Archive for February, 2016

At a Pipeline workshop™, one of the most important takeaways, drawn by almost every building company executive in attendance, is that a notoriously fragmented value stream has to be unified, if they are ever going to be able to manage production as a system.

Partnering 1 (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;  every homebuilding company has its own value stream.

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 entirely 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, each having their own goals.

In 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™ consistently emphasize the need for stronger trade-partnering, better coordination, more cohesiveness, a more unified approach to managing the trade side of production.

They 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, and they are completely dependent and reliant on skilled construction resources that are in short supply;  they understand that they can no longer dictate the terms.

Is vertical integration the answer?  We have been suggesting, for almost 20 years, that builders at least consider that possibility.  That suggestion is usually dismissed as a radical, undoable notion.

Which is usually where opportunity lies.

Whether or not vertical integration has a future strategic role to play in the homebuilding industry remains to be seen.  It is an area that has been covered in the Lessons from the Pipeline© business case at previous Pipeline workshops™, and it is a new section in the second edition of The Pipeline: A Picture of Homebuilding Production©, which was released for publication in the Spring 2016.

The outcome of the vertical integration question doesn’t change the underlying imperative.  Success in unifying the effort of even the existing value stream has profound ramifications, on both the margin and velocity components of Return on Assets;  and success in unifying the value stream has profound implications for creating competitive separation.

With or without vertical integration, addressing the issue will require Epic Partnering™.

Come.  Participate.  Learn.

 

Epic Partnering™ – the attributes of the relationships being fostered, the program, the process – is one of the two velocity accelerators (along with Critical Chain Project Management) highlighted at the next Pipeline workshop™, March 16-17, 2016, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  Cost is $850.00.

Sponsored by BUILDER and BuilderMT.

Details:  www.buildervelocity.com

 

Pipeline workshops™ are open events sponsored by BUILDER and BuilderMT.  They are size-limited, intense, interactive, comprehensive immersions into the principles and disciplines of homebuilding production.

In recent workshops, we have added the Lessons from the Pipeline© business case study and a robust set of problem-solving exercises built around the velocity accelerators, but most attendees and observers would still agree that the most compelling part of the Pipeline workshop™ is the Pipeline game™:  teams of geographically-diverse builders that are required to go through a progression of scenarios that is both a simulation of home building production and a business game.

It is the same Pipeline game™ we have used in recent years at the Housing Leadership Summit.

The objective of the Pipeline game™ is to reinforce the production principles taught in the Pipeline 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 never 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.

You have to play the Pipeline game™, see the measures, and calculate the results for yourself, in order to fully understand what the axis values mean;  instead, 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, the builders attending this Pipeline workshop™ learned from their participation.  They learned the principles and disciplines of homebuilding production.

Pipeline games™ teach builders to “see” production;  they simulate the fast-paced, rapidly-changing, uncertain, risk-laden, variation-filled environment in which homebuilding production decisions must be made.  It is learning based on experience and action, not words.  They 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©), this is how they were described:

“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.”

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.

Sponsored by BUILDER and BuilderMT.

Details:  www.buildervelocity.com

 

Pipeline Workshops™: Improvements to the Game

Posted February 13, 2016 By Fletcher Groves

“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)

“Pipeline games™ are a very innovative way to demonstrate the critical nature and relationship between cycle time, inventory turn, margin, and return on assets.”  (Vishaal Gupta, President, Park Square Homes, Orlando, FL)

“The Pipeline Game™ was a great visual tool that emphasized the importance that velocity plays in home building.  It has allowed me to begin thinking creatively about the ways I can improve my department to ultimately improve our companies velocity overall.”  (Alexa Drees, Design Consultant, Drees Homes)

Pipeline Game (staged)

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

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.

For example, some time ago, we shortened the game, so that we could run more production scenarios in the same amount of time.  Shortening the duration of the game made each operating decision more consequential, and also made the results more realistic, more intuitive, easier to comprehend.

We also made the game more realistic, by making it depict the outsourced nature of homebuilding production.  In previous versions of the game, the resources that did the work reflected both capacity and the cost of that capacity.  That is an arrangement that reflects a manufacturing operation or project management organization;  a more realistic depiction of a homebuilding production system is to separate capacity from cost.

And, that’s because, 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;  Operating Expense – the indirect, non-variable cost of internal resources associated with overhead – is what 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 Gross Margin.

In the improved version of the Pipeline game™, we restore Revenue and Cost of Sales to 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 the cost of those resources is reflected in Cost of Sales, stipulated as a percentage of Revenue;  they are a direct, variable cost associated with the product.  This represents a significant stride in reconciling Revenue, Cost of Sales, Throughput, and Gross Income, making operating decisions easier to connect to financial outcomes.

Operating Expense is now an imposed value, reflecting the budgeted 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.

The outcome is a production simulator and business game that is vastly more reflective of a homebuilding operation, with lessons that are now much easier for builders to understand.

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;  it has been used in Builder 20 Club meetings;  and, it has been used at all but the first Pipeline workshop™.

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.

Details:  www.buildervelocity.com

 

Pipeline Workshops™: Lessons from the Pipeline©

Posted February 7, 2016 By Fletcher Groves

(excerpted and adapted from the latest version of Lessons from the Pipeline©, which is the business case study used at every Pipeline workshop™)

Three Pipelines to the Horizon

It is the first quarter of 2016.  RB Builders is aiming to extend its reputation as a builder thriving on both the margin and velocity sides of Return on Assets, by expanding into another new geographical market, via the late-2015 acquisition of its third pre-existing homebuilding operation.

Like previous years’ acquisitions, the newly-acquired division serves segments of the new home market compatible with RB Builders’.  Like its predecessors, the newly-acquired building division generates historical operating results and business outcomes that are unacceptable to RB Builders.  On the other hand, RB Builders is confident that it has once again acquired a building operation with satisfactory land/lot positions.

To date, RB Builders has converted the new division to the current system and started the conversion of the business and operating processes;  it is confident it can continue its track record for unifying, developing, and improving the capabilities of existing teams at acquired divisions, to ones reflecting the own savvy, motivated, and mutually-accountable homebuilding team that defines the parent operation.

This road has become a familiar path for RB Builders.

 

HISTORY OF RB BUILDERS:  Eight years earlier, at the beginning of 2008, shortly after the end of the halcyon period known as the Age of Homebuilder Entitlement®, RB Builders had begun its own transformation process, with the objective of extracting itself from what it self-described as “the tar pits of averageness”.

RB Builders benefited from the use of four tools:  (1) a unique team-based performance compensation plan;  (2) a method of sharing numbers that produced full operational and financial transparency;  (3) an accounting system that connected operating performance to business outcomes;  and (4) a focused process of continuous improvement consisting of consecutively-ordered initiatives with short durations aimed at achieving targeted, defined, measurable results.

And – RB Builders had made massive strides.

During the ensuing five-year period (2008-2012), annual Revenue grew from $50 million to more $121 million.  During the same period, the number of closings increased from 200 houses per year to 453 houses per year.  Despite the margin pressure from higher market share, overall Gross Margin increased from 22% to 24%;  Gross Income grew from $11 million to $29.5 million.

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

In 2008, RB Builder’s cycle time was 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, the company had been able to reduce its average work-in-process to 80 houses under construction.  The reductions in cycle time and work-in-process occurred despite more than doubling the annual number of closings.

In 2008, RB Builders had targeted an inventory turn of 2.5x, which was 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 turned the value of its assets two times;  in 2012, it turned the value of its assets almost five times.  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 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, which would have served to further increase Asset Turn – and ROIA – had those measures been restated to reflect the remaining assets.

It had been a remarkable transformation.

 

NEWLY-ACQUIRED DIVISION:  Near the end of 2015, RB Builders acquired its third homebuilding operation.  In its last year of independent operation, it had closed 64 houses, and generated $16 million in Revenue;  with $12.16 million in Cost of Sales now reflecting only its direct, variable costs, the operation had generated $3.84 million in Gross Income, producing a 24% Gross Margin.

With its $2.56 million in Operating Expense now reflecting only its indirect, non-variable costs, the newly-acquired operation had produced $1.28 million in Net Income, resulting in an 8% Net Margin.

Because it had average work-in-process of 32 houses under construction during 2015, the division had a calculated cycle time of 180 days (despite job schedules that were typically 120 days);  it had turned its physical inventory exactly twice in 2015.

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 showed a restated average work-in-process of $4.24 million;  with Revenue of $16 million, it had an asset turnover ratio of 3.8x.

With a Net Margin of 8% and a restated asset turn of 3.8x, the new operation had an ROIA of 30.4%.

 

Here is the nature of the issues and questions that attendees will have to consider at the upcoming Pipeline workshop™:

  • Addressing a mandate that the new division double its annual closings over a two-year period, with less work-in-process, a smaller line of credit, and the same amount of overhead.
  • Refuting a contention that variation – evidenced by 2015 cycle time, supported by other operating performance measures – is costing the new division between $1.5 and $1.9 million per year in Net Income, when the division only had Net Income in 2015 of $1.3 million.
  • Determining how the new division will adapt from Epic Partnering™, RB Builders’ proven program/process for creating cooperative relationships and beneficial arrangements with its suppliers and subcontractors.
  • Modifying the work breakdown structure of its job schedules to reduce cycle time to 96 days (from 120 days), while assuring reliable job completion dates.

 

Come.  Participate.  Learn.

Lessons from the Pipeline© is the underlying business case study that will be used at the next Pipeline workshop™, being held March 16-17, 2016, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  Cost is $850.00.

Sponsored by BUILDER and BuilderMT.

Details:  www.buildervelocity.com