop™.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on March 16-17, 2016.  Cost is $850.00.

Sponsored by BUILDER and BuilderMT.

Details:  www.buildervelocity.com

Answers:  (1) size is 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) 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 more capacity;  (7) Critical Chain;  (8) work-in-process and throughput, expressed in units;  (9) False;  (10) inventory turn;  (11) the most capacity-constrained resource;  (12) True;  (13) Student Syndrome (wait until it is too late), Parkinson Law (expand to the time allowed), and multi-tasking (divide 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 is a vector measure, velocity is speed in a specific direction, speed with purpose.

 

Pipeline Workshops™: Disruptive Learning

Posted January 17, 2016 By Fletcher Groves

“The concept of production building being a ‘pipeline’, along with the simple and straight-forward concepts discussed in this seminar, made this one of the most eye-opening experiences I have ever had when it comes to learning about production building.”  (Patrick Bukszar, Dir. Construction Services, Essex Homes, Lexington, SC)

“The Pipeline workshop™ was an eye opening experience.  I took away invaluable insight on what it takes to operate a profitable homebuilding company.”   (Daniel Hopkins, Director of Purchasing/Estimating, Jeff Benton Homes, Huntsville, AL)

“It was quite intense, challenging, and not for the intellectually lazy”. (Scott Sedam, President, TrueNorth Development, South Lyon, MI)

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In relentlessly improving the Pipeline workshop™, our intent – simply and plainly – is to open the eyes of attendees ever-wider, and make the learning as disruptive as possible to conventional, long-accepted ways of thinking.

Specifically:

> Pipeline games™ are a production simulator and a business game;  they are what make Pipeline workshops™ so intense, so interactive, so competitive, and so worthwhile.  Already the best sim in the business, we have made the Pipeline game™ even better over the years, by shortening its duration and making the operating statement look exactly like a homebuilding operation.

> Lessons from the Pipeline© is the business case that we use;  it presents a set of problems dealing with a very realistic homebuilding operation that attendees are required to solve;  it is a test that challenges their knowledge and understanding of production principles.

The use of Pipeline games™ and the Lessons from the Pipeline© business case means that a Pipeline workshop™ – already known for its unique, engaging format – is now even edgier in that regard, because that is where almost all of the learning occurs.

Pipeline workshops™:  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;  emphasizing the actions that accelerate velocity.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ is at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on March 16-17, 2016.  Cost is $850.00.

Clark Ellis and Brandon Hart of Continuum Advisory Group continue in their presentation and facilitation roles, adding heft and extending the legacy of FMI Corporation in the residential construction vertical space.

Sponsored by BUILDER and BuilderMT.

For more details:  www.buildervelocity.com

 

Pipeline Workshops™: Right for you?

Posted January 10, 2016 By Fletcher Groves

Homebuilding production is a system, and it has to be managed as a system;  in order to be managed, it must first be understood.  Unfortunately, that type of ordered, process-centric, capacity-focused thinking is not the homebuilding industry’s natural inclination;  it clashes with the deal-driven, product-centric, margin-focused mentality that pervades the industry.

That understanding is now particularly crucial, because in the challenging environment that confronts the industry that has survived the worst economic and housing recession in three-quarters of a century, it is no longer a choice between higher margin or higher velocity;  it is the requirement to produce higher margins at higher velocities.

It is all about creating sustainable competitive separation.

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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, 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 industry knowledge and experience that resides with SAI Consulting and Continuum Advisory Group.

The workshops are designed to transfer in-depth knowledge and create an intuitive, instinctive understanding of production principles and disciplines, focused exclusively on homebuilding operations.  They are not a lecture;  the material is comprehensive, the learning is intense, and the format is interactive and competitive;  they are size-limited, with attendance capped at 40 attendees.

The comprehensiveness, intensity, interaction, and competitiveness found in a Pipeline workshop™ flows from two unique elements:  (1) Lessons from the Pipeline© is a state-of-the-art business case;  (2) the Pipeline game™ is 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 outcomes.

Sometimes good, oft-times bad, occasionally meeting or exceeding the budgeted performance, oft-times not, results 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 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 – a manner of thinking about size, growth, capacity, and other areas – that define a homebuilding production system, provide a systemic approach to solving production problems and managing finite production capacity, and deliver a blended approach to process and project portfolio management that addresses the unique attributes and parameters of homebuilding production.

> a set of velocity accelerators – Pipeline™ tactics, techniques, and practices dealing with trade partnering, job scheduling, and other areas that produce shorter schedules, reduce build/cycle times, increase production throughput, and control 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.  They 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 an excellent experience for the equivalent positions with building trade partners – for the manufacturers, distributors, suppliers, and subcontractors who must interact with builders in the value stream.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on March 16-17, 2016.  Cost is $850.00.

Sponsored by BUILDER and BuilderMT.

For more details:  www.buildervelocity.com

 

Since homebuilding is an industry that leverages equity with debt, some version of Return on Assets is the best measure of a homebuilding enterprise’s economic return.  The most useful version of ROA is the DuPont identity, which expands economic return into two components:  Margin (reflected as Return on Sales) and Velocity (reflected as Asset Turn).

 

EFA - ROA (capture3)

 

From an operational perspective, the vast majority of assets on a builder’s balance sheet ought to be houses in some stage of construction, particularly when raw land and developed lot inventory is held off-balance sheet;  which means, when we calculate Return on Invested  Assets, we can readily substitute Inventory Turn for Asset Turn.

The point is to thrive, not just survive.  To do that, a builder has to do well on both the margin side and the velocity side of ROA.  That understanding fundamentally proposes two questions:  (1) How much can I make on every house?  (2) How many houses can I build with a planned, finite, and controlled amount of inventory and production capacity?

As a builder, consider this:  if you generate a Gross Margin of 24% and turn your inventory twice a year, you will be outperformed – better than two-to-one – by a homebuilding enterprise that generates a Gross Margin of only 18%, but turns its inventory four times a year;  you will be outperformed in terms of Net Income, outperformed in terms of Return on Assets.

You will struggle to compete;  you will struggle to survive.

Your operation is a slow, marginally-productive homebuilding company;  your competitor’s operation is a fast, highly-productive homebuilding company;  your competitor generates 85% more Revenue and 40% more Gross Income than you do, with the same amount of assets.

It is also a picture of the difference between a 180 day cycle time and a 90 day cycle time, and if that contrast is too stark, then consider this:  your competitor with the 18% Gross Margin and a 4x turn produces almost the same ROA as you would with a 24% Gross Margin and a 3x turn;  that’s the picture of your competitor’s 90 day cycle time versus your 120 day cycle time.

In the face of clear differences in economic outcomes, note that your competitors – the two homebuilding companies represented in those scenarios – are exactly the same size as your company, when the real measure of size is the amount of work-in-process you each have to carry;  you and your competitors each have the same resource overhead, the same working capital requirements, the same risk profile.

In an industry with a capacity shortage, like homebuilding, there is not going to be any price elasticity of supply and demand, because there is not going to be any wide-spread, capacity-driven increases in supply.  Homebuilding is essentially a build-to-order process, which tends to regulate short-term supply.  Moreover, the demands of higher productivity are so tough, require so much rigor, so much discipline, so much resolve, that most builders won’t attempt it.

It’s not a choice between higher margin or higher velocity;  it’s the challenge – and the opportunity – of producing higher margin and higher velocity.

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.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on March 16-17, 2016.  Cost is $850.00.

Delivered by SAI Consulting and Continuum Advisory Group.  Sponsored by BUILDER and BuilderMT.

For more details:  www.builderevelocity.com